lan trade in lumber futures

one subcontractor on a guaranteed basis were $2,230 and $3,600, per house for a 42 and 50 house tract, respectively. The comparable bids from the other subcontractor on a non-guaranteed basis were 82,940 and $3,369, respectively. These guarantees were efiective through June, 1970.

The combined cost difierence of $23,730 for essentially the same services and materials is strictly due .to the risk of price fluctuations of framing lumber. In effect, the housing producer has the alternative of passing the risk of price fluctuations to the subcontractor at an average cost of $312 per house. We calculated that on the basis of one-third of a carload of lumber per house, the cost to a housing producer to hedge his purchases in a futures market would be about $15.00 of broker's commission per house plus the interest cost of having his margin in the. brokerage account. The advantage of a futures market to a hedging producer of this size (2,000 houses per year) is obvious.

From the above examples it becomes quite evident that several key factors must be considered before an eftective hedee can be placed.

(l) A company must know the quantity of its product to be hedged. lf a producer sells more futures contracts than he needs to cover his cash position, he is speculating with the excess board feet on the futures market. If he sells less futures contracts than his cash position, he is speculating on his cash position not covered by the hedge. It is wise for a producer, processor or builder to discuss his operation with his broker in determinins the exact number of contracts to buy or sell.

For example, a retailer who has agreed to furnish material toa home builder to construct 200 homes over a period of a year realizes that because of potential high interest rates, rising labor costs or whatever reason, the builder may eventually only sell one-half of the homes in his intended project. Therefore, the retail yard may want to hedge only one-half the lumber he has agreed to sell to the homebuilder.

(2) A true hedger must know his exact costs before he can hedge properly. Knowing his costs, combined with a fixed selling price will enable the producer to determine the profitability of his operation.

(3) And again, I stress that hedged properly he will take a position in the futures market opposite to his position in tle cash market.

(4) It is important to confer with a reliable broker to determine the trading month in which the contract should be placed and other technical information.

(5) A producer must be aware of the consistency of price relationships between the various species of lumber and the various sizes of lumber.