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May 2008

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Commodity Speculation: Not just fun and games, its far reaching ramifications

May 21, 2008 – Comments (4)

Below is the best and most important (at least as far as the economy is concerned) article I've read in some time. Commodity markets are theoretically created to promote an efficient market between buyers and sellers. A wheat farmer can sell his produce, via a commodity futures market, months before the wheat has grown. This allows the farmer to lock in a price (and hopefully profit) and allocate his/her farming expenses and budget accordingly. On the other side of any commodity trade is the futures purchaser. For example: a bread company. By purchasing the wheat future the bread company now has a known quantity of a key component of its product set to arrive on a certain date. The bread company can then budget and set its product prices accordingly. Efficient and theoretically less volatility for the price of wheat. The buyer and seller have hedged their risk of future wheat price swings by locking in a known price the day of the futures trade.   [more]

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