markets

[ramccrea]

would someone explain , what going long,or short into the markets means

[Jman]

Long:
Means you own something that you haven’t sold yet.

Short:
Means you sold something that you don’t yet own.

Let’s use canola from a farmer's perspective as an example:

Scenario 1:
If you have 100 tonnes of canola sitting in the bin from the 2005 harvest that is not priced, you are "long" 100 tonnes of canola. [This is not a good thing should the markets keep dropping on you].

On the other hand:

Scenario 2:
You have no canola on the farm right now. But you plan on producing 100 tonnes this fall and you want to lock in a price before you harvest it because you think the price is going to fall. You will then need to sell futures, or "Short" the market in order to set a price on your canola. By doing this, you are selling something that you don’t yet own.

From want I have learned from my brokers, is most farmers don’t directly buy or sell futures contracts with a personal broker, they instead sign flat-priced, New-Crop Production contracts directly with the grain companies, essentially pre-selling ("shorting") the market before they harvest the canola. If you are new to the game of grain marketing, you may want to go this route to start, and take small steps into directly participating in the futures markets to manage your own price risk.

I personally use the futures to hedge (“short”) my production because I don’t like using the grain company's new-crop" contracts due to the often poor basis values as well as, and the one-sided clauses such as "minimal buyout costs to recover lost elevation fees, and the refusal to pay futures gains on a contract, should I not be able to deliver against the contract due to crop failure or hail damage.
Once I have the grain in the bin, I will then shop it around to the highest bidder with the best basis value. Once I strike a deal with the grain company, I then buy my futures position back so that I am no longer short in the futures market.

As for the futures markets:
The biggest downside to the futures markets is margin calls, and learning not to use them as a speculation or gambling tool and trying to outwit the markets. Only use the futures to hedge your production, and used wisely, they can substantially reduce your exposure to the unpredictable ag commodity markets.

Good Luck.

[charliep]

The way I think a long position is having a market position that benefits from higher prices if you are a speculator or is protrected against higher prices if you are a grain user (i.e. a hedger). A long in the futures market is someone who owns the buy side of a futures contract. A grain farmer who holds grain inventory in the bin unpriced is long the market. In both cases, you enjoy the benefit of higher prices and endure the pain of lower ones. A feedlot operator that has priced barley (either bought futures contracts, has a contract with someone to suppply barley or has inventory stored at the feedlot) to feed their cattle over the next three months is long - they are protected against higher feed prices as hedger.

I think of a short as someone who benefits from market declines as speculator or is protected against price declines as a hedger. A speculator with a short position holds the sell side of a futures contract. A feedlot operator is short the market when they haven't forwarded contracted enough feed barley for the cattle they have in their pens to last until the animals are finished. In both cases, they benefit from price declines but suffer the pain of price increases (margin calls/higher costs of gain). A grain producer who has forward sold crop prior to harvest (sold futures or signed a DDC) is short the market as a hedger.

To make things interesting, a farmers can hold both positions. A farmer who has grain in bins is long physical inventory. If they sold futures to protect a price as a hedge, they would be short futures.

Hopefully this helps.

[TOM4CWB]

ramccrea,

There are other ways to avoid margin calls... by buying options.

Calls give the right to go long; at a certain "strike" price... but not the obligation to do so... if the market falls.

This is price "insurance" for a premium... cost... we can buy these options.

A Put, gives the right to profit from a falling market... with out the obligation to pay margin calls if the market rises instead.


I like to remember them using the following saying:

Put Down; and Call Up.

[onearm]

http://www.wce.ca/NewsNotices.aspx?first=hedginginformation

go to the above link for good information on basic terminlogy. the chicago merc (cme) and the chicago board of trade (cbot) have info as well.

charlie has it almost right: to short the market is to purchase a short futures contract. This contract gives you the right to sell the product at a future date for a specific price on that future date. a long futures contract gives you the right to purchase the product on a future date at a certain price. As you get closer to that future date, and you don't want to actually buy or sell the product on that future date for that price, you sell your contract that gives you the right to sell or buy the product on a future date at a certain price and pocket or pay the difference.

clear as mud?

by the way, what is the arrow icon supposed to mean?

[charliep]

My interpretation of the arrow is to forward the question to someone else to keep the conversation. I will have to check with my god son (teenager) to get the correct interpretation.