Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell Cornflakes for $3 a box. Now say that due to a drought, the price I pay for corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't want to pay $5 for a box of Cornflakes, and my sales drop.
But if I buy corn futures when the price of corn is low, then when it goes up those become more valuable, canceling out some of my increased supply cost, therefore my business is less exposed to risk in price volatility of raw materials.
In other words, it's for hedging.
Now, there are various ways to exploit this unethically, for example if I as a commodity trading bank, actually have control over the prices of the commodities. We're right to be concerned about that. But commodities hedging itself is a good thing for the economy and we shouldn't spread FUD about it.
Correct, and to be clear, that is exactly what Kellogg's, General Mills, Coca-Cola, and other big food companies have been doing for years now. It's not uncommon whatsoever -- if anything, it's considered a best practice -- to hedge on commodities prices if your fundamental business depends on them.
In and of itself, that big food companies deal in commodities futures (call and/or put) is neither surprising nor irrational.
Things start to get scary when speculators dominate the markets for those commodities, and when commodities houses corner markets. The reverberations across various sectors of the economy would be frightening if anything went to shit at even one commodity shop.
Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell Cornflakes for $3 a box. Now say that due to a drought, the price I pay for corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't want to pay $5 for a box of Cornflakes, and my sales drop.
But if I buy corn futures when the price of corn is low, then when it goes up those become more valuable, canceling out some of my increased supply cost, therefore my business is less exposed to risk in price volatility of raw materials.
In other words, it's for hedging.
Now, there are various ways to exploit this unethically, for example if I as a commodity trading bank, actually have control over the prices of the commodities. We're right to be concerned about that. But commodities hedging itself is a good thing for the economy and we shouldn't spread FUD about it.