This is Steve Ember with the VOA Special English Agriculture Report.
Consider the life of a crop farmer. One year, the growingconditions are excellent. The farmer has a huge crop. But so do theother farmers. When they all sell their crops, prices go down.
Next year, conditions are poor. Prices go up. But the farmershave less to sell.
These are the risks when farmers take a crop to market at harvesttime. With supply highest, prices are lowest. And there is alwaysthe danger of a bad harvest.
To control risk, farmers may use commodity contracts. These areagreements to buy or sell a product for a set price within a periodof time. Commodity contracts represent financial protection againstchanges in price.
In the eighteen-hundreds, progress in transportation andcommunications permitted new markets to be built and linked. TheChicago Board of Trade is one of the oldest of these markets. Itopened in eighteen-forty-eight.
At first, farmers received immediate payment as crops arrived atthe market by horse or train. Soon, people recognized a bettersystem: Guarantee the price of goods that would arrive in thefuture. Traders called these guarantees forward contracts. A farmercould buy a contract and know exactly how much money to expect.
By eighteen-sixty-five, the Chicago Board of Trade set rules fortrade in futures. Futures are contracts that rarely involve anythingreal, except money. Farmers still sell their crops at harvest time.Market forces still set the prices. But farmers can use futures toprotect themselves if they sell at a loss. The contracts pay thedifference between the price they hoped for and the price theyreceived.
Farmers are not the only ones who trade in futures. Companies buyfutures to guarantee costs for materials.
The Chicago Mercantile Exchange is the biggest commodities marketin the United States. Traders sell futures for agricultural andenergy products, valuable metals — even weather.
A futures market could not operate without another kind oftrader. Speculators try to guess the direction of commodity pricesto make a profit.
Speculators can cause big changes in the price of futures. Butthe Commodity Futures Trading Commission in Washington says researchsuggests they do not affect the price of goods. This federal agencysays money from speculators helps provide the kind of continuousactivity that is part of a healthy market.
This VOA Special English Agriculture Report was written by MarioRitter. This is Steve Ember.