Commodity Futures Markets

This is Steve Ember with the VOA Special English AGRICULTURE REPORT.

Consider the life of a crop farmer. One year, the growing conditions are excellent. The farmer has a huge crop. But so do the other farmers. When they all sell their crops, prices go down.

Next year, conditions are poor. Prices go up. But the farmers have less to sell.

These are the risks when farmers take a crop to market at harvest time. With supply highest, prices are lowest. And there is always the danger of a bad harvest.

To control risk, farmers may use commodity contracts. These are agreements to buy or sell a product for a set price within a period of time. Commodity contracts represent financial protection against changes in price.

In the eighteen-hundreds, progress in transportation and communications permitted new markets to be built and linked. The Chicago Board of Trade is one of the oldest of these markets. It opened in eighteen-forty-eight.

At first, farmers received immediate payment as crops arrived at the market by horse or train. Soon, people recognized a better system: Guarantee the price of goods that would arrive in the future. Traders called these guarantees forward contracts. A farmer could buy a contract and know exactly how much money to expect.

By eighteen-sixty-five, the Chicago Board of Trade set rules for trade in futures. Futures are contracts that rarely involve anything real, except money. Farmers still sell their crops at harvest time. Market forces still set the prices. But farmers can use futures to protect themselves if they sell at a loss. The contracts pay the difference between the price they hoped for and the price they received.

Farmers are not the only ones who trade in futures. Companies buy futures to guarantee costs for materials.

The Chicago Mercantile Exchange is the biggest commodities market in the United States. Traders sell futures for agricultural and energy products, valuable metals -- even weather.

A futures market could not operate without another kind of trader. Speculators try to guess the direction of commodity prices to make a profit.

Speculators can cause big changes in the price of futures. But the Commodity Futures Trading Commission in Washington says research suggests they do not affect the price of goods. This federal agency says money from speculators helps provide the kind of continuous activity that is part of a healthy market.

This VOA Special English AGRICULTURE REPORT was written by Mario Ritter. This is Steve Ember.