Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples?
What percentage of futures trading is on farmers crops?
What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death?
How well will it work if we create unsustainable land that the farmers can no longer grow crops on?
I don't have a percentage for you but agriculture-related futures make up a non-negligible amount of overall trading. It's not just some artificial example. Agricultural futures were also the first futures, and much of today's trading infrastructure was built around agricultural futures. So that's probably part of why it is such a common example.
They are far from the only example. Airlines use futures to hedge against fluctuations in fuel prices. Manufacturers use futures to hedge against fluctuations in the price of input materials. International businesses use FX swaps to hedge against currency fluctuations. Borrowers use interest rate swaps to hedge against interest rate rises. Investment funds (including pension funds and sovereign wealth funds) use options to hedge against drastic movements in asset prices.
I don't really understand your other questions. The use of derivatives in agriculture does not, on balance, result in fewer crops being produced. On the contrary, by allowing farmers to protect themselves against various risk, derivatives markets allow farmers to safely invest more money in production, and reduces the risk of farmers going bankrupt (bankrupt farmers don't produce many crops). Food would almost certainly be more scarce and more expensive if farmers did not have access to the financial markets.
Because farmers have been using futures contracts (traded on an exchange) since 1859.
And technically, futures are a more standardized tool than forwards are, hence the talk about futures all the time. [1] For reference, forwards have been used forever, and used for all sorts of commerce. [2]
We take for granted that you can pull out an iPhone and buy your favorite stock in seconds, but for most of history, nobody could even imagine that. That the modern world even exists is because of forwards and futures. The ancient world was able to grow and expand because of forwards.
The one goal of future contracts is for producers and consumers to be able to make deals before that production and consumption happens. Those are the primary dealers there, and I don't really remember where I got statistics, but AFAIK, they are about 10% of the volume.
On top of those primary deals, a lot of people pile up making bets on secondary deals. Those are the people going for "hey, a lot more farms are growing rice this year, I bet its price will fall". They are very welcome because they not only stabilize the prices on those markets, but they also provide short-term money to make the deals flow more homogeneously. Without them, making deals on those markets would be a profession by itself (as it was).
Now, there exist people making bets on the results of the bets of the secondary market. That is a different market. At some point it's clear that this becomes toxic, but nobody seems to agree on what point exactly.
> What about the crops they destroy because they would be less profitable?
You mean farmers getting bankrupt? You seem to be misunderstand, because the main reason farmers love the futures market is because it lowers their risks.
> How well will it work if we create unsustainable land that the farmers can no longer grow crops on?
Well, surely if you go and kill everybody, there will be nobody losing money on those markets.
> What about the crops they destroy because they would be less profitable?
To clarify this point specifically, food self sufficiency is considered a national security issue.
Consider the situation where a hostile country floods your market with cheap food products (below cost) until your country's farms go bankrupt due to an inability to compete. Once you stop producing food of your own, you give significant power to whoever controls your food supply.
This is a large part of why agricultural subsidies exist. And yes, sometimes it means paying farmers to let crops rot on the vine in order to not cause market gluts. That is an entirely different situation from futures and hedging, which in any sane market match supply and demand (with the result of minimizing waste).
Not necessarily, if they can produce the crops more cheaply. Since each country ideally wants to secure it's own food supply, it's inevitable that many countries will find themselves subsidizing local production that would otherwise disappear in a competitive international market.
Additionally, hostile countries do not need to flood markets sustainably if the goal is simply to hollow out food production in the target country before taking more overtly hostile (i.e. military) actions.
Because it's an example you can use to explain a forward contract, which is easily understandable as a form of hedging risk. Vast amounts of the value of crops are hedged, either through forwards, futures or derivatives. Crops aren't destroyed because of hedges (in the financial sense). Indeed, the whole point is to ensure you don't need to, because you've hedged the value of your crop.
I get where you're coming from, and there's a lot which is not great in farming, but hedging values isn't one of those areas.
>Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples?
Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.
You’re right but in America we use the agricultural example as it was a big shift in our market thinking. I didn’t know about metal futures but I did know about Dutch and how they created futures and securities. I believe the Dutch East India Co to be ahead of its time and because of world politics (and war) it didn’t survive and was nationalized. A lot of papers about our CME here in the states talks about it. I’m not an expert but I do know we use the agri example because it’s one most would be familiar with since it was a somewhat recent addition.
It’s not just farmers. It’s useful for anything that involves future delivery of a good that could have a variable price or production.
A mining company would sell gold futures under the expectation that they will mine a known quantity of gold. They trade the risk of price fluctuations to match against their known liabilities (e.g. labor or depreciation of equipment costs).
Now replace “gold” with lithium (for electric car batteries) and you can create the greenwashed story that you want to hear.
The website gives the gold mine example. Farmers and gold miners often have to weigh taking on a loan to get them through next season. They want a fixed rate of return to determine if the loan is worthwhile.
> Why is it that every time someone mentions futures trading
They didn't just mentioned, they had an outsider negative take on it.
The best way is to respond with simple examples.
> What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on?
How does futures trading cause these negatives? If anything, trading reduces these risks. Countries with markets have large bounties as opposed to those that don't.
Because that’s what futures are for? Consumers and producers of commodities want to lock in prices to lower the risk of price fluctuations in the future.
Other examples are _all_ commodities markets like mining, logging, etc.
Of course public company share futures are inherently abstract, but they serve similar purposes, just not to a particularly similar party, depending on your perspective (of ownership, operation).
Not sure why this person is getting downvoted, these seems like fair questions.
Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.
What percentage of futures trading is on farmers crops?
What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death?
How well will it work if we create unsustainable land that the farmers can no longer grow crops on?