The Pros and Cons of Futures Trading for Woolgrowers

The purpose of this report is to discuss the advantages and disadvantages accruing to woolgrowers of using the Sydney Greasy Wool Futures Market. No reference will be made to the general advisability of having such a market. The discussion proceeds on the basis that a Futures Market has now been established and the question to be examined is how far growers can use it to advantage. The report will proceed in three stages. The first section will discuss under what conditions a woolgrower is likely to find futures trading of value. This will be followed by a hypothetical example of how a grower would use the market. It will be shown that the usefulness of futures depends on the degree of correspondence between movements in auction prices and movements in futures prices. The second section examines how close this correspondence is likely to be in practice. The third section discusses the mechanics of using the market - in other words, the technical points about futures which a grower needs to consider, how he would go about trading in futures, and the costs involved.