If the price still is at 6.00 when you desire to liquidate, you would sell your futures and buy your actual sugar at about the same price. Thus you have neither gained nor lost, but you have been sure of getting sugar at 6.00, which is the price you felt was low.
The time to buy actual sugar is generally when the market becomes strong and an advance in the price of the actual commodity seems imminent; but the time to buy sugar futures is before the strength develops. The future market invariably discounts declines and anticipates advances.
_2. Buying of Sugar Futures to protect profits on advance sales to customers_
While it may not be an established custom, we know numerous instances where jobbers have sold sugars in small quantities for future delivery. The examples to which we refer are small manufacturers buying sugar locally, who, when the market appears in a strong condition desire to be assured of their regular supply of sugar at a specified price. Under such conditions we have known jobbers to sell them sugar for delivery over several months. If at any time you are placed in a similar position, and desire to take care of your customers in this manner, without incurring too great a risk, the Exchange offers exceptional opportunities for protection, as, of course, you would be able to buy sugar for delivery in any month you desire, even as far in advance as one year.
It is clear that if you sell at a specified price for delivery at a certain time, your only protection is your belief that you'll be able to buy sugar cheaply enough to make a profit.
---------------------------------------------------------------------------- BUYING SUGAR FUTURES
1. Based on the expectation of higher prices. 2. To establish costs, pre-determine selling prices and protect profits on advance sales. ---------------------------------------------------------------------------- Initial | | | Transactions | Subsequent Transactions |Sugar Cost | Result -------------+------+----------+--------+-------+------+------------+------- | |Condition | Price |Result |Price | Figure it | In | |of market | you | of | you | this way |each | | when you | would |selling| pay | |case | |buy actual| obtain | your | for | |the | | sugar |for your|futures|actual| |same | | |futures | |sugar | | -------------+------+----------+--------+-------+------+------------+------- | | | | | |Price paid |Your | | | | | |for actual |sugar | | | |A | |sugar less |cost is You buy Sugar|When |If it has | |profit | |hedging |6.00 Futures at |you |advanced | |of | |profit |as pre- 6.00 to cover|buy |to 8.00 | 8.00 |2.00 | 8.00 |8-2=6 |deter- future |actual| | | | | |mined requirements;|sugar,| | |A | |Price paid | fix your |you |If it has | |loss | |for actual | price and |sell |declined | |of | |sugar plus | take orders |your |to | | | |hedging loss| on the basis |fu- |4.00 | 4.00 |2.00 | 4.00 |4+2=6 | of 6¢ sugar |tures | | | | | | | |If it is | |No | | | | |still at | |profit,| | | | |6.00 | 6.00 |no loss| 6.00 | 6.00 | -------------+------+----------+--------+-------+------+------------+-------