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<blockquote data-quote="csmfutures" data-source="post: 49381" data-attributes="member: 718"><p>Craig - A position in futures is speculation, <u>unless it's a hedge</u>. If you have 70 feeder cattle, say 700 lbs, and you sell 1 CME feeder contract (50,000lbs) you have locked in the price in the Major Market. Not the local market. Therefore the risk has gone from a market risk to a basis risk. You are therefore protecting against major price shifts which inevitably hit the local market. Your upside is also gone, because the feeder contract will take away any price gain excepting cash basis and gains in weight price (ie:feeders vs fats). </p><p></p><p>This is where the option market comes in so handy for hedges because it applies a floor or base price in the Major Market without the upside price elimination, excluding the premium paid for the option. There are numerous strategies using options as well to reduce risk or premium, but the key is to be diciplined at hedging and avoid speculation. </p><p></p><p>Being conservative is the idea, not getting extreme, using diversifcation. Hedge portions of the herd, etc. Being victim to the market with no defense is the definition of speculation. </p><p></p><p>If you know agriculture, you know that it's all purely speculation, not an investment. A CD as bill said is an investment, a cow is speculating. Your average bank CD doesn't jump fences, get sick and run up bills, just drop dead or have the market price crash from BSE. Hedging offsets that speculation to a certain degree.</p></blockquote><p></p>
[QUOTE="csmfutures, post: 49381, member: 718"] Craig - A position in futures is speculation, [u]unless it's a hedge[/u]. If you have 70 feeder cattle, say 700 lbs, and you sell 1 CME feeder contract (50,000lbs) you have locked in the price in the Major Market. Not the local market. Therefore the risk has gone from a market risk to a basis risk. You are therefore protecting against major price shifts which inevitably hit the local market. Your upside is also gone, because the feeder contract will take away any price gain excepting cash basis and gains in weight price (ie:feeders vs fats). This is where the option market comes in so handy for hedges because it applies a floor or base price in the Major Market without the upside price elimination, excluding the premium paid for the option. There are numerous strategies using options as well to reduce risk or premium, but the key is to be diciplined at hedging and avoid speculation. Being conservative is the idea, not getting extreme, using diversifcation. Hedge portions of the herd, etc. Being victim to the market with no defense is the definition of speculation. If you know agriculture, you know that it's all purely speculation, not an investment. A CD as bill said is an investment, a cow is speculating. Your average bank CD doesn't jump fences, get sick and run up bills, just drop dead or have the market price crash from BSE. Hedging offsets that speculation to a certain degree. [/QUOTE]
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