Wondering what a corn future is? That’s certainly a legitimate question, especially if you are considering investing in futures or another type of financial instrument. By now you’ve almost certainly figured out that corn futures involve corn, but what does the term itself actually mean?
A future is an obligatory contract that requires one party to buy, and another party to sell, a specific commodity in the future, hence the name. In this case, a future for corn will require one party to sell corn at a specified future date and another party to buy the corn on that date at an already agreed upon price. So a corn future is simply a contract to buy corn in the future for an already agreed upon price.
Why Corn Futures Are Used
So why bother with a corn future at all? Why doesn’t the farmer or other seller simply wait until he or she has the corn in hand and then sell it? And why don’t buyers simply buy corn that is available for sale? For one, a lot of commodities are bought through futures. So if you want to buy a large quantity of something, you might have to buy it in advance. If not, all of the corn might already have been bought.
Sellers, on the other hand, often need cash and they need it before their crops have fully matured. An easy way to raise that cash then is to simply sell the crops ahead of time. This way, the farmers and companies selling corn will have at least some money coming in even if they should choose not to sell all of their corn at once. The seller can then reinvest the money and used to produce more corn.
All futures have an expiration date. When the future expires, the commodity must be delivered. Of course, most traders don’t want corn or gold or anything else delivered to them, so they generally sell the futures to companies that are looking to actually buy and use the commodities. So make sure you pay close attention to the expiration date on the future, or you might find yourself taking delivery of some unwanted commodities!
Futures inject speculation into markets
Futures allow for buyers and sellers to speculate on prices, and this in turn can generate profits (and of course, also losses). Let’s say that in March, Jane becomes convinced that a drought will hit the United States this year and this in turn will create negative impacts on crops. Production will be down and prices will go up.
At the moment, however, most other traders, analysts and farmers are optimistic that this will be a good growing season. As such, corn futures are quite low. Jane now sees an opportunity to make some money and buys $1 million dollars’ worth of corn futures with a six month expiration date. Jane’s intuition or knowledge turns out to be correct and as summer rolls around, the rains don’t come.
Suddenly corn prices are sky rocketing, but Jane locked in low prices when she bought her futures back in March. With prices skyrocketing due to the drought Jane is able to sell her corn future at a significant mark up.
By injecting risk and reward into markets, futures serve a useful purpose for both buyers and sellers. Some people actually prefer trading futures to stocks because they feel that it is easier to predict general trends, such as droughts, than it is to predict the performance of a single company. Some people also find commodity markets simpler to analyze as consumption is usually easier to predict. Either way, corn futures and other types of futures are worth a close look if you are considering investing.