Future greed vs. pragmatism.

Here is a basic paradigm: Wheat is a commodity grown by a farmer to sell to a processor (such as Pillsbury) to make flour for an end user.  Both the farmer and the mill know how many dollars they will need to make on their product in order to be profitable in the future.  They arrange a deal with each other to price next year’s wheat crop at a mutually acceptable level.  This contract on tomorrow’s wheat helps insure both parties against some adverse fluctuations in crop yields.  It becomes a wheat futures contract traded on the commodities exchange.  If contracts are created by third parties willing to make bets om the factors that affect crop yields, we might consider those speculative.  They were never intended to actually hedge an end-product’s cost at delivery, just generate a trading opportunity.  After the wild swings in most commodities seen in 2008, a clamor of protest is now swelling, asking for an end to the creation of such contracts.  The exchanges stand to lose a bundle if that happens, and are claiming the additional liquidity provided by these contracts keeps everything running smoothly.  Stay tuned, this will be a long, hard-fought battle.  Lobbying efforts and bribes will spread cash all around.  Each of us will be affected by the outcome no matter which way it goes.