1234 - 10/4/2014 19:43


You raise an very interesting question that I'm sure we all have thought about.
Just thinking out loud now. Is there a difference between investing (risking) the capital (land, equipment, etc.) & management actually producing a product or merely taking the same capital (money) and trading the corresponding futures?
One essential difference is that if everybody just did futures speculation there won't be anyone to produce the product. To that extent the population of futures traders is limited. On the other hand, there are obviously more than enough suckers (myself included) who appear willing to take the very real production risk as well as the market risk so that's probably not a limiting factor.
It is taken as conventional wisdom that farming and ag futures trading is a zero sum game. That traders don't expand the pie they just take more or less as their share depending on circumstances. Some traders want you to believe that they provide a valuable service by providing liquidity but I think they would be hard pressed to actually prove it. Most producers who hedge eventually come to the realization that cost of hedging over the long run equals or exceeds the average losses of a straight marketing program. Again this is almost obvious because like casinos where house has to win more than 50% of the time or they go out of business traders won't stay in the business unless they made a profit in the long run . And food production is such a low margin business that in the long run prices average out to just above costs plus wages (or equivalent).
There is another factor that isn't widely appreciated, namely farmers and traders face the same risks like the weather or world trade disruptions but unlike traders they are stuck with their trades (planting a crop) when they put the seed in the ground if not before (sign the rent agreement). Traders can cut their losses with a simple keystroke and try again tomorrow. And unlike farmers, traders can take full advantage of all the power and convenience of modern communication and weather forecasting to continually re-evaluate their trades.
Well, after thinking about it for a while I wonder why I even bother to farm?
Hopefully somebody else will provide a valid rationalization of my career choice.



Very well put! I have some speculator friends who are quite interesting to talk to. For some reason, I always feel dumb for actually doing the work to produce a real product to try to make money on after our visits though! I've always thought the same thing. Maybe I'd be no further ahead or behind just making the trades, but I imagine my back wouldn't hurt quite as much! lol