Futures markets are markets that deal with the promise to either buy or sell a set commodity at a set price at some point in the future. They originated as a way for producers to protect themselves somewhat against price fluctuations based on external forces, such as the demand for corn in the marketplace. The earliest modern futures market was created in Osaka, Japan, as a way of selling futures of rice. In the United States in the early 19th century, around Chicago, agricultural commodity markets sprang up to sell futures, including corn futures. The first forward contract through the Chicago Board of Trade (CBOT) was in corn futures, and took place in 1951.
The corn futures market operates on contracts that come up in March, May, July, September, and December. The minimum size for a corn futures contract is 5,000 bushels of corn, and the price limit is set at $1000 US Dollars (USD) per contact above or below the previous day’s final price. There are three grades of tradable corn: Number 1 yellow, which trades at 1.5 cents over the contract price, Number 2 yellow which trades at contract price, and Number 3 yellow, which trades at 1.5 cents under the contract price.
Corn futures are one of the major futures markets in the world, as corn is the staple grain used in the west, especially in the United States. Billions of USD worth of corn futures are traded each day through markets, helping both to drive the price of corn, and to stabilize the market. Like other futures markets, not everyone involved in buying corn futures is interested in actually buying or selling corn. In fact, many people involved in corn futures are doing so simply as a way of making money through speculation.
There are two distinct reasons one might buy corn futures: hedging and speculating. Hedging is something people who actually want to be buying the physical commodity of corn do in order to minimize their risk of profit loss, should the market shift between the time they want to buy or sell a contract for corn, and the time they actually have the corn on hand. Speculating, on the other hand, is done by investors, as a way of taking advantage of the shifting market to earn money, using the physical commodities just as a proxy for the market itself. They never get their hands on actual corn; instead they continuously buy and sell corn futures to try to leverage the market.
Corn futures can be short-hedged or long-hedged, depending on whether the contract entered into says the investor will be selling corn or buying it. When someone short hedges corn, it means they are saying that at a point in the future they will sell a certain amount of corn for a set price. If someone long hedges corn, it means they are saying they will buy it for a set price. Someone who has speculated on a short hedge will make money if the actual price of corn falls between the time they buy the corn futures and the time the contract comes up, while a long hedge will be profitable if the price of corn rises.
Hedgers use the corn futures market in tandem with the spot market, which is the market that reflects the actual price of corn at the moment, to ensure that no matter what way the market moves, they never lose money. By taking opposite positions in the corn futures market and the corn spot market, any loss they might suffer in one market is offset by the gains in the other, and visa versa, so the money they make is based entirely on the physical commodity itself.
