Using Rice Futures against Rising Price

[italkcash]

The trade patterns of rice are showing high pricing. This is threatening to the consumers or businesses that need large quantities of rice. Rice is the staple food of people mainly in the Asian countries. People who need the rice in significant quantities can take control of the situation by using the rice futures for controlling the price of rice. Consumers of rice as well as producers can make use of purchasing and selling of rice futures to manage the risk in rice pricing. The producers of rice uses the short hedging for locking of future selling price of rice, which is under production. The rice producers will sell off rice futures contracts in the rice market to produce enough quantity of rice according to the requirement. The consumers can use long hedge or locking of the price of the commodity to be purchased in the future. This technique is also known as input hedge in the commodity trading market.

Rice futures are a type of contract made between a seller and a buyer of rice. The parties in the contract agree to buy or sell rice at a price fixed at the present time with the knowledge of the two parties in the contract. Rice futures help to lessen the risk of price changes that are occurring in the rice trading market. The rice futures contract offers both the parties a 15 % protection from any risk arising from price fluctuations and very high losses. In the rice future contract the buyer will be enjoying the long position and the seller has a short position.

One can understand the use of rice futures by a small example. If in a rice future the producer of rice agrees to sell the sack of rice for $25 on a date after one month and if the market price of the rice reaches $35 per sack, then the seller in the short position will be losing $10 per sack while the buyer in the long position will be getting $10 per every sack. But the seller will be protected by the leverage offered by the rice futures.

The farmer or the producer should not sell more than 40 % of his total production for rice futures trade. This step will help him to save his money if the price increases after making the agreement on rice futures. He will still have 60% of the production left with him for selling. In the same way the buyer should protect him from fluctuations by assuming that there are possibilities of the rice price going down at least by 10 % after making the contact of rice futures. If the buyer loses the contract he can buy the rice from the cash market at lower price than the rates in futures contract. One should be cautious while trading commodities like rice that is subjected to sudden changes in rates. The pricing of rice is dependent on climatic factors and hence more risky to trade.