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The futures market really is about the future

Agriculture.com Staff 12/22/2006 @ 10:04am

The futures market's main job is to provide a reflection of what prices will be in the future, based on what market participants know today. The last few days of trading in the corn market illustrate that concept.

Here are the basics of what is known today. In the future, there will be more ethanol plants and more corn demand from that sector. There will be a shortage of corn in coming years. An unprecedented number of corn acres will be needed. This certainly implies that corn in the future will be higher priced than now. But funny things happen when people "know" corn will be more expensive in the future-the price of corn right now goes up as well. Why pay more for corn in the future when it can be purchased today and stored for the future? Of course, it may just be "stored" by simply buying a futures contract.

In the past few days, the Renewable Fuels Association web site has twice updated its list of members' current plants and future construction. With current and planned ethanol production of over 10 billion gallons, according to this list, the market had a wake-up call. No more wondering about end-of-the-year positioning, possible fund selling, end of the year farmer selling-the potential demand for corn is just too overwhelming.

Merry Christmas from Advantage Ag Strategies!

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

The futures market's main job is to provide a reflection of what prices will be in the future, based on what market participants know today. The last few days of trading in the corn market illustrate that concept.

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