How does an agri fu­tures con­tract work?

Financial Mail - Investors Monthly - - Feature -

Hedg­ing con­tracts in the com­mod­ity de­riv­a­tives mar­ket can be en­tered into at any time of the year, but are set­tled in March, July, Septem­ber and De­cem­ber. Say a farmer buys a fu­tures con­tract in Jan­uary, ex­pir­ing in July, to lock in a maize price of R2,700. Come July, the ac­tual price of maize has fallen to R1,700. The farmer sells 100 t of maize at the lower price, but then re­cov­ers the dif­fer­ence, in this case R1,000, from the fu­tures con­tract. In this way, fu­tures con­tracts make it pos­si­ble for farm­ers to get more con­sis­tent pric­ing for their crops and en­able them to re­coup costs re­lat­ing to the buy­ing and sell­ing of phys­i­cal maize.

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