In Australia, there's this stereotype of the "hard working Aussie battler farmer" and that we should all support our farmers. My friend's family business was one of these growing a type of nut. It was common for neighbouring farmers to make a good living selling their produce and using it for their own purposes and expect the government to bail them out with something like a tax break.
My friend's business wanted to prepare for water shortages and spent a huge amount of money setting up a dam or storage system of sorts. Lo and behold, a drought came some time after and they were prepared. A lot of other businesses did not prepare for this and instead spent it on other things. My friend mentioned to me that he has no sympathy for those types of people.
Disclaimer: This is a generic statement, I did not pry into the story and there could be a multitude of reasons why one didn't/couldn't prepare for such a thing
Local 'big name' family is voracious in their consumption of government grants. They're not struggling by any means but they've got application writing down to a fine science.
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> A lot of other businesses did not prepare for this
So did the government bail them out?
The farmers probably can't sell their product any other way than as futures; and can't buy energy any other way than at the current market price.
That would mean the actual choice involved is just the choice to go into the farming business. Not exactly fair to compare that to casino betting.
In practice, hedging for increases in fuel prices means buying something like oil futures.
Which requires you to be at terminal at some port city 6 months down the line to physically collect the oil/gasoline/whatever that you bought. And then store it for the months before you use it.
The same for your other inputs, you have contacts to buy them well into the future, you don’t just pay the market rate when you need it.
Commodities futures are heavily used to arrange actual exchange of goods and aren't abstractions but real contracts.
If you're a person who actually needs the future, you need to take delivery. This makes sense on an industrial mega-farm scale, but doesn't make sense at the private-farm scale.
I’m talking about going to the local farmers coop and purchasing next years fertilizer, fuel, etc. months in advance for a set price to be paid and delivered in the future.
When you sell your outputs it’s a good idea to buy your inputs at the same time. The outputs are often exchange traded commodities, the inputs are often contract purchases with local dealers although you can also hedge with appropriate exchange traded commodities.
Correct. You have an over the counter market with different derivatives.
> Forwards don't have enforcement for when the seller goes bankrupt, which leaves the buyer out any money paid in the forward contract and needing to find another supply at market price. That's my understanding, at least.
You're referring to counter party risk. A futures exchange seeks to eliminate this type of risk with daily settlement of positions, margins, etc.
- Diesel for tractors
- Fertilizers
- The weather itself
- interest rates
- real estate
AFAIK the only inputs without derivatives are labor cost and pesticides.
Financier: "Well Jim, I know you were focused on digging the irrigation for your farm but with 'Free Money' in the economy, valuations for real estate and other commodities were going to rise. The Delta's on your futures were all out of wack!" Jim: "What's a delta?"