People often have a wrong impression: the trading of futures contracts is purely for speculation, but it can not bring about the growth of social benefits or promote the development of market economy. In fact, the standard commodity futures contract is formulated to solve the inherent economic risks of some commodities.
If the weather is fine during the corn growing period, farmers are expected to have a bumper harvest. As a result, corn flooded the market, the supply exceeded the demand, and the price fell. At this time, farmers who grow corn have to sell corn at a low price because they have overcharged three or five buckets, but their income may decline. If the climate is dry, too much rain or too much wind and sand will cause crop failure during the growth of corn. Other farmers are facing the same situation. As a result, there is not enough corn in the market to meet the demand, and the price rises. At this time, farmers who use corn to raise pigs can only buy high-priced corn, which greatly increases the feeding cost.
How do farmers predict corn prices? The answer is unpredictable, because in a market economy, commodity prices are determined by the relationship between supply and demand, and there are many factors that affect the change of commodity prices. Therefore, producers and operators can only resign themselves to fate. In this way, farmers' behavior of planting corn and raising pigs is speculation. However, most farmers don't want to be speculators. They want to sell their products at reasonable prices and earn enough profits to support their families. If they can transfer some of their business risks through transactions and get a certain degree of protection, they will be overjoyed. What is the tool to transfer price risk? This is a futures contract.
Standard futures contract is a tool to transfer the business risks of producers and operators to speculators who want to make huge profits through contract transactions. Because producers and operators can transfer risks, they can reduce operating costs more effectively. Therefore, the ultimate beneficiaries of futures trading are of course consumers, who can buy goods at lower prices.
Price risk is the result of time in the trading process, which can be said to be everywhere. In the international market, droughts, floods, wars, political turmoil, storms and other changes will spread all over the world, directly affecting commodity prices. An individual or company with a large number of such goods will soon find that the value of his inventory has risen or fallen sharply almost overnight. Intense market competition will lead to large price fluctuations in a short period of time. The risk factors related to supply and demand also include the seasonality of harvest of some commodities and the seasonality of demand. The potential price risk brought by the unpredictability of supply and demand is inherent in the market economy, and both buyers and sellers can't resist it.
It can be seen that the risk of futures market comes from real economic activities and exists objectively, while the risk of gambling is artificially created. This is also the most essential difference between futures trading and gambling. In futures trading, risk is different from gambling. Gambling is generated by putting money on rolling dice or handing out cards. If he doesn't gamble, the risk disappears. But in futures trading, we know that risk is an inherent part of business activities, and the exchange is a place to transfer risk from hedgers to speculators.
Looking for price
In a market economy, producers and operators make business decisions according to the price signals provided by the market. The authenticity and accuracy of price signals directly affect the correctness of their business decisions, and then affect their business benefits.
Before the futures market came into being, producers and operators made decisions mainly on the basis of commodity prices in the spot market, and adjusted their business direction and mode according to the changes of spot prices. Because spot transactions are mostly scattered. It is not easy for producers and operators to collect the required price information in time. Even if the feedback information from the spot market is collected, it is scattered and one-sided, with low accuracy and authenticity, and poor ability to predict future changes in supply and demand. When the spot market price is used to guide enterprise decision-making, the lag of spot price often leads to decision-making mistakes. For example, for a long time, the grain circulation market in China has been plagued by the difficulty of selling grain at low prices and buying grain at high prices, partly because the grain production and business units lack a mechanism to guide production and sales at forward prices.
Since the emergence of futures trading, people have found that the price function has gradually become an important economic function of the futures market. The so-called price discovery function refers to the futures price formed by futures trading in an open, fair, efficient and competitive futures market, which has the characteristics of authenticity, predictability, continuity and authority, and can truly reflect the trend of future commodity price changes.