Commodities futures

The prices of commodities—such as crops, livestock and such metals as copper, gold, lead and tin—tend to fluctuate from one period of time to the next. Commodity traders fall into two broad categories: hedgers and speculators. Hedgers are business firms (or individuals) that enter into a commod­ity contract to be assured access to the commodity at a guaranteed price. A firm secures a needed commodity and is protected against price fluctuation. Thousands of individuals, in contrast, trade in commodity futures as speculators.

The major reason for the rising volume of commodity speculation is the lure of huge profits which can be made on small or thin margins. Uncontrolled forces such as weather or wars can affect supply and demand and send commodity prices up or down very rapidly, thereby creating great profits or losses.

Speculating in commodities is done primarily at a com­modities exchange, and there are a dozen such exchanges in the United States. These exchanges are voluntary trade asso­ciations, but they are called organized markets because members are required to follow set trading rules.

How does the commodity-trading system operate? Sup­pose a person bought a standard contract for 30,000 kilo­grams of cocoa. This buyer could pay the money and take possession of the cocoa. Or the buyer could make the pur­chase and then sell the contract to someone else. Most people have no need for that much cocoa, nor do they have a place to store it. Their purchase is purely a paper transac­tion; they hold the contract with the intention of selling it to someone else.

Commodity futures contracts, like stocks, are traded on margin. The difference typically is that a commodities margin is only about 10 to 20 percent of the value of the contract, which increases the opportunity for speculation, and large gains or losses.

Those who make money are often professional traders, well versed in the way the market is likely to react. It has been estimated that of all the small buyers who enter this market, 85 percent lose money. In practice this statistic suggests a few very large winners and a great many losers. The risks are high because a small price change raises profits or losses dramatically.

Market dynamics

Markets in stocks and commodities form a vital part of the American economic system. Millions of individuals buy and sell small lots of stocks and commodities while mutual funds and trusts trade in large lots. In good times, when it appears that prices will rise, money from savings or from other types of investment flows into the market. When this happens, prices are driven higher. Often a period of speculation follows in which the "bulls," those who make money on a rising market, dominate the market. When the market can no longer sustain the speculative fever, a reaction sets in, selling devel­ops and prices begin to fall. At this point the "bears," or those who make money in a falling market, are the gainers.

During this process the Federal Reserve Board may be trying to curb excesses and stimulate or dampen the market by raising or lowering the margin.

A new significant factor in the market is the volume of funds from abroad that is being invested. Not only has Middle Eastern oil money made its way into American securi­ties, but many people in Europe, Japan and other parts of the world feel that their best opportunity for securing their wealth is to invest in American stocks. This preference for investment in the U.S. economy partially explains the ex­traordinary strength of the American dollar in the early 1980s. It also, of course, is partly responsible for the gradual upward climb of stock prices in the decades toward the end of the century.