Wheat futures are basically exchange-traded standardized contracts where the buyer of the contract agrees to accept delivery from the seller. The quantity and price will be predetermined and set for a future delivery date.
The quantity of wheat is calculated in bushels. Futures are traded on the NYSE Euronext (Euronext), Euronext Milling Wheat Futures, and the Chicago Board of Trade (CBOT).
Wheat producers and consumers manage the wheat price risk by buying and selling futures contracts. Producers can utilize a short hedge to lock the selling price of the wheat while the consumer can utilize a long hedge to secure the purchase price for the required commodity.
Wheat futures are often traded by speculators and they do this by assuming the price risk that hedgers like to avoid for a chance to profit from wheat price movement. If they think the price is going to fall, they will sell rapidly.
If you’re optimistic about wheat, you can turn a profit if the price of wheat rises by taking up a long position in the futures market. Buying is called “going long” and you can do this by purchasing one or more contracts at the wheat exchange.
As there’s just a requirement of a relatively low margin, leverage is made possible to control a large amount of wheat. These will be represented by each futures contract.
Leverage enables you to make huge profits when the market moves favorably. But at the same time, if it goes against you, you will lose big and you will be required to meet the margin requirements to keep your futures position open.
If you think the prices of wheat’s going to drop, you can turn a profit by taking a short position in the futures market. You can do this by what’s called “shorting” or selling your futures contract or contracts on the futures exchange.
The producers of the commodity are known as hedgers, so in this case, it will be the wheat farmer. They will enter the futures exchange to ensure that the price risk of their underlying assets and business holdings are managed.
So for example, if the farmer believes that the cost of wheat is going to drop by the time it’s ready for harvest, he or she will sell a futures contract in wheat. What that means is that the farmer can opt for trade by selling a futures contract and leave it at a later date by buying it. This is how the risk is hedged to manage the risk of falling crop prices.