Research Note: Organised Futures Trading

Futures trading serves a useful economic purpose because, in an uncertain world, someone must assume a speculative role for there to be production and distribution. An economy based on private property gives people leeway in what they choose to own. One's choice is dictated by many considerations including alternative opportunities to produce and to invest. A key point is that a producer's capital commitments (ownership) for production can be lessened by renting durable assets or by contracting with others to provide needed services. Whoever owns the durable or single-use goods assumes the responsibility for any gains or losses arising out of the changing market value of these goods. In agriculture, forward contracts are a major way to shift ownership responsibility for commodities on to different people or firms. A futures contract is nothing more than a particular type of forward contract, namely one that is traded under special rules and regulations of an organised commodity exchange and the Government, and each contract for a particular commodity and market place is identical. There is little or nothing that can be accomplished through organised futures trading in a commodity that cannot be accomplished without it. However, the costs and inconvenience are often much less through futures trading if the market is functioning properly. The protection of their own interests by farmers may prohibit the proper development of futures markets in the Republic of South Africa.