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Re: Help me understand commodities please


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Posted by Wardner on May 17, 2011 at 14:58:12 from (209.86.226.60):

In Reply to: Re: Help me understand commodities please posted by Fargo on May 17, 2011 at 13:34:08:

I am not a farmer nor am I in the corn belt. Don't know what goes on between the grower, the elevator, and the feed buyer or exporter. I am guessing that any of the parties can lock in a future price directly with any of the others. The opposite party can offset his risk by going to the Chicago Mercantile Exchange through a broker.

Here in the Northeast during the summer, home owners can lock in their next season's heating oil costs directly with their fuel dealer. He, in turn, will offset any distributor fuel hikes through the New York Mercantile Exchange.

There is a fourth party here and that is the Govt. They provide crop guarantees and/or corp insurance. Many crop losses are reimbursable. I am guessing the Govt will be writing many checks to farmers located along the Mississippi and many of its tributaries. Your county Ag agent should be able to offer specific advice to you regarding your crop.

One should also understand that much of the action, or "open interest" on the commodity exchanges is from parties who will never deliver or receive product. This action comes from speculators placing "educated" bets. The turnover in paper contracts (called derivatives) only produces "price discovery" but that is an important part of any market.

Other derivatives are called "options" on futures contracts. Deposits are not necessary for "puts" and "calls". Dealer only takes a commission. You can buy or sell either a put or call for a total of four ways to do business. Actually there are many more ways when you get into spreads and straddles between delivery months, strike prices, and two different commodities. Many trades only last seconds or minutes and are put on to "scalp" a few dollars per contract. The strategies are endless and are frequently done automatically with a computer program.


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