Futures Markets


Instead of condemning commodity speculation, we ought to recognize the vital function it serves. Let’s look at it with a simplified example that captures the essence of speculation in commodity futures markets.

Say that today’s price of corn is $6 a bushel. I have a hunch that because of future supply and demand conditions, such as drought, war and increased other uses for corn, that in May 2009 corn will sell for $12 a bushel. I stand to make a lot of money if I buy corn now for $6 a bushel, hold it, and in May 2009 sell it for $12 a bushel. Sure, I’ve made a bundle of money for myself but is my speculative activity deserving of condemnation? The answer is no; I’ve served a valuable social function.


The futures market is no bed of roses. My guess could be wrong. There could be a bumper crop of corn and its May 2009 price might be $3 a bushel. I’d have to sell corn that I bought today for $6 a bushel for $3 in May 2009 and suffer a big loss.



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