When farming transitioned from being a way to provide for the family to a viable commercial business providing for a population the farmer faced a dilemma. With every short growing season they faced uncertainty, what price would they get for their crops when they went to market at harvest time?
Was it going to be an abundant bumper crop year that would drive the market price down or a poor crop resulting in scarcity that would drive the market price up? This uncertainty made it impossible or at least very difficult to run a business. After all, you don't know what you're going to sell your crops for at harvest.
The same could also be said for the buyers of farm produce.
Manufactures of food, ice cream for example, would want to know what their cost of milk will be for the long winter months ahead. They too could not operate with uncertainty and run their business properly without knowing what their cost of supplies will be.
So it only made sense than that the farmer and the manufacture make a deal and agree on an acceptable future price they would commit to each other for. The farmer would know the price for supplying and the manufacture would know the cost for taking delivery of the goods at point in the future.
It was a great arrangement...
At first...
But business is business and if the harvest was plenty, the market price went lower; the manufacture would not honor the deal and save money by going to market to buy the required supplies. The same held true for the farmer, if the crops were poor and the market price was much higher, than he would renege on the deal and sell his crop to the market for more money. This great arrangement needed someway of holding both parties accountable.
This was the birth of the Futures Market, a middle man. Someone who contract's with the farmer to sell his harvest at a set price and pays him up front a deposit to legally bind the contract. The farmer gets some much needed cash up front to use and he knows what he will get at harvest. The same is done with the manufacture except he buys a contract for his needs and gives a deposit to confirm his commitment. Both parties are happy, confident the deal will be honored.
The middle man now holds contracts of value that will fluctuate daily. The value is always changing, increasing or decreasing depending on the market price each day. The middleman took all the risk and profits leaving the farmers and manufactures to do what they do best, farm and manufacture. This system has worked well ever since and as expanded to almost every goods and materials you can think of. Currency, all commodities such as minerals, precious gems and oil are just a few examples of futures trading contracts that are traded daily. Today the futures trading market exceeds 100 Trillion Dollars and is the foundation of today's stock markets. Learn futures trading and you can take your share of this very active market.
Was it going to be an abundant bumper crop year that would drive the market price down or a poor crop resulting in scarcity that would drive the market price up? This uncertainty made it impossible or at least very difficult to run a business. After all, you don't know what you're going to sell your crops for at harvest.
The same could also be said for the buyers of farm produce.
Manufactures of food, ice cream for example, would want to know what their cost of milk will be for the long winter months ahead. They too could not operate with uncertainty and run their business properly without knowing what their cost of supplies will be.
So it only made sense than that the farmer and the manufacture make a deal and agree on an acceptable future price they would commit to each other for. The farmer would know the price for supplying and the manufacture would know the cost for taking delivery of the goods at point in the future.
It was a great arrangement...
At first...
But business is business and if the harvest was plenty, the market price went lower; the manufacture would not honor the deal and save money by going to market to buy the required supplies. The same held true for the farmer, if the crops were poor and the market price was much higher, than he would renege on the deal and sell his crop to the market for more money. This great arrangement needed someway of holding both parties accountable.
This was the birth of the Futures Market, a middle man. Someone who contract's with the farmer to sell his harvest at a set price and pays him up front a deposit to legally bind the contract. The farmer gets some much needed cash up front to use and he knows what he will get at harvest. The same is done with the manufacture except he buys a contract for his needs and gives a deposit to confirm his commitment. Both parties are happy, confident the deal will be honored.
The middle man now holds contracts of value that will fluctuate daily. The value is always changing, increasing or decreasing depending on the market price each day. The middleman took all the risk and profits leaving the farmers and manufactures to do what they do best, farm and manufacture. This system has worked well ever since and as expanded to almost every goods and materials you can think of. Currency, all commodities such as minerals, precious gems and oil are just a few examples of futures trading contracts that are traded daily. Today the futures trading market exceeds 100 Trillion Dollars and is the foundation of today's stock markets. Learn futures trading and you can take your share of this very active market.
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