At the beginning of the Corona-virus crisis, when every one was panic-buying their toilet rolls and hand sanitizer I was explaining to the team how complex and lengthy our supply chains really are. Take apples for example, it takes around 10 years for an apple tree to produce enough fruit to make planting one worthwhile and therefore getting enough fruit to market can take years!
Now another issue with say apple trees, is the farmer will not exactly know how many apples he will get from one year to the next so if he has a bad harvest, he would lose some money. This is where “futures” can come in. The farmer will sell all of next years crop for a fixed price in the future. If he then has a bad harvest, he is protected whereas if he has a bumper year, he could lose out but either way he knows he will make some profit as his sale price is already guaranteed! It effectively de-risks his crop.
An apple factory will know it needs say one hundred thousand tons of apples per year but again doesn’t want to worry about the cost of their “raw materials”, ie the apples shooting up. If the farmer above has a bad harvest then the apple factory will need to pay more to get the same volume of crop. The factory then buys up all the apples from say 100 farmers around the country to pretty much guarantee them enough apples one way or the other and at a price they are willing to pay, ensuring their profit. Simple really!!
The reason we tell you is that futures are another part of building investment portfolio’s, whether coffee beans from Africa, Olives from Turkey or Pork from the USA they often underpin most business’s and allow the smoothing out of good and bad harvests for both the farmer and the producer! – resulting in steadier profits all round! – Interesting eh? Get in touch with your local experts to find out more!