Today, the Internet hosts a multitude of sites and protocols whereby the sale of goods and commodities can be consummated. The majority of such sites and protocols are seller oriented where a seller advertises goods or commodities to a multitude of buyers to achieve an optimized selling price. The seller's goal is straightforward, i.e., once the goods are sold, the seller has achieved his objective.
Commodity buyers often hedge their purchases against the listed exchange rate for the same or a different commodity. For example, buyers of agricultural products often sell futures contracts at the exchange rate listed by the Chicago Board of Trade to hedge their purchases (i.e., take a short futures position). These “hedge purchasers” face a more complicated series of transactions than do sellers. Thus, it is not surprising that the seller-oriented platforms currently available on the Internet do not fully satisfy the hedge buyer's needs. First, the buyer must advertise a bid price to a plurality of sellers. Since the buyer will hedge his purchase, his bid price is based on the exchange rate listed for a particular hedge commodity (which may be the same commodity he is seeking to purchase). Since the hedge commodity's exchange rate is constantly fluctuating, the buyer must constantly adjust and post his current bid price. Furthermore, once the buyer buys, he should immediately complete the hedge transaction to avoid adverse price shifts of the hedge commodity.
A futures contract is a standardized contract to make or take delivery of a commodity or financial instrument at a predetermined time and place. Thus, a futures contract locks in a price for a future date. Some of the most popular futures contracts traded in the United States today are equity-based contracts such as the Dow Jones Industrial Average; interest rate contracts such as Treasury bonds and Treasury notes; agricultural contracts, such as corn, soybeans, and wheat; and precious metals, such as silver and gold.
Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes. Thus, hedgers try to protect themselves from an inherent price risk associated with a future purchase or sale of an asset. A wide variety of institutions and individuals hedge, such as mortgage bankers, stock portfolio holders, food processors, and farmers. The classic example of a hedger using the futures market as a risk management tool is a farmer. Buyers of commodities often take a short futures position, which is a position in the market where one has sold futures contracts to offset risk. Because of the complexity of completing a transaction, hedge buyers generally spend long hours on the phone to transmit bids, consummate sales, and place their hedge.
Grain elevators provide facilities for elevating, storing, discharging, and sometimes processing grain. Country elevator operators, who generate a majority of their revenue through put-through and storage charges, have little desire to take on risk and thus hedge grain purchases against the futures price listed at the Chicago Board of Trade. Currently, grain elevators and grain producers conduct a majority of their business by phone. Elevator operators are constantly on the phone trying to find grain. Once the buyer locates a seller for the desired grain, he then needs to negotiate the price. After the grain is purchased, the buyer then needs to call a futures broker to place a futures hedge on the grain just purchased. Then the buyer starts the process all over again. An elevator operator may have anywhere from 100 to 2,000 different producers calling to check prices daily. It is very difficult for a buyer to remember who is offering what amount and at what price. With the futures price constantly changing, local basis levels constantly changing, and the phone-ringing non-stop it is difficult to execute transactions in an orderly fashion.
There are several factors that can simultaneously affect the price a grain elevator operator is willing to pay at a given time. In general, an elevator operator calculates his bid price based on a basis, which is the difference between the grain's current local cash price for a specific delivery period and the futures option price the commodity is being put against. The elevator buys the product this way because it makes it easier for them to hedge their purchases. When a grain producer calls to get a bid for his product, the elevator operator adds or subtracts his local cash basis from the Chicago Board of Trade futures price to come up with a flat price to quote to the grain producer.
Because hedge buyers (e.g., grain elevator operators) face a complicated series of transactions that require numerous hours on the telephone, there is a need for improved methods and systems for purchasing commodities with concomitant hedging.