tag:blogger.com,1999:blog-1141932539860553199.post1489292874201908812..comments2024-03-05T10:52:24.691+00:00Comments on Mark Wadsworth: Something else i don't understandMark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-1141932539860553199.post-27009061777625644642016-06-19T19:13:06.162+01:002016-06-19T19:13:06.162+01:00Phys, he doesn't need a purchase option and th...Phys, he doesn't need a purchase option and that would just makes things worse. It would make more sense for the farmer to guess the lower range of his likely harvest, say 80 or 90 and sell that forward, and take his chances on the rest.<br /><br />The worst risk is the unavoidable risk of the crop failing, you can insure against that, but futures contracts exacerbate things - in the "poor harvest" scenario, the farmer who sells forward has less income than if he hadn't done and the speculator is laughing. A proper insurer would be crying.<br /><br />Din, yes, they reduce the downside if there is a good harvest/low prices but make things worse for themselves if there is a poor harvest/high prices. That's why I did the examples.<br /><br />M, fair point about not selling all your harvest forward, that makes sense, but can you please do the two scenarios and show how the farmer's risk profile is reduced?<br /><br />L, examples? <br /><br />I don't think that the FS industry has messed it up, the system clearly works or people would;t do it and no farmers would ever sell forward - or perhaps they don't? Perhaps it the entire risk spreading is between customers like tea factories and speculators. <br /><br />That makes more sense. I didn't say it didn't make sense, I said I don't understand it and to understand it I need examples and scenarios.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-76247041079194209102016-06-19T19:13:04.427+01:002016-06-19T19:13:04.427+01:00Phys, he doesn't need a purchase option and th...Phys, he doesn't need a purchase option and that would just makes things worse. It would make more sense for the farmer to guess the lower range of his likely harvest, say 80 or 90 and sell that forward, and take his chances on the rest.<br /><br />The worst risk is the unavoidable risk of the crop failing, you can insure against that, but futures contracts exacerbate things - in the "poor harvest" scenario, the farmer who sells forward has less income than if he hadn't done and the speculator is laughing. A proper insurer would be crying.<br /><br />Din, yes, they reduce the downside if there is a good harvest/low prices but make things worse for themselves if there is a poor harvest/high prices. That's why I did the examples.<br /><br />M, fair point about not selling all your harvest forward, that makes sense, but can you please do the two scenarios and show how the farmer's risk profile is reduced?<br /><br />L, examples? <br /><br />I don't think that the FS industry has messed it up, the system clearly works or people would;t do it and no farmers would ever sell forward - or perhaps they don't? Perhaps it the entire risk spreading is between customers like tea factories and speculators. <br /><br />That makes more sense. I didn't say it didn't make sense, I said I don't understand it and to understand it I need examples and scenarios.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-51151979745928405832016-06-18T06:52:17.200+01:002016-06-18T06:52:17.200+01:00Crop futures contracts have a long and generally h...Crop futures contracts have a long and generally honourable history. They've been going for yonks. They have worked for farmers, speculators and end users.<br />The reason FS industry has messed them up is all the bad money washing about. If you have wads of cash washing about at the wrong price that came about out of thin air then it's going to go somewhere.Lolahttps://www.blogger.com/profile/04586735342675041312noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-69570518666245154192016-06-17T16:09:26.907+01:002016-06-17T16:09:26.907+01:00I don't think a farmer would ever hedge all of...I don't think a farmer would ever hedge all of their crop - precisely to avoid not being able to deliver the quantity promised. It's a very useful tool for farmers in theory - it does take a lot of the risk off their hands. But the financial services industry has done it's usual and found a way to completely screw everyone over...mombershttps://www.blogger.com/profile/09650866436764567516noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-47584279796281886072016-06-17T12:18:59.666+01:002016-06-17T12:18:59.666+01:00The benefit to the farmer is they protect their in...The benefit to the farmer is they protect their income against a large drop in prices at the particular time when they come to sell their harvest, such a large drop that it leaves them without the income to cover their production costs. Sure, over an accumulation of years the farmer might miss out on some high prices, but its a one off large drop in price for one single year that is advantages to avoid.<br />Interestingly there isn't a futures market used by dairy produces in the UK milk industry.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-75034689325054946552016-06-17T11:33:41.349+01:002016-06-17T11:33:41.349+01:00Presumably the farmer would need a purchase option...Presumably the farmer would need a purchase option against the possibility of a shortfall?<br /><br />The end user benefits from the knowledge that he has an assured supply at a known price in the future. The manufacturer is presumably willing to pay a premium for delivery of, say, 1000 tons of chocolate, in six months' time. A middleman carries the risk.<br /><br />Surely the point of these markets is to spread the risk?Physiocrathttps://www.blogger.com/profile/13682019625346594568noreply@blogger.com