[lolpython]

Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1].

[0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219....

[1] https://emp.lbl.gov/publications/primer-electricity-futures-...

[panarchy]

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?

[NoboruWataya]

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.

[MR4D]

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.

[0] - https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc....

[1] - https://www.investopedia.com/ask/answers/06/forwardsandfutur...

[2] - https://www.encyclopedia.com/social-sciences/applied-and-soc...

[marcosdumay]

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.

[pwatsonwailes]

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.

[gabereiser]

>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.

[koolba]

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.

[tedunangst]

Ask for an example. Get an example. "That's not the example I wanted." Every time.

[rawgabbit]

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.

[cscurmudgeon]

> 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.

It is not a zero sum game.

[opportune]

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.

>what about the crops they destroy

This has nothing to do with the discussion

[pdntspa]

Well, pretty much everybody buying commodities at an institutional level are using futures contracts to smooth over price risk.

Oil, gas, lithium, corn....

[OJFord]

Because that's the origin story.

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).

[dmbche]

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.

[gmd63]

There is a societal benefit that comes with individuals internalizing their own costs of risk. Treating society like it's in an economic womb while Mother Finance shields it from the world of worries rewards ignorance and in my opinion accelerates us toward the world depicted in Idiocracy.

It is nice as a purchaser of such securities that you can build things more quickly than usual and transfer worry to someone who is willing to be worried for you. However I don't believe the SEC financial highway patrol has enough cruisers or sophistication to pull over enough abusers to deter the disproportionate fraud that increasingly arcane financial instruments create.

The costs of a few bad actors building piles of money illegitimately do not show themselves immediately. They pop up slowly, in dark money investments in destabilizing elections, funding of war criminals, market manipulation, etc. The societal cost of a charlatan having several lifetimes worth of an honest person's influence are grave and not to be laughed off.

[yesbut]

> accelerates us toward the world depicted in Idiocracy.

We're already there, brother.

[dataflow]

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

[HWR_14]

Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features.

At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people will obviously need to be compensated.

[OJFord]

In general/basics/origins, farmers only want to sell futures, because they actually have (intend to have) the commodity for physical delivery, and do want to physically deliver it.

So who is on the buy-side? Exclusively supermarkets/distributors, while exclusively farmers sell? I suppose that could work, but I assume it would quickly regress into tight relationships like we have (probably regionally variable) for smaller market's, like most vegetables (vs grain) where as I understand it it's largely a direct relationship with the buyer - you probably still sell a future contract, but it's not via a central market and it is 'farm x will deliver to buyer y', i.e. a pre-order if you will, not really a commodity.

And as others say, price discovery, liquidity. What harm does completely open (no obligation) do? And maybe you eat a lot of potatoes and want to lock in the price today. (Or more seriously maybe you're a big baker, but not big enough to be buying direct from farm, your miller is. So grain price affects you, but ypu can't directly control/choose when to take it. Secondary grain futures allow you to hedge risk of it moving against you. In turn this means lower prices or lower risk of shock price increase to your consumers.)

[choeger]

It creates the market and should thus create the best possible price. Think of any speculation as a voting system with proof of stake.

Problems always appear when market participants try to affect reality to increase their odds, like shorting a position and then releasing some ugly news.

[skybrian]

It's doubtful that farmers care about you in particular. However, in general, the societal benefit should be like a loan, like insurance, or both, depending on what it is.

Loans are useful and necessary because businesses need to buy things before they get paid. It can't all be done using Kickstarter! Farming works this way.

Insurance is useful because you get paid when something bad happens to you. On a day when you're glad that you had insurance, it means someone else lost a bet.

Buying insurance you don't actually need is kind of dumb because you'll lose on average, but people do sometimes win in casinos, too. Selling insurance when you can't afford to lose is risking disaster, but sometimes people get away with that too.

[jdaw1]

Society allows the people to trade futures, but makes it difficult. US brokers seem to make it very easy for “randos” to own equities, but difficult to trade futures. Recently, when I wanted to trade a one-by-one call spread on a commodity future (not saying which) via Interactive Brokers, the required initial margin would have been eight times my maximum possible loss. Bonkers! Hence trade not done.

And what would you rather happen? That you were prohibited?

As others have said, your counterparty won’t know who you are: hedge fund; commercial hedger; rando — unknown.

[charlieyu1]

Provide liquidity. Speculators are trying to make profit, but their existence is important to make sure the farmers are correctly priced.

Do farmers prefer that? Yes, the larger the futures market, the price of selling futures will be closer to optimal. If the market is illiquid, farmers often have to sell futures at a lower prices to market makers.

[anon291]

Many 'randos' like you have lots of money and would happily buy the contract in the hope that they win out, and would be not bummed out completely if they lose, unlike the farmer, for whom such events could be existential.

[jacobr1]

They prefer a liquid market