An example would be an airline that purchases energy futures to hedge its fuel needs out into the future. They may be aggressive buyers in the futures market if they believe that prices are cheap and will rise in the future. They may hedge more aggressively if there is a current supply problem in the cash market, and they need to lock in and secure delivery. (When demand outpaces supply, prices in the front months may become higher than those in the back months. Normally, the back months are higher due to carrying charges.)
If commercial consumers are in dire need of the raw commodity, they will pay virtually any price to get what they need. This is not a position in which any business wants to find itself. Thus, these big consumers manage their purchases well so that they have adequate supply and pay less than retail prices. Thus, it makes sense to monitor their trading activity!
Another example of a commercial consumer is a cereal maker (such as Quaker Oats) that makes and sells oatmeal. To do so, they need the raw commodity, oats. In this case, the commercial consumer hedges against the risk of rising oat prices by buying oat futures, which are traded on the Chicago Board of Trade. The long position essentially locks in a price for oats, and gives the cereal company the option (but not the obligation) to take delivery at the entry price of the long futures position. Deliveries take place during the delivery period of the contract, which tends to occur after speculators have moved to the next month.
By hedging in the futures market, rising or falling oat prices will no longer affect the cereal company’s cost for producing oatmeal. They also avoid any short-term capital gains tax implications because of their hedger classification.
Read More : Trading Behavior Of The Consumer
