Question

Farmers can eliminate the uncertainties of fluctuating crop prices by selling their crops in futures markets (agreeing to a fixed price for crops to be delivered in the future) Who gains or loses from this practice?

Answer 1

Solution:-Farmers can eliminate the uncertainties of fluctuating crop prices by selling their crops in futures markets (agreeing to a fixed price for crops to be delivered in the future) in this process the farmer s income, however, is stabilized and he has no fears of an agricultural market going sour because a major group of consumers aren t willing or able to buy his product, as was the case in the Asian economic crisis if the late 1990 s. In this, a farmer gains peace of mind and income security. He loses the opportunity cost of a booming agricultural market, since his produce is already sold at a fixed price. A farmer who sells his commodities to a futures market, therefore, cannot take advantage of high demands and the higher prices.Because an individual farmer has no real market power, he cannot necessarily alter market prices of his produce by adjusting the supply he puts out. He may choose to grow and sell an alternate product or he may produce less of this product in hopes of selling this product at higher prices. However, because of the time gap between time when the good is planted and finally sold on the market, agricultural market conditions may be very different than the market the farmer initially responded to. Conversely, a farmer must grow excess goods when prices are high simply in the hopes of cashing in on high prices before they inevitably fall from excess supply. Without government intervention, this becomes a vicious cycle, with the farmer producing more and more at lower prices, if he chooses not to sell an alternate product. These prices may be stabilized in a number of ways.