FCI could procure only 9.2 mn tonnes this year, as against the target of 16.

2 million tonnes which was set for this year. This

despite, the Government’s decision to pay a bonus of Rs 50 a quintal on top of the minimum support price of Rs 650 a
quintal to wheat growers who sold their produce to the FCI or state grain procurement agencies. This is mainly b’coz of Price
dissemination & Awareness created among the farmers that they are able to sell their produce to big corporates. In this
entire process future Exchanges have played a major role in disseminating the present & future prices through News
Channels & Price Tickers.

Farmers of various commodities like Urad, Red Chilly, chana, pepper were able to get good prices comparatively after the
existence of Commodity exchanges.

The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of
their crop. From the the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through
the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking.in asset
prices. These were simple contracts developed to meet the needs of farmers and were basically a means

of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in
September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would
have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high
risk of price uncertainty.

A farmer is continuosly updated by price and the quantity traded by tickers kept in spot exchange by which he can decide
what quantity to be sold at what time.

NCDEX spot exchange launch in Oct-Nov

Our Bureau

Plans to invest Rs 12-15 crore

Kochi , Aug. 22

NCDEX plans to invest Rs 12-15 crore to set up electronic spot exchanges acrorss the country, Mr P.H. Ravikumar,
Managing Director and CEO of NCDEX told reporters here on Tuesday.

Efficient value chain

He said NCDEX proposed to start the trading in October-November this year.

Mr Ravikumar, who was here in connection with a seminar on opportunities in commodities futures jointly organised by
NCDEX and Infarm Agro Movement, said agricultural commodities to be taken up for spot trading in Rajasthan were
mustard, pulses and guarseed, whereas in West Bengal it would be jute, potatoes and rice.

The exchange would gradually extend spot trading to other agricultural commodities such as cotton, all spices, coffee and
cashew, he added.

Spot prices on the electronic exchange platform would reflect the fundamentals of demand and supply.

Hence, transparency would be assured in arriving at the final settlement price for settlement of futures contracts, he said.

Remunerative to farmers

The trading will bring down the number of intermediaries and help farmers realise remunerative price for their produce.

Earlier, speaking at the awareness programme, the Chairman of the Infarm Agro Movement, Fr Mathew Vadakkemuriyil said
that commodity exchanges should come close to farmers in a bid to spread awareness about the benefits of futures trading
in commodities. Farmers have an apprehension on the futures market as they were of the view that prices are being
manipulated, he said.

In futures, Infarm wanted the farmers should derive benefits from commodity exchanges. They need to be educated about
the advantages of these exchanges, he added.

Kerala Govt-MCX venture to enable farm price discovery

Vinson Kurian

Thiruvananthapuram , Dec 19

A STATE-SPONSORED agricultural initiative in Kerala that aims to link farmers with buyers and sellers electronically is set
to enter into a pioneering tie-up with the Multi Commodity Exchange of India (MCX) and the National Spot Exchange for
Agricultural Produce (NSEAP).

Spearheading the initiative is e-Krishi, an information and transaction platform for agricultural producers, buyers, and service
providers.

The arrangement with the MCX/NSEAP being formalised on Wednesday will provide the farmer with access to real-time
information on commodity prices.

The signing of the MoU will be preceded by the formal launch of e-Krishi by the State Chief Minister, Mr Oommen Chandy.

The project enjoys the support of the UNDP and the National Institute for Smart Governance (NISG).

The e-Krishi-MCX/NSEAP venture will empower farmers with an improved and efficient price discovery mechanism as well,
according to sources.

The project is anchored on the network of market-led and IT-enabled agri business centre operated by select Akshaya e-
centre entrepreneurs.

Piloted in the Malappuram district, the Akshaya programme will be rolled out across the State in phases.

Akshaya entrepreneurs will act as primary delivery points and benefit from this platform by availing themselves of additional
source of revenue mobilisation.

With their voluntary involvement in the initiative, farmer groups would become the secondary points of delivery.

The e-Krishi project seeks to establish a robust IT-enabled platform where the members can seek information, transact, and
make or receive electronic payments.

Responses from the farmer community cultivating priority crops as determined by the market demand will be collected.
Buyers and exporters in key markets and manufacturers in processing industries will be enlisted.

Other likely stakeholders are agricultural input providers, consultants, test laboratories, and warehousing facility providers in
respective geographical regions.

Logistics service providers, banks, insurers, legal consultants, farm accounting assistants, and documentation will provide
the rest of the support mechanism.

An implementation committee with members from the Department of Agriculture, Nabard, Apeda, the State Planning Board,
and the State IT Mission has been constituted to review and guide the project.

Consultants have been appointed to support and co-ordinate agricultural stakeholder activities.

`Futures trading must serve larger social purpose'

Our Bureau

Mumbai , Sept. 4
It was with the objective to deliver benefit to growers through price discovery and price risk management that commodity
futures trading was thrown open in terms of the recommendation contained in National Agriculture Policy released in the
year 2000.

However, if the objective is not served, it could invite public ire, according to Mr Rajiv Agarwal, Member, Forward markets
Commission, who was sharing his thoughts on the market regulator's perspective at Commasset 2006 conference here on
Sunday.

Following sharp increase in the open market prices of essential food items such as wheat, pulses, sugar and edible oil, the
Union Government had announced several measure to contain inflation including ban on exports, liberal imports, imposition
of storage limits and so on.

"Some government steps may appear restrictive, but there is a larger social purpose behind these decisions", the speaker
asserted.

The regulator's concerns include financial integrity, market integrity and correlation between physical and futures markets.

Unlike the securities market where everyone is happy with the market going up, in the commodities market, interests of both
producers and consumers have to be balanced.

If prices decline to low levels, producers' incomes would be hit, while consumers' interests would be affected with undue
price rise.

Mr Agarwal urged market participants to keep this larger picture in mind, adding that the regulator has to ensure no
manipulation took place in the market.

The commodity conference ended with a price outlook discussion on energy, base metals, bullion and agricultural products.
Integration of the Indian market with the global market means that domestic prices would be impacted by global factors.

`NCDEX world's third largest agri-exchange'

G. Chandrashekhar

Volume higher than NYBT: Unctad

Mumbai , Sept. 11

National Commodity and Derivatives Exchange (NCDEX) has emerged as the world's third largest agricultural exchange. In
only its second full year of operation, NCDEX trades a considerably higher volume of agricultural contracts than the New
York Board of Trade, the Unctad said in its latest report.

Special mention

Making a special mention of China's Dalian Commodities Exchange and India's NCDEX for their stellar performance, the
report said the key factor driving growth in agricultural futures has been the emergence of dynamic markets in China and
India.

NCDEX has undergone spectacular rise as a hub for agricultural trade in the subcontinent. Trading that stood at 6.5 million
contracts in 2004 increased by 562 per cent (more than six-fold rise) to 43.0 million traded contracts in 2005.

"We are glad our performance is being noted and we look forward to bettering it in future," Mr P.H. Ravikumar, Managing
Director of the country's foremost commodity futures exchange, told Business Line.

Growth

Global commodity futures and options trading continued to grow at a healthy pace in 2005, for the second year in a row,
outpacing financial futures and options, UNCTAD said in its report, adding that during January-February 2006, such trading
was an impressive 41 per cent higher than during same period previous year.

Developing country exchanges, particularly in China and India, can now clearly be recognised as one of the major liquidity
centres in world commodity markets with eight of top 15 commodity futures exchanges in 2005 located in Asia.
Looking forward, the coming years are likely to see substantial further growth in emerging commodity markets, the report
pointed said, adding that this will be driven by the continued growth of existing exchanges, particularly those in China and
India and also by the rise of other exchanges situated in emerging markets.

India's Forward Markets Commission, the regulator of the commodity exchanges, has been hinting that it may grant national
status to new entities, which could provide further competition to the existing one, the report remarked.

NCDEX plans to set up mandis for spot trading

M. Ramesh

High degree of sophistication to provide edge

Advantages
If a person in Chennai finds the price of a commodity cheaper in Rajasthan, he can buy it online from the Rajasthan mandi
and get the delivery from an NCDEX affiliated local warehouse.
SET FOR MAKEOVER?: Will these mandis such as the Chawni market in Indore undergo changes to accommodate
modern facilities?

Chennai , Aug. 20

The National Commodity & Derivatives Exchange (NCDEX) intends to set up mandis across the country as it is keen to
enter the spot market in commodities.

For starters, having obtained approvals from the Rajasthan and West Bengal Governments, the exchange will set up mandis
in the two States, Mr P.H. Ravikumar, Managing Director & CEO, NCDEX, told Business Line.

(The National Multi-Commodity Exchange of India (NMCE) has also announced that it would start an e-platform for spot
trading in commodities in Rajasthan and Gujarat.)

Sophistication

The mandis will have a high degree of sophistication. For example, if a person in Chennai finds the price of a commodity
cheaper in Rajasthan, he can buy it online from the Rajasthan mandi and get the delivery from an NCDEX-affiliated local
warehouse, Mr Ravikumar said.

But the bigger advantage is that the farmer will be able to get an idea of the ruling prices before he takes the produce to the
mandi. Today, a farmer may have to cart his produce all the way to a nearby mandi, which could be some 30 km away. So,
the chances of his taking it back home if the prices are down are small.

Benchmark likely

The NCDEX mandi, wired up to the local panchayats, will be able to inform the farmers of the ruling prices in advance.

The exchange intends to set up a benchmark in mandis so that all of them are upgraded eventually, Mr Ravikumar said.

At present, participants in the commodity exchanges can only operate in the futures market, unlike the stock exchanges
where one can trade in spot, futures, options and indices.

The Forward Contracts (Regulation) Bill, 2006, which is awaiting Parliament nod, seeks to enable options and index
products to be traded on the exchange. Mr Ravikumar said the commodity markets were set to explode. Today, even when a
number of players in the financial sector — banks, mutual funds, financial institutions and FIIs — are barred from trading in
commodity exchanges, the value of daily trade in these exchanges (about Rs 15,000 crore) is about 80 per cent of the
comparable futures segment in stock exchanges. He said he expected FIIs to be allowed to play in the commodity
exchanges by the year-end.

Bright prospects seen for commodity futures

C.J. Punnathara

Kochi , Jan. 5
WITH the accelerating pace of industrialisation and sustained population growth, the prospects for the commodity futures
market in 2006 seem bright.

"Many former developing nations are industrialising and joining the world economy, creating a massive middle class of
consumers. Even as the demand for several commodities are accelerating, many of the supply lines are tightening," Mr
Girish Kumar, Commodity In-charge, Peninsular Multi Comex Services Ltd, said.

Population growth and rapid industrialisation have ushered in a huge and growing middle class, which is competing for
every additional barrel of crude oil sold in the international markets, and for every kilogram of wheat, sugar, rubber or gold.
And the increasing purchasing power of the middle class has resulted in firm price trends.

Meanwhile, the rapid industrialisation is itself spurring a parallel demand for commodities: from copper for the burgeoning
telecom industry, silver for electronics, gas and oil for running factories, electricity for heating, and iron and steel for cars and
buses, Mr Kumar said.

To bridge any demand-supply mismatch, a new-generation commodity futures market has evolved that enables not only the
trader to book profits, but also extends the same facility to the farmer and common man. To counter wild market fluctuations,
the consumer has the facility to hedge against future price rises.

This recovery in the commodity prices is set to gain momentum after a 20-year downturn cycle. The last commodity market
rally started in the 1970s and continued till the 1980s, when grain and metal producers enjoyed a decade of rising prices
and fat profit margins, Mr Kumar said. This price surge triggered a worldwide expansion in commodity production, ultimately
bridging the demand-supply divide.

The subsequent downturn cycle witnessed commodity prices plunging to their all-time lows. Taking into consideration the
inflationary spiral, several commodity prices plunged to 100-year lows in real terms, during this period. But the conditions
seem bright for a revival of a commodity upswing cycle now, he said.

India and China — accounting for 38 per cent of the global population — are well positioned to guide and influence the
international commodity markets. And both these economies are accelerating fast, creating a huge demand for industrial raw
materials as well as generating a massive middle class with their growing demands.

Citing the magnitude of the demand, Mr Kumar said that China's projected copper demand for the next year would be up
400,000 tonnes above its domestic production. Similar demand surges can be expected for gold, silver, platinum copper and
zinc. The case for grains and commodity is expected to be no different.

In effect, the commodity prices are expected to firm up from the current year and the international commodity futures
markets are likely to become far more active and buoyant.

Bright prospects seen for commodity futures

C.J. Punnathara

Kochi , Jan. 5

WITH the accelerating pace of industrialisation and sustained population growth, the prospects for the commodity futures
market in 2006 seem bright.

"Many former developing nations are industrialising and joining the world economy, creating a massive middle class of
consumers. Even as the demand for several commodities are accelerating, many of the supply lines are tightening," Mr
Girish Kumar, Commodity In-charge, Peninsular Multi Comex Services Ltd, said.

Population growth and rapid industrialisation have ushered in a huge and growing middle class, which is competing for
every additional barrel of crude oil sold in the international markets, and for every kilogram of wheat, sugar, rubber or gold.
And the increasing purchasing power of the middle class has resulted in firm price trends.

Meanwhile, the rapid industrialisation is itself spurring a parallel demand for commodities: from copper for the burgeoning
telecom industry, silver for electronics, gas and oil for running factories, electricity for heating, and iron and steel for cars and
buses, Mr Kumar said.

To bridge any demand-supply mismatch, a new-generation commodity futures market has evolved that enables not only the
trader to book profits, but also extends the same facility to the farmer and common man. To counter wild market fluctuations,
the consumer has the facility to hedge against future price rises.
This recovery in the commodity prices is set to gain momentum after a 20-year downturn cycle. The last commodity market
rally started in the 1970s and continued till the 1980s, when grain and metal producers enjoyed a decade of rising prices
and fat profit margins, Mr Kumar said. This price surge triggered a worldwide expansion in commodity production, ultimately
bridging the demand-supply divide.

The subsequent downturn cycle witnessed commodity prices plunging to their all-time lows. Taking into consideration the
inflationary spiral, several commodity prices plunged to 100-year lows in real terms, during this period. But the conditions
seem bright for a revival of a commodity upswing cycle now, he said.

India and China — accounting for 38 per cent of the global population — are well positioned to guide and influence the
international commodity markets. And both these economies are accelerating fast, creating a huge demand for industrial raw
materials as well as generating a massive middle class with their growing demands.

Citing the magnitude of the demand, Mr Kumar said that China's projected copper demand for the next year would be up
400,000 tonnes above its domestic production. Similar demand surges can be expected for gold, silver, platinum copper and
zinc. The case for grains and commodity is expected to be no different.

In effect, the commodity prices are expected to firm up from the current year and the international commodity futures
markets are likely to become far more active and buoyant.

Spot agri exchange takes off

TIMES NEWS NETWORK [ FRIDAY, FEBRUARY 11, 2005 01:29:36 AM]

NEW DELHI: The Centre made a decisive move towards synergising private players in farm goods marketing by kicking off
India’s first National Spot Exchange for Agricultural Produce (NSEAP).

The NSEAP is expected to provide referral national spot prices on real time basis for the benefit of farmers.

Speaking on the occasion of signing a MoU by Financial Technologies (India) (FTIL), the Multi Commodity Exchange (MCX)
and Nafed (National Agricultural Cooperative Marketing Federation) with the SBI as the principal clearing and settlement
bank of exchange for the NSEAP, agriculture minister Sharad Pawar said the move was in line with PM’s stress on setting
up a national level common market for farmers with the least cost.

The introduction of the national level spot market, Mr Pawar said, marked a milestone in agricultural marketing.

This would provide adequate financing and the Model Agricultural Produce Marketing Cooperatives Act (APMC) was
another step in this direction, he said.

As part of the strategy to increase private participation in the farm sector, the Centre is facilitating a law to make Warehouse
Receipts a negotiable instrument, to attract lending by banks to the farm sector. Another radical change, Mr Pawar said, was
the introduction of the Value Added Tax (VAT) regime in order to increase inter-state trading and for the creation of a national
market.

Rooting heavily for direct procurement of commodities by major agri-business enterprises from production centres on
remunerative prices, Mr Pawar emphasized that electronic linkages have to be created for better efficiency in procurement,
along with necessary infrastructure support to settle transactions.

In his address, consumer affairs secretary L Mansingh pointed out that the government had removed restrictions in futures
trading in various commodities and the integration of spot marketing with futures trading will open up a single commodity
market place for farmers.

Organised marketing of agricultural commodities is promoted in the country through a network of regulated markets. All the
State Governments and Union Territories (except Kerala, Manipur, Dadra & Nagar Haveli, Lakshdweep and Andaman &
Nicobar Islands) have enacted legislation viz. the Agricultural Produce Marketing Regulation Act (APMC Act) to provide for
regulation of the agricultural markets. No State Government/Union TerritoryAdministration has enacted separate legislation
for setting up of Agricultural Produce Marketing Companies.

By disseminating spot price data on agricultural commodities, NSEAP would enable farmers across the country to access
the national market and to trade with each other on an electronic platform and settle their trades under the support and
regulations of NSEAP, the minister added.

Farmers can opt to sell their produce at NSEAP

NEW DELHI, DHNS:

After being harassed by intermediaries for decades, Indian farmers can now opt to sell their produce at better rates at the
National Spot Exchange Agriculture Produce (NSEAP).

Multi Commodity Exchange (MCX) and Financial Technologies (India) Ltd (FTIL) signed an official MoU with the National
Agricultural Cooperative Marketing Federation of India Ltd (NAFED) on Thursday to set up the country’s first electronic spot
trading mechanism for commodities markets.

Soon after inaugurating the NSEAP, Union Agriculture, Food and Consumer Affairs Minister Sharad Pawar told reporters,
“The spot trading will act as a referral price in real time for farmers across the country. It is important for farmers to get good
remuneration for their products.”

Expressing hope that spot trading would help farmers get better prices for their produce and prevent distress sales, Mr
Pawar said the electonic initiative would also benefit consumers.

Centre is planning to bring in a legislation to make warehouse receipt a negotiable instrument, the minister added.

The cost of intermediation is the highest in India whereby farmer often fails to recover his input cost of the produce while the
consumers pay high price for agro produce.

“Spot trading will help farmers develop a stake in what the consumer wants, while benefiting the consumer. The dramatic
results of futures trading in a short time has helped pave the way for commencement of spot trading,” said Union Consumer
Affairs Secretary L Mansingh.

Will farmers benefit from commodity futures?

A strong regulatory regime is needed to oversee market's functioning

The price discovery function enables participants to know the market sentiment and take trading decisions accordingly.

COMMODITY MARKETS have been receiving focussed attention after remaining in relative obscurity for over three
decades. This follows the lifting of controls and restrictions that had stymied their natural growth.

In the era of controls and restrictions risks were largely assessable and possibly containable. In the current free economy
with many players in the fray and funds flowing freely, risk assessment and risk containment have become important though
onerous.

Realising the need for scientific risk management tools to enable commodity based trade and industry to remain
competitive, the Government has revived futures trading in commodities.

Until the early 1960s India had a thriving commodities futures market but hedge trading was prohibited till recently for
economic and political reasons.

In the current liberalised scenario, where India is gradually integrating with global markets, hedging of price risk has become
important.

Price discovery

Futures trading in commodities performs two functions: price discovery and price risk management. The price discovery
function enables market participants to know the market sentiment and take trading decisions accordingly.

The price risk management function helps those with underlying exposure to commodities (such persons are called
hedgers) to insure themselves against adverse price movements in future.

Futures trading should normally help farmers plan their cropping pattern, based on forward prices on the exchanges.
However, in a country like India, the ability of farmers to switch from one crop to another based on forward prices is rather
limited. For processors and traders faced with the risk of adverse price movements, futures trading is a boon. They can buy
or sell futures contracts and lock in their profits or margins. Hedgers and speculators impart liquidity to the market.
There is however the need to evaluate the impact of commodities futures trading on the country's economy.

Too much of speculative activity on the bourses and flow of funds can potentially distort the market. A strong regulatory
regime is necessary to oversee the functioning of this market. There is a move to strengthen the Forward Markets
Commission by giving it more administrative autonomy as also financial independence.

Rapid growth

Commodity futures trading has shown remarkable expansion in the last four years. Specifically, after the setting up of three
nation-wide commodity exchanges trading in multiple commodities online, trading volumes have shown a phenomenal
growth rate.

During 2004-05, all the exchanges together, including commodity specific and regional exchanges, logged a turnover of Rs.
5.71 lakh crore, registering a 350 per cent growth over the previous year.

Some of the major commodities traded now are bullion (gold and silver), crude oil, products of the oilseeds complex
including vegetable oil and pulses. Minor items like guar seed have also attracted tremendous speculative interest
contributing to trading volumes.

Commodity futures trading cannot exist independent of the physical market. A strong and free physical market is a
prerequisite for a healthy derivatives market.

It is necessary for the policy makers to address the deficiencies of the physical market at the earliest as it affects the lives of
people.

How far has the commodity futures been able to ensure price stability to the farmer?

I think it is too early to comment on this issue. However, our experience in rubber and pepper has been extremely positive
and the farmers have definitely benefited. Since the farmers could sell in futures contracts, they can now opt for increased
production using appropriate methods such as usage of rain guards, etc. In fact, during the last off-season period, there was
more-than-expected supply of producers in the case of rubber and the reasons are easy to find.

How far has it been able to help the small farmer?

I do not think small farmers have benefited directly from futures trading. At the same time, they have reaped huge benefits
indirectly as trading terminals helped a nationwide price discovery mechanism. Terminals also act as information
dissemination tools and this, too, helped small farmers to take informed decisions. In the case of cardamom, there was a
huge price difference between the realised price for a farmer and the end price for a consumer, say, in North India. After the
introduction of futures trading, the consumer in Delhi and the producer in Idukki have started negotiating directly through the
satellite terminal, and this has resulted in indirectly raising the level of realisation for the small farmer.

The case in India seems to be too many commodity exchanges competing with each other for the same products.
Do you think India also should emulate the American markets?

I think India will go the American way, and each exchange will specialise in certain commodities and that focus will enable
them to deliver the best possible values to the stakeholders. Instead of trying to introduce all the commodities, focusing on a
few in which they have a competitive advantage will take them to a higher level of growth in terms of volume. In fact, there
are clear signals already in the market place.

As far as volumes are concerned, what do you think the true potential of Indian commodity markets are vis-a-vis
the capital markets?

India is predominantly a commodity-based country and, hence, chances are that our commodity futures exchanges will turn
out to be very big in terms of trading turnover. There are estimates of trading volumes as estimated by various agencies
indicating up to Rs 20 lakh crore per annum.

How about if we compare with the US markets?

If we take the total volume of the NYSE and Nasdaq and the total volume of commodities exchanges in the US, the
commodities turnover is much higher than the stock market turnover. In fact, the turnover on just one of the leading
commodity exchanges viz. CME is $333.7 trillion while the NYSE and Nasdaq combined turnover is only $8.285 trillion. If
this is taken as an indication, the commodities futures trading turnover will increase manifold in India too.
Could the Indian commodity futures markets buttress the swings of the capital markets and ensure a level playing
field for the farmers, the traders and the brokers?

The way forward in India is likely to be the predominance of equity brokers in commodities too. If this trend continues, there
will be a meaningful convergence resulting in brokers offering various products to their clients including commodities. This
will see equities clients investing in commodities when the going is tough in capital market and commodities players such as
farmers parking money in equity markets when there is an opportunity.

In my view, the biggest beneficiary will be the broking community as futures trading in commodities will help them to reach
out to a new and large number of hitherto untapped clientele i.e. farmers. This will be an opportunity for the brokers to hedge
the risk arising from the extreme volatility in their earning stream.

Hedging in the futures market is a two-step process. Depending upon the hedger's cash market
situation, he will either buy or sell futures as his first position. For instance, if he is going to buy a
commodity in the cash market at a later time, his first step is to buy futures contracts. Or if he is
going to sell a cash commodity at a later time, his first step in the hedging process is to sell futures
contracts.
The second step in the process occurs when the cash market transaction takes place. At this time
the futures position is no longer needed for price protection and should therefore be offset (closed
out). If the hedger was initially long (long hedge), he would offset his position by selling the contract
back. If he was initially short (short hedge), he would buy back the futures contract. Both the
opening and closing positions must be for the same commodity, number of contracts, and delivery
month.
Example: Assume in June a farmer expects to harvest at least 10,000 bushels of
soybeans during September. By hedging, he can lock in a price for his soybeans in June and protect
himself against the possibility of falling prices.
At the time, the cash price for new-crop soybeans is $6 and the price of November bean futures is
$6.25. The delivery month of November marks the harvest of new-crop soybeans.
The farmer short hedges his crop by selling two November 5,000 bushel soybean futures contracts
at $6.25. (Typically, farmers do not hedge 100 percent of their expected production, as the exact
number of bushels produced is unknown until harvest. In this scenario, the producer expects to
produce more than 10,000 bushels of soybeans.)
By the beginning of September, cash and futures prices have fallen. When the farmer sells his cash
beans to the local elevator for $5.72 a bushel, he lifts his hedge by purchasing November soybean
futures at $5.95. The 30-cent gain in the futures market offsets the lower price he receives for his
soybeans to the cash market.
Cash Futures
June Price for Sells 2 November
new-crop soybeans at soybean contracts
$6.00/bushel at $6.25/bushel
September Sells 10,000 bushels Buys 2 November
soybeans at soybean contracts at
$5.72/bushel $5.95/bushel
Result Cash sale price $ 5.72/bushel
Futures gain + .30/bushel
Net selling price$ 6.02/bushel
Had the farmer not hedged, he only would have received $5.72 a bushel for his soybeans - 30 cents
lower than the net selling price he received.
Past performance is not necessarily indicative of future results.
The risk of loss exists in commodity futures trading.