So you buy that futures contract for 5,000 bushels of corn at $4 each. You don't want to risk higher prices if there's a smaller crop. On the other side, say you're a food processing company that needs corn to produce cornmeal for food retailers. But you miss out on profits if prices rise to $5. You win if prices drop because you've locked in $4 a bushel. So you sell a futures contract, agreeing to sell 5,000 bushels of corn at $4 each in 90 days. You want to be sure that you'll be able to get at least the prevailing market price for your crop. They're often used by producers or major industrial consumers as a risk management tool in case prices increase or decrease.įor instance, say you're a corn farmer. These agreements specify the terms of delivery of an asset for a specified date in the future. If you think the price will drop, you sell futures, or go short.Īlthough it's possible to trade commodities by buying and selling the physical commodity, trading through futures contracts is far more common. If you think the price of a commodity will go up, you buy futures, or go long. Often these raw materials are the building blocks of manufactured products.Ĭommodities traders bet on how the commodity's price will move. Commodities trading is the buying and selling of these interchangeable materials in bulk. That's because both corn and flour are commodities. When you buy an ear of corn or a bag of wheat flour at a supermarket, you probably don't pay much attention to where they were grown or milled.
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