• TABLE OF CONTENTS
HIDE
 Copyright
 Title Page
 Introduction
 What is a futures contract?
 How does trading in futures differ...
 What conditions are necessary for...
 Whta are the logical steps to having...
 What is the main function of futures...
 What is contract unit?
 Can less than a full contract be...
 Who trades in futures contract...
 who can trade in futures?
 What is the futures trading...
 What are the trading fees and commission...
 What is margin?
 Are there limits on the number...
 What is hedging in futures...
 What is speculation in commodi...
 How could an orange grower use...
 How could a processor of orange...
 How might a user of frozen orange...
 Who decides the time, place and...
 What proportion of the total futures...
 Is futures trading controlled by...
 How can futures trading be discontinued...
 What factors are conducive to the...
 What factors are likely to impede...
 What factors are conducive to the...
 What factors are likely to impede...
 What are the benfits likely to...
 What would be the results of making...






Group Title: Agricultural economic mimeo report - Department of Agricultural Economics, University of Florida - EC 66-6
Title: Questions and answers on futures trading and the Florida orange industry, by B.A. Dominick, Jr. and F.W. Williams
CITATION PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00071974/00001
 Material Information
Title: Questions and answers on futures trading and the Florida orange industry, by B.A. Dominick, Jr. and F.W. Williams
Physical Description: vi, 79 p., : fig., tables, ; 28 cm.
Language: English
Creator: Dominick, B. A. Jr.
Williams, F. W
Publisher: University of Florida, Agricultural Experiment Stations
Place of Publication: Gainesville Fla
Publication Date: 1965
 Subjects
Genre: non-fiction   ( marcgt )
 Notes
General Note: December, 1965.
Funding: Florida Historical Agriculture and Rural Life
General Note: Mimeo report - University of Florida, Agricultural Experiment Station ; EC 66-6 (supplement)
 Record Information
Bibliographic ID: UF00071974
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: Florida Agricultural Experiment Station, Florida Cooperative Extension Service, Florida Department of Agriculture and Consumer Services, and the Engineering and Industrial Experiment Station; Institute for Food and Agricultural Services (IFAS), University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 28747235

Table of Contents
    Copyright
        Copyright
    Title Page
        Title Page
    Introduction
        Introduction
    What is a futures contract?
        Page 1
    How does trading in futures differ from forward selling?
        Page 1
    What conditions are necessary for successful futures trading?
        Page 2
    Whta are the logical steps to having a commodity traded on a futures market?
        Page 2
    What is the main function of futures exchanges?
        Page 3
    What is contract unit?
        Page 3
    Can less than a full contract be traded?
        Page 4
    Who trades in futures contracts?
        Page 4
    who can trade in futures?
        Page 4
    What is the futures trading procedure?
        Page 4
    What are the trading fees and commission for a particular commodity?
        Page 5
    What is margin?
        Page 5
    Are there limits on the number of futures contracts that one individual or firm can hold?
        Page 5
    What is hedging in futures contracts?
        Page 6
    What is speculation in commodities?
        Page 6
    How could an orange grower use a futures market?
        Page 6
    How could a processor of orange concentrate use a futures market?
        Page 7
    How might a user of frozen orange concentrate deal in a futures market?
        Page 8
    Who decides the time, place and grade of product to be delivered on a futures contract?
        Page 8
    What proportion of the total futures traded is completed by delivery?
        Page 8
    Is futures trading controlled by government?
        Page 8
    How can futures trading be discontinued for a commodity once it is established?
        Page 9
    What factors are conducive to the development of futures trading in fresh oranges?
        Page 9
    What factors are likely to impede the development of futures trading in fresh oranges?
        Page 10
    What factors are conducive to the development of futures trading in frozen orange concentrate?
        Page 11
        Page 12
    What factors are likely to impede the development of futures trading in frozen orange concentrate?
        Page 13
    What are the benfits likely to be derived from futures trading of oranges and/or frozen orange concentrate?
        Page 14
    What would be the results of making a wrong decision to establish a futures market in oranges and/or frozen orange concentrate?
        Page 14
        Page 15
Full Text





HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida






C PC-)


Supplement to
Agricultural Economics Mimeo Report EC 66-6
December 1965


QUESTIONS AND ANSWERS

ON

FUTURES TRADING AND THE FLORIDA ORANGE INDUSTRY


B. A. Dominick, Jr.
and
F. W. Williams





Department of Agricultural Economics
Florida Agricultural Experiment Stations
Gainesville, Florida
in cooperation with
Florida Citrus Commission
Lakeland, Florida













FUTURES TRADING AND THE FLORIDA ORANGE INDUSTRY

B. A. Dominick, Jr. and F. W. WilliamsJ*


This paper contains answers to important questions concerning possible

futures trading in Florida oranges and/or orange concentrate., It is

designed for use in discussion groups and individual study. The questions

and answers are based on the publication entitled Futures Tradinn and the

Florida Orange Industry by B. A. Dominick, Jr. and F. W. Williams, issued

by the Florida Agricultural Experiment Stations, Gainesville, Florida, as

Agricultural Economics Report EC 66-6.

Greater understanding of futures markets will allow a more informed

decision as to whether there is a need for futures trading and whether

industry members want their products traded in a futures market. While

the more important questions and answers are contained in this paper,

a more complete treatment of the subject is given in Agricultural Economics

Report EC 66-6.









Dr. Dominick is Professor of Marketing, Department of Agricultural
Economics, University of Florida,on sabbatical leave from Cornell Univer-
sity, Ithaca, New York. Dr. Williams is Research Economist, Florida Citrus
Commission and Associate Economist, Florida Agricultural Experiment
Stations, University of Florida, Gainesville, Florida.












What is a futures contract?

A futures contract is one in which the seller agrees to sell and the

buyer agrees to buy given quantities of a commodity at a stated price for

delivery during some stated later month, all subject to the rules of the

particular exchange where the commodity contracts are traded. A certain

grade of produce is specified as the contract grade and the price is for

that grade. Other grades which can be delivered at premiums or discounts

are determined by the exchange. Trading in futures contracts takes place

on one of the organized commodity exchanges or futures markets, as they

are often called.


How does trading in futures differ from forward selling?

A forward sale of a commodity may be made in a number of different

ways. Prices on futures contracts are openly determined through auction

bidding, are instantly recorded and publicized, and reflect the best

combined opinion of traders of all kinds. The futures market serves as

a guide in establishing cash prices and prices for forward deliveries of

the commodity. In forward selling, the price may be known only to the

parties involved. The intent of forward selling, generally is fulfillment

of the contract by delivery of the actual commodity, while in the futures

market the contract is completed in practically all instances by an

offsetting futures purchase or sale. In forward selling, the lot may be

ungraded and quality may very well vary among lots, whereas the futures

contract represents a particular grade and the price is for that grade.












What is a futures contract?

A futures contract is one in which the seller agrees to sell and the

buyer agrees to buy given quantities of a commodity at a stated price for

delivery during some stated later month, all subject to the rules of the

particular exchange where the commodity contracts are traded. A certain

grade of produce is specified as the contract grade and the price is for

that grade. Other grades which can be delivered at premiums or discounts

are determined by the exchange. Trading in futures contracts takes place

on one of the organized commodity exchanges or futures markets, as they

are often called.


How does trading in futures differ from forward selling?

A forward sale of a commodity may be made in a number of different

ways. Prices on futures contracts are openly determined through auction

bidding, are instantly recorded and publicized, and reflect the best

combined opinion of traders of all kinds. The futures market serves as

a guide in establishing cash prices and prices for forward deliveries of

the commodity. In forward selling, the price may be known only to the

parties involved. The intent of forward selling, generally is fulfillment

of the contract by delivery of the actual commodity, while in the futures

market the contract is completed in practically all instances by an

offsetting futures purchase or sale. In forward selling, the lot may be

ungraded and quality may very well vary among lots, whereas the futures

contract represents a particular grade and the price is for that grade.









What conditions are necessary for successful futures trading?

Three basic requirements are necessary for successful futures trading

in a commodity. First of all, there must be a need for hedging. Second,

the product should have certain characteristics. Third, the marketing con-

ditions and arrangements should be favorable. There is not universal

agreement on these requirements. Evidence indicates that futures trading

continued, if not developed, in commodities because there was a need for

hedging to facilitate better financing terms, protection against price

changes, or the like. It is doubtful that futures trading started primarily

to reduce or eliminate wide fluctuations in price. Some generally recog-

nized commodity characteristics include: it should be subject to grading

and should be storeable without deterioration; and it should be seasonally

produced so that storage is required over a period of time for orderly

marketing. As for marketing condition or arrangements, trade in the

commodity should have been conducted in an unrestricted forward market for

some time. Even though the commodity may have gone through a manufac-

turing process, its market should not be dominated by a few organizations

who produce and/or utilize the commodity. Some believe that futures

trading can be "tailored" for a commodity, if there is enough interest in

an industry, when all of the basic general requirements do not exist.


What are the logical steps to having a commodity traded on a futures market?

The first step is to determine needs of the industry for the product

being traded in such a manner. If there is widespread interest in the

industry for having a commodity traded on a futures market, then an organ-

ization representing the industry could seek legislation to permit such









What conditions are necessary for successful futures trading?

Three basic requirements are necessary for successful futures trading

in a commodity. First of all, there must be a need for hedging. Second,

the product should have certain characteristics. Third, the marketing con-

ditions and arrangements should be favorable. There is not universal

agreement on these requirements. Evidence indicates that futures trading

continued, if not developed, in commodities because there was a need for

hedging to facilitate better financing terms, protection against price

changes, or the like. It is doubtful that futures trading started primarily

to reduce or eliminate wide fluctuations in price. Some generally recog-

nized commodity characteristics include: it should be subject to grading

and should be storeable without deterioration; and it should be seasonally

produced so that storage is required over a period of time for orderly

marketing. As for marketing condition or arrangements, trade in the

commodity should have been conducted in an unrestricted forward market for

some time. Even though the commodity may have gone through a manufac-

turing process, its market should not be dominated by a few organizations

who produce and/or utilize the commodity. Some believe that futures

trading can be "tailored" for a commodity, if there is enough interest in

an industry, when all of the basic general requirements do not exist.


What are the logical steps to having a commodity traded on a futures market?

The first step is to determine needs of the industry for the product

being traded in such a manner. If there is widespread interest in the

industry for having a commodity traded on a futures market, then an organ-

ization representing the industry could seek legislation to permit such









trading to be included in the Commodity Exchange Act. If one of the

existing commodity exchanges were interested in handling the commodity, it

could be very helpful in formulating contract terms, margins, commission

and other general trading procedures.


What is the main function of futures exchanges?

Exchanges perform many functions. Opinions vary as to the importance

of each. Certainly among the more important are transferring legal titles

to contracts sold and bought, price discovery and publicizing prices

established. By attracting large quantities of risk capital to a central

location, hedging is made possible. More recently, the thought has been

advanced that "futures markets exist chiefly to facilitate the holding of

contracts. The making and offsetting of these contracts, misleadingly

called buying and selling, is only incidental to the main function of such

markets."

Other functions, such as greatly reducing or eliminating price

fluctuations or changes, are not among the purposes of futures exchanges.

An active, efficient futures market will, however, contribute greatly to

price structure through price discovery.


What is contract unit?

Commodities are bought and sold in futures markets by standardized

contracts. The details include the quantity of the commodity the contract

represents. This amount is also referred to as the "unit of trading."


Holbrook Working, "New Concepts Concerning Futures Markets and
Prices," The American Economic Review, Vol. LII, No. 3, June 1962, p. 433.









trading to be included in the Commodity Exchange Act. If one of the

existing commodity exchanges were interested in handling the commodity, it

could be very helpful in formulating contract terms, margins, commission

and other general trading procedures.


What is the main function of futures exchanges?

Exchanges perform many functions. Opinions vary as to the importance

of each. Certainly among the more important are transferring legal titles

to contracts sold and bought, price discovery and publicizing prices

established. By attracting large quantities of risk capital to a central

location, hedging is made possible. More recently, the thought has been

advanced that "futures markets exist chiefly to facilitate the holding of

contracts. The making and offsetting of these contracts, misleadingly

called buying and selling, is only incidental to the main function of such

markets."

Other functions, such as greatly reducing or eliminating price

fluctuations or changes, are not among the purposes of futures exchanges.

An active, efficient futures market will, however, contribute greatly to

price structure through price discovery.


What is contract unit?

Commodities are bought and sold in futures markets by standardized

contracts. The details include the quantity of the commodity the contract

represents. This amount is also referred to as the "unit of trading."


Holbrook Working, "New Concepts Concerning Futures Markets and
Prices," The American Economic Review, Vol. LII, No. 3, June 1962, p. 433.






4

It has been suggested that the trading unit for frozen orange concentrate

be 15,000 pounds of orange solids at 5" Brix. This would amount to 2,433

gallons. Another possible contract would be fresh oranges on the tree. A

trading unit which would closely parallel the concentrate contract would

be 2,500 boxes weighing 90 pounds each, based on the average solids content

of fresh oranges.


Can less than a full contract be traded?

For some commodities, amounts less than full contracts can be traded.

These are known as "job lots." Conditions for such trading are specified

by the exchange handling the particular commodity.


Who trades in futures contracts?

Two types of traders deal in futures contracts. Those who buy and

sell in an effort to avoid losses, or insure a profit in their business

enterprises enter the market for the purpose of hedging. Those who partic-

ipate in the market to make a profit from price changes alone are called

speculators. The efficient, effective operation of a futures market

depends on the active participation of each type of trader. The trading

procedures are the same regardless of the intentions of those who deal in

futures.


Who can trade in futures?

Anyone who can qualify and establishes a trading account with a

member of the particular exchange where the commodity is traded.


What is the futures trading procedure?

It is quite similar to trading on a stock exchange. A person must






4

It has been suggested that the trading unit for frozen orange concentrate

be 15,000 pounds of orange solids at 5" Brix. This would amount to 2,433

gallons. Another possible contract would be fresh oranges on the tree. A

trading unit which would closely parallel the concentrate contract would

be 2,500 boxes weighing 90 pounds each, based on the average solids content

of fresh oranges.


Can less than a full contract be traded?

For some commodities, amounts less than full contracts can be traded.

These are known as "job lots." Conditions for such trading are specified

by the exchange handling the particular commodity.


Who trades in futures contracts?

Two types of traders deal in futures contracts. Those who buy and

sell in an effort to avoid losses, or insure a profit in their business

enterprises enter the market for the purpose of hedging. Those who partic-

ipate in the market to make a profit from price changes alone are called

speculators. The efficient, effective operation of a futures market

depends on the active participation of each type of trader. The trading

procedures are the same regardless of the intentions of those who deal in

futures.


Who can trade in futures?

Anyone who can qualify and establishes a trading account with a

member of the particular exchange where the commodity is traded.


What is the futures trading procedure?

It is quite similar to trading on a stock exchange. A person must






4

It has been suggested that the trading unit for frozen orange concentrate

be 15,000 pounds of orange solids at 5" Brix. This would amount to 2,433

gallons. Another possible contract would be fresh oranges on the tree. A

trading unit which would closely parallel the concentrate contract would

be 2,500 boxes weighing 90 pounds each, based on the average solids content

of fresh oranges.


Can less than a full contract be traded?

For some commodities, amounts less than full contracts can be traded.

These are known as "job lots." Conditions for such trading are specified

by the exchange handling the particular commodity.


Who trades in futures contracts?

Two types of traders deal in futures contracts. Those who buy and

sell in an effort to avoid losses, or insure a profit in their business

enterprises enter the market for the purpose of hedging. Those who partic-

ipate in the market to make a profit from price changes alone are called

speculators. The efficient, effective operation of a futures market

depends on the active participation of each type of trader. The trading

procedures are the same regardless of the intentions of those who deal in

futures.


Who can trade in futures?

Anyone who can qualify and establishes a trading account with a

member of the particular exchange where the commodity is traded.


What is the futures trading procedure?

It is quite similar to trading on a stock exchange. A person must






4

It has been suggested that the trading unit for frozen orange concentrate

be 15,000 pounds of orange solids at 5" Brix. This would amount to 2,433

gallons. Another possible contract would be fresh oranges on the tree. A

trading unit which would closely parallel the concentrate contract would

be 2,500 boxes weighing 90 pounds each, based on the average solids content

of fresh oranges.


Can less than a full contract be traded?

For some commodities, amounts less than full contracts can be traded.

These are known as "job lots." Conditions for such trading are specified

by the exchange handling the particular commodity.


Who trades in futures contracts?

Two types of traders deal in futures contracts. Those who buy and

sell in an effort to avoid losses, or insure a profit in their business

enterprises enter the market for the purpose of hedging. Those who partic-

ipate in the market to make a profit from price changes alone are called

speculators. The efficient, effective operation of a futures market

depends on the active participation of each type of trader. The trading

procedures are the same regardless of the intentions of those who deal in

futures.


Who can trade in futures?

Anyone who can qualify and establishes a trading account with a

member of the particular exchange where the commodity is traded.


What is the futures trading procedure?

It is quite similar to trading on a stock exchange. A person must





5


establish a trading account with a member of the particular exchange

where the commodity contracts are traded. Most brokerage houses are

members or have contacts with the commodity exchanges.


What are the trading fees and commission for a particular commodity?

These are determined by the particular futures exchange where the

commodity contracts are traded. Information concerning fees and commissions

charged can be obtained from brokers dealing in commodity futures.


What is martin?

This is money deposited with a broker as evidence of intention to

complete a futures trade. The amount of the margin is set by the partic-

ular exchange where the commodity is traded. The size depends generally

on the value of the contract. Initial margin is the amount of cash

required to be deposited by buyers and sellers as they make their initial

commitments in the market. Maintenance margin provides continuous pro-

tection to buyers and sellers regardless of price changes. It is the

amount of money which must remain on deposit during the life of the contract

and varies with the price of the commodity future covered by the contract.


Are there limits on the number of futures contracts that one individual or
firm can hold?

For the commodities covered by the Commodity Exchange Act, "the

Commodity Exchange Commission is authorized to fix limits on the amount of

trading which may be done by any person during any trading day or on the

maximum position which any trader may hold or control All trading

except 'bona fide hedging transactions' as defined by the Act, is subject





5


establish a trading account with a member of the particular exchange

where the commodity contracts are traded. Most brokerage houses are

members or have contacts with the commodity exchanges.


What are the trading fees and commission for a particular commodity?

These are determined by the particular futures exchange where the

commodity contracts are traded. Information concerning fees and commissions

charged can be obtained from brokers dealing in commodity futures.


What is martin?

This is money deposited with a broker as evidence of intention to

complete a futures trade. The amount of the margin is set by the partic-

ular exchange where the commodity is traded. The size depends generally

on the value of the contract. Initial margin is the amount of cash

required to be deposited by buyers and sellers as they make their initial

commitments in the market. Maintenance margin provides continuous pro-

tection to buyers and sellers regardless of price changes. It is the

amount of money which must remain on deposit during the life of the contract

and varies with the price of the commodity future covered by the contract.


Are there limits on the number of futures contracts that one individual or
firm can hold?

For the commodities covered by the Commodity Exchange Act, "the

Commodity Exchange Commission is authorized to fix limits on the amount of

trading which may be done by any person during any trading day or on the

maximum position which any trader may hold or control All trading

except 'bona fide hedging transactions' as defined by the Act, is subject





5


establish a trading account with a member of the particular exchange

where the commodity contracts are traded. Most brokerage houses are

members or have contacts with the commodity exchanges.


What are the trading fees and commission for a particular commodity?

These are determined by the particular futures exchange where the

commodity contracts are traded. Information concerning fees and commissions

charged can be obtained from brokers dealing in commodity futures.


What is martin?

This is money deposited with a broker as evidence of intention to

complete a futures trade. The amount of the margin is set by the partic-

ular exchange where the commodity is traded. The size depends generally

on the value of the contract. Initial margin is the amount of cash

required to be deposited by buyers and sellers as they make their initial

commitments in the market. Maintenance margin provides continuous pro-

tection to buyers and sellers regardless of price changes. It is the

amount of money which must remain on deposit during the life of the contract

and varies with the price of the commodity future covered by the contract.


Are there limits on the number of futures contracts that one individual or
firm can hold?

For the commodities covered by the Commodity Exchange Act, "the

Commodity Exchange Commission is authorized to fix limits on the amount of

trading which may be done by any person during any trading day or on the

maximum position which any trader may hold or control All trading

except 'bona fide hedging transactions' as defined by the Act, is subject









to the limits."2 Daily trading limits and position limits are in effect

for a number of commodities.


What is hedqina in futures contracts?

An elementary definition of hedging is taking the opposite position

in the futures market that one takes in the cash (spot) market. Then to

complete the transaction, the positions are reversed. It has been defined

as the use of futures contracts as a temporary substitute for a merchan-

dising contract that is to be made later."3 Hedging is done for a number

of reasons depending upon circumstances. One of these is to provide some

degree of protection against price fluctuations.


What is speculation in commodities?

Speculation in commodities is the holding of a net long or net short

position for gain from price change, and not in connection with the opera-

tion of a producing, merchandising or processing business.


How could an orange grower use a futures market?

If there were a futures contract in Valencia oranges, a grower could

sell well in advance of harvest futures contracts for a particular month

to help insure against a decline in price at the time the oranges are

harvested. He could complete his trade in one of two ways. Before the

delivery month, he could sell his orange crop and at the same time buy the

same number of contracts he sold earlier. How well he fared would depend


Donald A. Campbell, "Trading in Futures Under the Commodity Exchange
Act," The George Washington Law Review, Vol. 26, No. 2 (Washington, D. C.:
January 1958), pp. 244-245.

3Working, p. 442.
4Working, p. 443.









to the limits."2 Daily trading limits and position limits are in effect

for a number of commodities.


What is hedqina in futures contracts?

An elementary definition of hedging is taking the opposite position

in the futures market that one takes in the cash (spot) market. Then to

complete the transaction, the positions are reversed. It has been defined

as the use of futures contracts as a temporary substitute for a merchan-

dising contract that is to be made later."3 Hedging is done for a number

of reasons depending upon circumstances. One of these is to provide some

degree of protection against price fluctuations.


What is speculation in commodities?

Speculation in commodities is the holding of a net long or net short

position for gain from price change, and not in connection with the opera-

tion of a producing, merchandising or processing business.


How could an orange grower use a futures market?

If there were a futures contract in Valencia oranges, a grower could

sell well in advance of harvest futures contracts for a particular month

to help insure against a decline in price at the time the oranges are

harvested. He could complete his trade in one of two ways. Before the

delivery month, he could sell his orange crop and at the same time buy the

same number of contracts he sold earlier. How well he fared would depend


Donald A. Campbell, "Trading in Futures Under the Commodity Exchange
Act," The George Washington Law Review, Vol. 26, No. 2 (Washington, D. C.:
January 1958), pp. 244-245.

3Working, p. 442.
4Working, p. 443.









to the limits."2 Daily trading limits and position limits are in effect

for a number of commodities.


What is hedqina in futures contracts?

An elementary definition of hedging is taking the opposite position

in the futures market that one takes in the cash (spot) market. Then to

complete the transaction, the positions are reversed. It has been defined

as the use of futures contracts as a temporary substitute for a merchan-

dising contract that is to be made later."3 Hedging is done for a number

of reasons depending upon circumstances. One of these is to provide some

degree of protection against price fluctuations.


What is speculation in commodities?

Speculation in commodities is the holding of a net long or net short

position for gain from price change, and not in connection with the opera-

tion of a producing, merchandising or processing business.


How could an orange grower use a futures market?

If there were a futures contract in Valencia oranges, a grower could

sell well in advance of harvest futures contracts for a particular month

to help insure against a decline in price at the time the oranges are

harvested. He could complete his trade in one of two ways. Before the

delivery month, he could sell his orange crop and at the same time buy the

same number of contracts he sold earlier. How well he fared would depend


Donald A. Campbell, "Trading in Futures Under the Commodity Exchange
Act," The George Washington Law Review, Vol. 26, No. 2 (Washington, D. C.:
January 1958), pp. 244-245.

3Working, p. 442.
4Working, p. 443.









upon the relationship between the cash price and the futures price. Or he

could wait until the delivery month, and deliver on the contract or con-

tracts he had sold earlier.

if the futures contract were in frozen concentrated orange juice in

bulk, a grower could also hedge against a price decline. However, it would

be more difficult to complete his contract by delivery. Most likely he

would complete his trade by buying the same number of contracts he sold

earlier.


How could a processor of orange concentrate use a futures market?

If there were a contract in Valencia oranges, processors could buy

futures contracts well in advance of harvest to help insure against a rise

in price. They might buy these contracts as they made forward commitments

to sell frozen orange concentrate. They could complete their hedge in one

of two ways. They could wait until the delivery month and take delivery on

the contracts, or, as they buy fresh oranges at harvest, they could sell the

same number of futures contracts they had bought earlier. How well they

would make out would depend upon the relationship between the cash price

and the futures price.

If the futures contract consisted of frozen concentrated orange juice

in bulk, processors could hedge against a decline in price by selling con-

tracts. Then as they sell frozen concentrate from their pack, they could

buy the same number of futures contracts they sold earlier. The degree of

price protection would depend on the relationship of the cash and futures

prices.









How might a user of frozen orange concentrate deal in a futures market?

A firm utilizing frozen orange concentrate in the manufacture of

chilled juice, for example, could trade in a futures market in the fol-

lowing manner: as the firm makes commitments to sell chilled juice for

delivery, several months later they could buy an equivalent number of

futures contracts of frozen concentrate in bulk as insurance against an

increase in price of the concentrate. The hedge could be completed later

in one of two ways. The firm could accept delivery of the bulk juice

during the delivery month, or as they deliver on their commitment of

chilled juice they could immediately sell the same number of futures

contracts of bulk juice which they earlier had bought.


Who decides the time, place and grade of product to be delivered on a
futures contract?

The seller within the limits set by the particular exchange where the

commodity is traded.


What proportion of the total futures traded is completed by delivery?

It varies among commodities, but the proportion is extremely small.


Is futures trading controlled by government?

Some exchanges, called contract markets, are licensed by the U. S.

Department of Agriculture pursuant to a law originally enacted in 1922

and amended several times, now known as the Commodity Exchange Act.

The main purpose in regulating exchanges where domestically-produced

commodities are traded is to assure that trading takes place in the public

interest. Actually, the Act provides for the regulation of futures trading

by the Secretary of Agriculture, the Comm-.dity Exchange Authority and the









How might a user of frozen orange concentrate deal in a futures market?

A firm utilizing frozen orange concentrate in the manufacture of

chilled juice, for example, could trade in a futures market in the fol-

lowing manner: as the firm makes commitments to sell chilled juice for

delivery, several months later they could buy an equivalent number of

futures contracts of frozen concentrate in bulk as insurance against an

increase in price of the concentrate. The hedge could be completed later

in one of two ways. The firm could accept delivery of the bulk juice

during the delivery month, or as they deliver on their commitment of

chilled juice they could immediately sell the same number of futures

contracts of bulk juice which they earlier had bought.


Who decides the time, place and grade of product to be delivered on a
futures contract?

The seller within the limits set by the particular exchange where the

commodity is traded.


What proportion of the total futures traded is completed by delivery?

It varies among commodities, but the proportion is extremely small.


Is futures trading controlled by government?

Some exchanges, called contract markets, are licensed by the U. S.

Department of Agriculture pursuant to a law originally enacted in 1922

and amended several times, now known as the Commodity Exchange Act.

The main purpose in regulating exchanges where domestically-produced

commodities are traded is to assure that trading takes place in the public

interest. Actually, the Act provides for the regulation of futures trading

by the Secretary of Agriculture, the Comm-.dity Exchange Authority and the









How might a user of frozen orange concentrate deal in a futures market?

A firm utilizing frozen orange concentrate in the manufacture of

chilled juice, for example, could trade in a futures market in the fol-

lowing manner: as the firm makes commitments to sell chilled juice for

delivery, several months later they could buy an equivalent number of

futures contracts of frozen concentrate in bulk as insurance against an

increase in price of the concentrate. The hedge could be completed later

in one of two ways. The firm could accept delivery of the bulk juice

during the delivery month, or as they deliver on their commitment of

chilled juice they could immediately sell the same number of futures

contracts of bulk juice which they earlier had bought.


Who decides the time, place and grade of product to be delivered on a
futures contract?

The seller within the limits set by the particular exchange where the

commodity is traded.


What proportion of the total futures traded is completed by delivery?

It varies among commodities, but the proportion is extremely small.


Is futures trading controlled by government?

Some exchanges, called contract markets, are licensed by the U. S.

Department of Agriculture pursuant to a law originally enacted in 1922

and amended several times, now known as the Commodity Exchange Act.

The main purpose in regulating exchanges where domestically-produced

commodities are traded is to assure that trading takes place in the public

interest. Actually, the Act provides for the regulation of futures trading

by the Secretary of Agriculture, the Comm-.dity Exchange Authority and the









How might a user of frozen orange concentrate deal in a futures market?

A firm utilizing frozen orange concentrate in the manufacture of

chilled juice, for example, could trade in a futures market in the fol-

lowing manner: as the firm makes commitments to sell chilled juice for

delivery, several months later they could buy an equivalent number of

futures contracts of frozen concentrate in bulk as insurance against an

increase in price of the concentrate. The hedge could be completed later

in one of two ways. The firm could accept delivery of the bulk juice

during the delivery month, or as they deliver on their commitment of

chilled juice they could immediately sell the same number of futures

contracts of bulk juice which they earlier had bought.


Who decides the time, place and grade of product to be delivered on a
futures contract?

The seller within the limits set by the particular exchange where the

commodity is traded.


What proportion of the total futures traded is completed by delivery?

It varies among commodities, but the proportion is extremely small.


Is futures trading controlled by government?

Some exchanges, called contract markets, are licensed by the U. S.

Department of Agriculture pursuant to a law originally enacted in 1922

and amended several times, now known as the Commodity Exchange Act.

The main purpose in regulating exchanges where domestically-produced

commodities are traded is to assure that trading takes place in the public

interest. Actually, the Act provides for the regulation of futures trading

by the Secretary of Agriculture, the Comm-.dity Exchange Authority and the









exchanges themselves. The exchanges are self-governing organizations

with rules and regulations developed by the numbers. However, they are

under the supervision of government to assure their operation in the

public interest.


How can futures trading be discontinued for a commodity once it is
established?

There are several ways. If there were no need for it, trading would

cease and the futures market would become inactive. The particular

exchange where the commodity is traded could suspend trading and order

liquidation of all outstanding contracts. Trading may be discontinued by

federal legislation when it is felt that trading in a particular commodity

is not in the interests of the public.


What factors are conducive to the development of futures trading in fresh
oranges?

1. Uncertainty of supply from season to season.

This causes market uncertainty and price fluctuations resulting

from individual and collective opinions. Because of uncertainty of

fruit supplies, futures trading would facilitate hedging against the

price fluctuations which uncertainty generated. This would create

conditions attractive to speculative trading.

2. Fluctuating on-tree prices.

Price fluctuation, again resulting from individual and collective

opinions of supply and market conditions, is an essential ingredient

of futures trading.

3. Relatively constant expenses from month to month while income distri-

bution is uneven, requiring financing for production expenses by

growers.









exchanges themselves. The exchanges are self-governing organizations

with rules and regulations developed by the numbers. However, they are

under the supervision of government to assure their operation in the

public interest.


How can futures trading be discontinued for a commodity once it is
established?

There are several ways. If there were no need for it, trading would

cease and the futures market would become inactive. The particular

exchange where the commodity is traded could suspend trading and order

liquidation of all outstanding contracts. Trading may be discontinued by

federal legislation when it is felt that trading in a particular commodity

is not in the interests of the public.


What factors are conducive to the development of futures trading in fresh
oranges?

1. Uncertainty of supply from season to season.

This causes market uncertainty and price fluctuations resulting

from individual and collective opinions. Because of uncertainty of

fruit supplies, futures trading would facilitate hedging against the

price fluctuations which uncertainty generated. This would create

conditions attractive to speculative trading.

2. Fluctuating on-tree prices.

Price fluctuation, again resulting from individual and collective

opinions of supply and market conditions, is an essential ingredient

of futures trading.

3. Relatively constant expenses from month to month while income distri-

bution is uneven, requiring financing for production expenses by

growers.









Credit is generally considered to be more readily obtained on

products which are hedged in a futures market than on products not

hedged.

4. Some forward selling at present time, but some problems with contract

completion.

Forward selling is presently practiced in the industry, but when

prices change in response to drastic changes in supply, contract

completion becomes more difficult. Futures trading requiring initial

and maintenance margins may help alleviate some of these problems.

5. Lack of specific price information on forward sales.

Those presently practicing forward selling do so with incomplete

information on prices of fruit for delivery on specified future dates.

Prices of futures contracts for any future delivery month would be

disseminated instantaneously on a continuing basis.


What factors are likely to impede the development of futures tradinLLn
fresh oranges?

1. Short harvest season and lack of storage other than on-tree.

There likely would not be continuous trading in fresh fruit

-futures because of the short harvest season. The present lack of

satisfactory storage of fresh fruit would limit the contract delivery

months to those in the harvest season.

2. Possible drastic changes in supply and quality because of weather.

The futures market would react to extreme weather conditions

affecting the supply and quality of fruit. Price adjustments would

be rapid, reflecting both informed and uninformed opinion. The risk

of financial loss would be great for those people holding short market

positions.









3. Difficult to apply to varieties other than Valencias.

Trading in early and mid-season orange varieties would be

limited by the short period of time the fruit remains on tree and

by the short harvest season.

4. Difficulty of establishing grade standards relative to finished

product.

Variations in juice yield, pounds solids, and other quality

factors affecting fruit value will complicate futures trading and

give added emphasis to discount and premium provisions of contracts.

5. Present degree of vertical integration within the industry and

relatively small base from which to initiate trading.

About 30 percent of the Florida oranges used for frozen concen-

trate is sold at specified prices. This proportion of the crop would

initially provide the base for futures trading. The remaining 70

percent is marketed through integration plans, including cooperatives

and participation plans.

6. Lack of general industry understanding of futures trading.

Knowledge of the principles and mechanics of futures trading is

essential to broad participation by the Florida citrus industry.

This understanding will require time, experience and a realization

of the need for market participation.


What factors are conducive to the development of futures trading in frozen
orange concentrate?

1. General lack of highly developed and widely disseminated information

on present and future prices.









Establishment of futures trading would immediately create a

system of nationally disseminated price quotations available on a

minute-to-minute basis,

2. Need of industry members for planning and adjusting to changing price

conditions.

Knowledge of the price of concentrate for delivery 3, 6, 9 or

12 months in the future would provide a valuable aid to industry

planning.

3. Some forward selling at the present time.

This suggests a realized need for committing product for future

delivery. This is one result of futures trading and has been a fore-

runner of futures markets in other products.

4. Relatively stable shipments of concentrate from month to month while

inventory fluctuates requiring storage financing by processors.

Credit is generally considered to be more readily obtained on

products which are hedged in a futures market than on products not

hedged.

5. Uncertainty of supply from season to season.

The supply of concentrate depends on the availability of fresh

oranges for processing and the amount of carry-over inventory from

season to season. These factors vary considerably from season to

season and contribute to variable supplies and prices of concentrate.

Variable prices resulting from uncertain supplies provide the basis

for hedging against price changes and the basis for speculation in

futures trading.









What factors are likely to impede the development of futures trading in
frozen orange concentrate?

1. Possible lack of long hedgers.

Hedgers in the Florida citrus industry would take predominantly

short positions in a concentrate futures market to protect themselves

against price declines. For each contract sale there must be a

buyer interested in assuming an opposite, or long, position in the

market.

2. Possible lack of speculative interest because of market structure.

The present degree of vertical integration and the concentration

of processing interests in the Florida citrus industry might initially

discourage speculative interests in futures trading.

3. Lack of general industry understanding of futures trading.

Broad participation of the Florida citrus industry in futures

trading will require greater understanding of the principles and

mechanics of futures markets than is presently evidenced. Once a

need for trading is realized, potential traders will likely be

motivated to gain a better understanding of the process through study

and trading experience.

4. Amount of product moved in bulk at the present time compared with

the total movement provides a relatively small base from which to

initiate futures trading.

If trading is initiated in bulk concentrate based on recent

movement of bulk, the volume of product will be small and there may

be relatively few contracts in which to trade.

5. Uncertainty of the effects of futures trading on retail prices.









Because bulk concentrate is readily convertible to retail and

institutional container sizes, the prices established by futures

trading for bulk concentrate are likely to affect prices at which

retail and institutional pack are sold. The exact relationships

which will exist among these prices are uncertain at the present

time.


What are the benefits likely to be derived from futures trading of oranges
and/or frozen orange concentrate?

The answer is directly related to the degree of success a futures

market enjoys. If there were a broad market with active industry partici-

pation, there would be several benefits. Growers, fresh fruit buyers,

and processors could hedge against price changes during the harvest

season. All industry members could use the prices generated for much

needed short and long range planning, primarily in balancing supply and

demand. Those who participate in the market would likely receive the

greatest benefits, but others could use the prices arrived at in making

decisions concerning their operations. Futures trading would also bring

about wider representation in price making.

To the extent that credit is made more readily available for those

participating in hedging, a futures market could assist the financing

requirements of growers, handlers and processors. Another possible

benefit could be in reducing the problems of contract fulfillment pres-

ently existing in forward sale commitments for fresh oranges.


What would be the results of making a wrong decision to establish a
futures market in oranges and/or frozen orange concentrate?

The Florida citrus industry may decide that futures trading in its









Because bulk concentrate is readily convertible to retail and

institutional container sizes, the prices established by futures

trading for bulk concentrate are likely to affect prices at which

retail and institutional pack are sold. The exact relationships

which will exist among these prices are uncertain at the present

time.


What are the benefits likely to be derived from futures trading of oranges
and/or frozen orange concentrate?

The answer is directly related to the degree of success a futures

market enjoys. If there were a broad market with active industry partici-

pation, there would be several benefits. Growers, fresh fruit buyers,

and processors could hedge against price changes during the harvest

season. All industry members could use the prices generated for much

needed short and long range planning, primarily in balancing supply and

demand. Those who participate in the market would likely receive the

greatest benefits, but others could use the prices arrived at in making

decisions concerning their operations. Futures trading would also bring

about wider representation in price making.

To the extent that credit is made more readily available for those

participating in hedging, a futures market could assist the financing

requirements of growers, handlers and processors. Another possible

benefit could be in reducing the problems of contract fulfillment pres-

ently existing in forward sale commitments for fresh oranges.


What would be the results of making a wrong decision to establish a
futures market in oranges and/or frozen orange concentrate?

The Florida citrus industry may decide that futures trading in its









products is not practical at the present time. If this decision were made,

it would be almost impossible to assess the present or future effect of

not initiating futures trading.

If a decision is made to establish futures trading and experience

subsequently proved this decision wrong, it would be extremely difficult

to state precisely the effects of having made a wrong decision, although

it is believed that no permanent damage to the industry would result. It

is most important, however, that if industry members decide to initiate

futures trading, they be quite specific in stating the problems they

expect futures trading to solve. Otherwise, the risk of disappointment

is great since there is a tendency to expect too much from a new, untried

marketing tool. Futures trading is no exception.

The time to make the correct decision certainly is before trading is

initiated. First, industry members must understand what a futures market

is and how it can be applied to their products. If, after it is under-

stood, there is a need for this mechanism by a substantial number of

members of the different producing and processing sectors, then the basis

for active trading would be present.




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