I’ve been trying to get my head round this for years; I get it up to a point, but then it all goes fuzzy.
Here’s what I understand about the subject - please correct me if I err:
A producer, e.g. a copra farmer, can sell his future crop to an investor at a predecided price, to be delivered on a set date. This is in effect a loan that allows the farmer to purchase seeds or whatever to make the harvest, and thus stimulates the rural economy.
That investor can then resell this potential crop on a futures exchange to someone who feels they have a better understanding of what the price for the goods will be on maturation. Thus if I feel that copra will go up in price, I can buy it at what I consider to be a bargain price and realise profit on the crop when it matures.
Practical questions: do individual farmers make these deals? How do they physically do it - paperwork, etc.? Do they work as a conglomerate or as individuals? Imagine I end up with a future that matures today. Do I now have to take delivery of the crop in order to resell it? Is this now a tradable commodity? How do I do this? Who pays the shipping costs? Does every trade mean that someone has made a loss?
Things that really confuse me: I gather that, to stimulate the market, there are futures being traded on the exchange that don’t actually refer to real stock; furthermore that they expire simultaneously with another future, and “cancel each other out”. How on earth does this work? What possible advantage could an investor have in buying one of these things?
