502 AGRICULTURAL ECONOMICS 



159. HEDGING TO PROTECT TRADE PROFITS 1 

 BY HENRY CROSBY EMERY 



The trader is primarily concerned with getting a profit from differ- 

 ences of price in different markets. He buys in the producer's market 

 and sells in the consumer's. This difference between markets is con- 

 stant and normal, and constitutes the reward for the services of the 

 middleman. To insure such normal profits, their desire is to escape 

 the risks of fluctuation within the same market. This, to a large 

 extent, the speculative market enables them to do. In the first place, 

 the holder of any commodity may sell it to a speculator, if he fears 

 a coming fall in value, or a buyer can buy of a speculator for future 

 delivery any actual commodity he needs, if he fears a rise. But the 

 speculative market affords a better method of insurance by means 

 of " hedging" transactions. Under this method, for every trade 

 transaction a corresponding transaction of the opposite kind is made 

 in the speculative market. If a man buys for trade purposes, he sells 

 short on the exchange an equal amount, and covers this short line as 

 soon as he disposes of his first purchase. He has made two equal and 

 opposite transactions, and if the price moves either way he loses on 

 one and gains on the other. In this way he makes himself largely 

 independent of speculative fluctuations. The details of this practice 

 may be seen from a hypothetical case given by A. C. Stevens, in the 

 Quarterly Journal of Economics (Vol. II, p. 50). Though simpler than 

 many actual transactions, it admirably illustrates the principle 

 involved: 



A New York merchant buys 100,000 bushels of No. i hard wheat at 

 Duluth, and orders it shipped by vessel to Buffalo, to go thence to New York 

 by canal. He does this not because he "wants the wheat for his own use," 

 but as a merchant who believes that the Duluth price and the cost of getting 

 the grain to New York, in view of known or apparent market conditions 

 or of anticipated requirements abroad, will enable him to sell the grain in 

 New York at a profit. With a more primitive view, he would ship his 

 grain, wait until it arrived, look for a purchaser, and, finding one, sell the 

 wheat at the price current at date of arrival say three weeks after he 

 bought it. If at a profit, well and good; but if the price had declined, he 

 would sustain a heavy loss, owing to the size of the shipment. Thus, when 

 the world's requirements are for larger available stocks, and the movement 



1 Adapted from "Speculation on the Stock and Produce Exchanges of the 

 United States," Columbia Studies in History, Economics, and Public Law, VII, 

 44I-44- 



