Drought In The Midwest Does Not Stop Farmers From Record Income

These commodity trading companies are using a commodity strategy that allows profits by hedging disasters

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The Midwest suffered its worst draught in half a century and farmers are recording record profits. This doesnt seem plausible. For farmers not devastated by the draught they received record prices for their crops. The draught drove the price of corn to over $8 a bushel. The Midwest is the largest agricultural supplier in the world. Prices were not only on the rise due to lower supply but also increased demand due to ethanol production in the U.S. So how did farmers have record income without much of a crop? Well, for the crop they could sell they received record prices and for the crops that were destroyed farmers had crop insurance. Depending on the type of insurance a farmer buys they could insure their crop and get the record prices. The insurance will pay the futures market price for the damaged crop. For farmers who were affected and had insurance they still received record prices for their whole crop. This gave them record income.

Farmers also use the futures market to hedge their crop. It is similar to buying insurance against falling prices but what it does is lock in a guaranteed price for their crop. Farmers can also lock in their prices by selling early to a local grain elevator prior to harvest. A commodity strategy such as one of the above allows farmers security in the price they get for their crop. Farmers cant predict the weather which determines a good or bad crop and high or low prices.

The commodity strategy of hedging can be done by more than one futures strategy. A farmer could purchase put options as one futures strategy or purchase put spreads which lower the cost of the purchasing the put but reduce the pay-out. They can also trade out-right futures contracts instead of options or spreads. With selling out-right futures contract the trader, or farmer, takes on much more risk. In the event price does decline the farmer will have more profit. With options the farmer is protecting against catastrophic decline in price that would wipe them out.

Farmers can trade futures through commodity trading companies which can be an introducing brokerage or directly through an FCM. The trades are always placed through and cleared by the clearing firm or FCM but accounts may be opened through introducing brokers. Farmers may also work with a broker at an introducing brokerage. This would be considered a broker assisted account. The other account is a self-directed which allows the account holder, or in this case the farmer, to trade from their own platform with-out the assistance of a broker. They can also trade on their own or with the help of a broker. Most commodity trading companies offer both. For more information please visit http://www.cedarassetmanagementllc.com

by: Cedar Asset

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