"Buying Prices on the Commodity Futures Market

Abstract

Trading in the future prices of commodities can be a way for food-service operators to gain some assurance of what price they will pay for the commodities they need. Food-service operators can "buy prices" by hedging in the commodity-futures market. Hedging works directly with commodities that food-service operators purchase and that are also traded as futures, such as potatoes or grains. For commodities that are not traded as futures, such as boneless beef, a cross-hedge works indirectly when the changing price of the futures contract (e.g., for steers) mediates any changes in price of the desired commodity (e.g., boneless beef). In a direct hedge, one can establish the future price to be paid for a commodity by opening a futures contract today to purchase the commodity at a given price at a later date. That allows food-service operators to plan for raw-material costs. The theory of a cross-hedge is that as the price of the underlying commodity changes, the price of the desired commodity and the value of the futures contract will move in the same direction, thereby offsetting some of the effects of any price changes.