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Futures Market Explained - YouTube
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a three dollar box of corn cereal stays
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at roughly the same price day-to-day and
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week-to-week but corn prices can change
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daily sometimes by a few cents sometimes
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by a lot more why does the cost of
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processed foods generally stay quite
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stable even though the crops that go
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into them have prices that fluctuate
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it's partly thanks to the futures market
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the futures market allows the people who
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sell and buy large quantities of corn to
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insulate you the consumer from those
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changes without going out of business
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themselves let's meet our corn producer
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this farmer of course she is always
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looking to sell her corn at a high price
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and on the other side our corn user this
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cereal company is always looking to buy
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corn at a low price now the farmer has a
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little bit of a problem because her
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whole crop gets harvested at once lots
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and lots of farmers will be harvesting
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at the same time and the huge supply can
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send the price falling and even though
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that price might be appealing to the
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company that makes cereal from corn it
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doesn't want to purchase all of its corn
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at once because among other reasons it
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would have to pay to store it
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but it's fortunate that corn can be
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stored because that means it can be sold
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and bought throughout the year and this
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is where the futures market fits in
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buyers and sellers move bushels around
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in the market though actual corn rarely
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changes hands instead of buying and
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selling corn the farmer and cereal maker
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buy and sell contracts now we're getting
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closer to peace of mind for both sides
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because a futures contract provides a
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hedge against a change in the price this
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way neither side is stuck with only
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whatever the market price is when they
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want to buy or sell these contracts can
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be made at any time even before the
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farmer plants the corn she'll use the
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futures market to sell some of her
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anticipated crop on a certain date in
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the future of course she's not going to
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sell all of her corn on that contract
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just enough corn to reassure her that a
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low price at harvest won't ruin her
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business the contract provides that
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security the cereal company uses the
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same market to buy bushels their
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contract protects against a high price
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later
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contracts will gain or lose money in the
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futures market if the price goes high
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the farmer loses money on that futures
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contract because she's stuck with it
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but that's okay because now she can sell
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the rest of her corn what wasn't in that
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contract at the higher price that
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offsets her loss in the futures market
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if at harvest time the price of corn is
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low well that's exactly why she entered
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the futures market the low price means
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her contract makes money so that profit
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shields her from the sting of the low
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price she'll get for the bushels
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she sells now the corn cereal company
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doesn't like those higher prices and
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that's why they have a futures contract
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they make money on it and can use that
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profit to cover the higher price of the
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corn they now need to buy the futures
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market serves as a risk management tool
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it doesn't maximize profit instead it
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focuses on balance and in this way it
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keeps your cereal from breaking your
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weekly shopping budget
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