have no position in the market, but decide todayto buy one futures contract of soybeans. If the seller on the other end of your transaction was closing out a previous long position in soybeans, the open interestwould not change.You would have, in effect, “replaced” that person in the market.He was long. Now he isn’t, and you are.On the other hand, if your seller was initiating a new short position, therewould be a new long (you) and a new short (him) in the market, and open interestin soybeans would go up by one.Now let’s assume it’s some time later and you have a nice $800 profit inyour soybean position and decide to sell and take those profits. When you do, youclose out your long position. If the buyer on the other end was closing out a shortposition to stop his losses, your transaction would reduce the open interest by one,as the soybean positions outstanding would be reduced by one long (you) and oneshort (him or her).On the other hand, if his was a new long position he would “replace” you andthe open interest in soybeans would remain unchanged.
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FINDING THE INFORMATIONStatistics on open interest and volume of trading are easily available from theexchanges, from your local broker, and in many major metropolitan newspapers. Inaddition, the Commodity Futures Trading Commission (CFTC) publishes monthlystatistics on open interest and volume of trading for all of the regulated commodities.The CFTC also provides information about the nature and size of traders who holdthe open contracts. Any trader who holds a position in any one future of a regulatedcommodity in excess of a particular amount—an amount set by the CFTC—mustreport daily his trades and the number of contracts he holds in his position. In making this report, the trader also classifies his positions as either speculative or hedging. These data are then compiled by the CFTC and reported each month. There aresome traders who believe this information provides good indications of the relativebuying or selling strength of the people in the market.
INTERPRETING CHANGESIn analyzing open interest and volume you should consider the total figures for allthe months of a particular commodity and not the open interest or volume of theindividual options (months) separately. A word of caution, however: For bestresults, the months to be aggregated should all be within the same “crop year.”Supply and demand factors in two separate crop years are not always related. Youcould have an increase in total open interest for the aggregate of the two years, withprice trends in each of the years moving in opposite directions. This could causea misreading of market signals. By separating the figures for the two years, a morereliable technical interpretation can be reached.Changes in open interest and volume of trading have forecasting value onlywhen considered in connection with price changes. Almost any book on technicalanalysis provides a summary of rules of thumb for relating change in open interest and volume to price action. Most such rules of thumb and their rationale go something like this:1. If the open interest is up and prices also are up, this indicates new buyingand a technically strong market. The increase in open interest means newcontracts are being created, and because prices are advancing, buyers mustbe more aggressive than sellers.2. Open interest going up while prices are going down indicates short sellingor hedging and a technically weak market. Again, the increase in open interest means new contracts are being established. However, because prices aredecreasing, sellers must be more aggressive than buyers.141
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3. If the open interest is going down and prices are also descending, thisimplies long liquidation and a technically strong market. Since open interest is declining, offsets and liquidations by old buyers and old sellers aremore numerous than new commitments by new buyers and new sellers.Inasmuch as prices are declining, these old buyers (who are now selling)must be more aggressive in their market activities than the old sellers(who are now buyers) in their covering operations.4. If the open interest is down and prices are up, this indicates short covering and a technically weak market. Again, because open interest is decreasing, old buyers and old sellers must be closing out commitments; butincreasing prices suggest that the old sellers who are covering their positions by buying back their contracts are more aggresive than new sellers.Hence, the market is considered to be technically weak.5. If the volume of trading “follows” the price, that is, if volume expands onprice strength and declines on price weakness, this indicates the marketis in a technically strong position and should go higher. By the same token,if the volume of trading expands on price weakness, and declines on pricestrength, the market is considered to be in a technically weak position,ripe to go lower.Like all rules of thumb, however, there are many pitfalls in rote application.One of these is the effect of seasonality.
SEASONAL PATTERNS IN VOLUME AND OPEN INTERESTAs in many aspects of commodity futures trading, there are seasonal influences andpatterns in open interest and, to a much lesser extent, volume of trading. This isparticularly true in commodities that have a seasonal aspect to their production orconsumption. For example, the seasonal change in the open interest in grains follows the same general pattern as the seasonal change in the visible supply of grains.Thus, there is a tendency for the open interest in commodities such as wheat, soybeans, corn, and oats to be at its low point for the year just before the harvest ofthe new crop and for open interest to gradually increase and peak at about the timeof the peak in storage stocks. These seasonal changes in the open interest result fromchanges in hedging requirements. As a commodity is put into storage, the numberof hedged transactions made in the market increases. Because hedge positions arefrequently longer-term positions, the open interest naturally grows as hedgingincreases. Then as stocks move out of storage and hedges are lifted, the open interest tends to decline.
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The gross seasonal changes in open interest are relatively unimportant inmeasuring technical market strength or weakness. A more important statistic isthe net change, after allowing for the seasonal trend. It is difficult to measure precisely these net changes, but if you follow the procedures we outlined in the earlier chapter for developing a seasonal index, you can remove much of the seasonality in the data. After that it’s a matter of measuring the deviations from year toyear and determining whether the deviation is comparatively large or small.Generally speaking, volume of trading has little seasonal tendency, and whatlittle there is, is relatively unimportant. There may be a slight tendency for trading volume to increase during heavy crop movements, but such increases are notconsistently repeated.
FUNDAMENTALISTS VERSUS TECHNICIANSAs we have pointed out, there are many different systems for forecasting prices.Practically all of these systems, however, are based upon the same general considerations. They assume that three types of forces influence prices: the fundamental conditions of supply and demand and certain technical factors arising outof the characteristics of trading and the psychological reactions of the traders themselves. Many believe, by studying either one or both of these methods, one can predict price changes. The two approaches do not always make good bedfellows,however, and the battle lines have been drawn for years as to which of these analytical methods is more useful. The fundamentalists can point to numerous instancesin which they were “right” and the technicians were “wrong.” Technicians canshow an equal number of cases that went their way.Most “orthodox” analysts look upon chartists with skepticism, mainly becausethey think that, in order to predict prices, it is necessary to understand the causesof price changes. They argue that anyone such as a chartist who bases his predictions on an evaluation of market action (prices, volume, and open interest), ratherthan upon the causes (supply and demand forces) is suspect. Yet many of thesesame analysts would grant the validity of the story of the old Indian woman whocould predict the appearances of Old Faithful without having the foggiest notionas to what caused the geyser. And most of them also would readily admit that ifthe ability to predict prices were no better than the ability to evaluate causation,many a successful stock market and commodity trader would be making a livingin some other way.Those who are accustomed to applying rigorous scientific tests to methodsof analysis can find plenty of inconsistencies in the various systems of chart reading. Yet these systems seek to provide a means of evaluating short-term marketmoves, which even the most skilled users of fundamental methods do not pretend
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to be able to predict. In view of this fact, the least the fundamentalist can do, in allfairness, is to give chart reading a sympathetically critical hearing.Purist chart readers, on the other hand, might do well to pay more attentionto the criticism offered by fundamental analysts. Chartists’ explanations of marketaction often are, well, over-imaginative. Some so studiously ignore fundamentalforces that even in the face of violent price-shattering events they may be found calmly making their price predictions for weeks ahead, to within a fraction of a cent!In point of fact, most successful traders combine fundamental and technicalanalyses. Many of the arguments propounding the superiority of fundamentalanalysis to technical analysis, or vice versa, are therefore really moot. The twomethods of analysis are complementary.
RANDOM WALKS VERSUS TRENDSThe random walk theory has been added to the controversy. Adam Smith in his bestselling book, The Money Game, included a chapter entitled, “What The Hell Is aRandom Walk?” He answered the question when he wrote that “prices have nomemory, and yesterday has nothing to do with tomorrow.”Put another way, the random walk theory states that today’s price change istotally unrelated to tomorrow’s price change and that one cannot predict futureprices solely on the basis of past prices.If Adam Smith’s economic model is a correct description of reality, there areseveral obvious implications. It can be shown, for instance, that such price seriescannot contain any cyclical or seasonal variation. This implies that so-called technical methods of investment analysis may be far less useful in predicting futuresprice changes than is commonly believed.Economists have probably spent more time seeking to determine the validity of the random walk theory than they have on any other single pricing model.Research on the random walk model goes back to the early 1900s. HolbrookWorking, that great economist from Stanford who is considered by many to beone of the best of all economists working in the area of futures trading, was the firstto do a definitive study of the random walk model as it is related to grain futuresprices. He concluded that the random walk model did appropriately describe commodity price behavior for the wheat market. His work led to subsequent attemptsto apply the model to the stock market, and the vast majority of the work on thestock market has reached the conclusion that the random walk model is a verygood approximation of stock market price action.Most studies using commodity prices, however, have rejected the modelalthough not always for the same reasons. Dr. Working himself, for example,reported a tendency for corn prices to deviate from random walk. Dr. Hendrik
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Houthakker, who was at Harvard University, and Dr. Seymour Smidt of CornellUniversity have conducted studies and concluded that on the basis of their information, the random walk model is an incorrect approximation of commodity futuresprices. Labys and Granger, in their book, Speculation, Hedging and CommodityPrice Forecasts, conclude that most price series of commodity futures contractsapproximate a random walk, although on some occasions seasonal patterns arefound, particularly in daily price-changing series.Economists and commodity futures traders have argued that purely speculative markets would have to approximate the random walk model, because if theyproduced price series with predictable patterns, these patterns would soon be “traded” out of existence. The obvious question, then, is: Why has research shown thatsome commodity futures series do contain predictable components?There seem to be several possible reasons:1. Commodity futures markets are not purely speculative markets, becausein them goods are actually sold by producers and bought by consumers.2. The production of many commodities is highly seasonal in nature. Demandis also seasonal, and because the cost of trading is so small, you would notexpect all of the seasonal pattern to be “traded out,” but only enough forit to be barely profitable to use this pattern in determining a buying orselling policy.3. It also might be argued that some commodity markets are not sufficiently developed to completely eliminate every predictable component. Dr.Houthakker comments that commodity price developments are watchedby relatively few traders, most of whom are quite set in their ways. Evenin the most active futures markets, the volume of serious research by participants seems to be quite small. It is therefore possible that systematicpatterns will remain largely unknown for a very long time.In summary, the random walk model is probably not descriptive of most commodity markets, although it is probably descriptive of some markets for selected periods of time. In any event, the random walk theory does not say that price changesare unpredictable if one uses all available information. It only postulates that theyare unpredictable if based solely on considerations of previous price changes.Do all futures prices trend? Yes, to some degree, but some of them are muchcloser to random walks than others. Research results suggest that most futures andsecurities price series are a mixture of trends and random walks. The trader’s challenge lies in determining which is which.
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Chapter 14
Commodity Hedging—A Primer
Malcolm C. Forbes, founder of Forbes magazine, once drew up 10 commandments “for those who earnestly seek to fight successfully the battle of life.” His fifthcommandment was: “Take out life insurance.”If we were to write 10 commandments for those who “earnestly seek to fightsuccessfully the battle of business,” our fifth commandment might be: “Take outprice insurance—hedge.”This chapter will introduce and define the concept of hedging and focus oncommodity hedging. The beginning of Chapter 24 provides further specific guidance on the practical decision-making steps of implementing a hedge, whether thehedge be for commodities, financial instruments, or currency.Most business professionals would not think of operating without insuranceagainst fire, theft, explosion, and other natural disasters. But physical loss or damage to goods are not the only risks they face. The risk of loss due to price changelooms equally large.It is a simple matter, of course, to get policies for fire or other physical risks. Yet,no matter how many insurance companies you go to, you won’t find one that willwrite a policy to protect against losses due to price changes. The reason, obviously,147Copyright 2001 The McGraw-Hill Companies. Click Here for Terms of Use.
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is that fires are usually independent events. When fire burns down an individual’sbuilding, it does not destroy the buildings of all that individual’s competitors. Thismeans that an insurance company can calculate the probabilities of a claim on anindividual basis.Price changes, however, are not independent in their impact. They affect allcompetitors at the same time and generally in the same way. That is why you cannot buy price insurance through a traditional insurance policy. Still, a form of“insurance” is available through a technique called hedging in the commodityfutures markets.There are many different definitions of hedging, many different circumstances under which hedging can be accomplished, and many different types ofhedges. The simple “short form” definition of hedging I prefer is: transactions orpositions in any futures contract that (a) represent a temporary substitute for atransaction or position to be made or taken at a later time in a physical marketingchannel; (b) are economically appropriate to the reduction of risk in the conductand management of a commercial enterprise, and (c) arise from potential changesin the price of assets, liabilities, and services (existing or anticipated) associatedwith the operation of a business enterprise.This definition fits all commodities traded on futures contracts, includingcurrencies and interest rate futures. It makes it clear that hedging is associatedwith risk reduction in the management of a business and that, in order for suchrisk reduction to occur, the prices in the futures market must be substantially related to the value of the assets, liabilities, and services being hedged.For example, a firm that knows it will need raw materials six months fromnow hedges (to reduce the risk that price will go up over the next six months) byentering the futures market and buying a contract of those raw materials now, thusestablishing its price. Later, when the time approaches that it actually needs the commodity, the firm purchases the actual commodity from its normal suppliers andcancels its obligation in the futures market by selling the futures contract. Thefutures contract thus acts as the temporary substitute for the later transaction.Then, a firm carrying inventory that it knows it will need to sell in the coming months hedges by entering the futures market and “selling” that inventory now,establishing its price. Later, when the time approaches that it actually needs thecommodity, the firm purchases the actual commodity from its normal suppliers andcancels its obligation in the futures market by selling the futures contract. Again,the futures contract thus acts as the temporary substitute for the later transaction.On the other hand, a firm carrying inventory that it knows it will be selling inthe coming months hedges by entering the futures market and “selling” that inventory now, establishing its price. Later, the firm will really sell its inventory throughits normal channels and cancel its obligation in the futures market by buying backthe futures contract. Once again, the futures acted as a temporary substitute.
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So long as the actual material and the commodity futures contract are identical or closely related, hedging can be a very effective tool for reducing pricerisks. If they are not closely related, the “hedge” may not reduce risk and mayincrease it. When one hedges, one trades the risk of change in price level for thelesser risk of change in price relationship between two related prices: the cashmarket price and the futures market price.The purchase or sale of the futures contract offsets the opposite position inthe cash market. Ideally, the loss in one market will be offset by a gain in the other,and the threat of loss through price change will be considerably reduced.The purpose of hedging, then, is to seek protection against major price changesby neutralizing the impact of price fluctuations.Let’s take a specific example and follow it through. Let’s assume you are asmall meat packer, and you know you are going to need about 400 head of fat cattle next December to slaughter and pack. Let’s further assume, for the sake of discussion, that December cattle on the Chicago Mercantile Exchange are quotedtoday at $43 per hundred pounds (or 43 cents per pound). At this price, you knowyou can conduct a profitable beef packing business, but you can’t be sure whatactual, live, on-the-hoof cattle will be selling for come next December.So you decide to hedge. You do so by buying 10 futures contracts of Decembercattle (400,000 pounds or about 400 head). And let’s say you did pay 43 cents perpound for them.Disregarding a few other factors, which we will delve into later, let’s assumethat by the time December rolls around and you are ready to buy the actual cattle,the cash price for fat steers has risen to 47 cents per pound. Ordinarily, your profit margin on your beef business would be so slim with cattle at this price that youmight even consider cutting back on your beef packing. But your hedge has doneits job and you can, in effect, buy cattle now for 43 cents a pound not 47 cents.How? Because the increase in the cash price will have been reflected in theDecember futures price, particularly as the delivery month approaches. The extrafour cents per pound you have to pay for live cattle while you waited until Decemberto actually buy your “loss,” so to speak, will be offset by your profit in the futuresmarket. So, you can buy your cattle through your normal supply channels for 47cents per pound, and offset your futures positions by selling 10 December cattlecontracts for about a four-cent-per-pound profit.As we said before, this is somewhat oversimplified, but it demonstrates thebasic concept of the “buying” hedge.A “selling” hedge is conceptually the same, but would be used, for example,by a silver processor who holds a large inventory of the metal and wishes to reducethe risk of its value declining over time as a result of a drop in cash silver prices.In this case, any loss in the processor’s inventory value would be approximatelyoffset by the profits on his short sale of silver futures.
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Whatever the reason, hedging provides protection against major price swingswhen the price of the product traded in the cash market (the market of immediatepayment and delivery, e.g., wholesale market) is closely related to the price of theproduct described and priced in the futures market.Business professionals hedge because they want to establish a price that theycan be certain to realize within a small range of error. When they hedge, they giveup the opportunity for obtaining a better price, of course; but at the same time theyprotect themselves against obtaining a dramatically worse price.
WHO HEDGES AND WHY?A review of the companies that do, can, or should use the futures market as a toolin corporate strategy reads like a veritable “Who’s Who” of U.S. industry. Amongthe readily recognizable names are Swift & Co., Armour, Oscar Mayer, Kroger,A&P, General Foods, General Mills, Kellogg, Kraft, Coca-Cola, Nestlè, HersheyFoods, National Biscuit, Weyerhauser, Georgia Pacific, and Boise Cascade. The listgoes on and on. Reviews of various published reports (government and private)reveal that thousands of corporations carry “large trader” hedge positions in various futures contracts. Although these figures probably involve some double counting, the significant point is that a large number of corporations do use the futuresmarket for hedging.Firms use the futures market as a business management tool in a diversenumber of ways, depending on the special circumstances of their lines of business. Dr. Holbrook Working, the noted agricultural economist, after careful andextensive observation of the business use of the futures market by handlers ofcommodities, defined and identified a number of types of hedges. Briefly, as identified by Dr. Working, the uses of hedging are as follows.The Carrying Charge Hedge This is undertaken for purposes of obtaining at least
partial payment for the cost of storing products, as in the case of a grain elevatoroperator who buys corn in November with the intent of storing it until the following summer. The operator hedges by attempting to sell the July futures at aprice difference sufficient to cover the cost of the product, plus all storage costs fromNovember to July.The Operational Hedge This involves the placing and lifting of hedges over shorttime periods as temporary substitutes for merchandising transactions. It is widelyused in the milling industry. There is no intent of earning storage charges in the useof this hedge.Anticipatory Hedge or Forward Pricing Hedge This involves the purchase orsale of futures in anticipation of a formal commitment to be made later, as in the150
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foregoing example of the meat packer. The operator carries an open position in thefutures market for a time without an offsetting cash commitment.The Selective Hedge This comprises hedging on the basis of price expectations.
The motivation is not so much to avoid risk, as such, but to preclude major losses. Thus, a firm would hedge incompletely; it would not carry short hedges at allwhen a price increase is expected.The Risk-Avoidance or “Insurance” Hedge This is the kind of hedge the silver
processor used in the previous example to protect its inventory. It involves the carrying of equal and opposite positions in the same commodity in a futures marketand the cash market. It is the typical textbook example.
SEVERAL BENEFITSThe description of the use of futures markets as a management tool makes clear that,properly employed, hedging can be one of the most important elements employedby managers in their overall mix of strategies for achieving company goals.There are at least six important benefits to properly used hedges:➥ First, hedging provides protection from adverse price fluctuations, thus permitting a business manager to escape in large part—rather than having toovercome—the uncertain impact of price changes on operations. By reducing exposure to price change uncertainty, hedging can help protect profit margins and stabilize income.➥ Second, and perhaps equally as important, is the flexibility hedging provides a firm in its corporate strategy of buying, selling, and pricing. Mostparticularly, it provides flexibility and control in the timing of purchasesand sales. Being able to buy earlier or sell later than your competitors oreven vice versa may be the key ingredient in obtaining better prices.➥ Third, in cases where the product is stored or inventoried, hedging can freeworking capital that would otherwise be tied up in inventory. Buying a contract for the future delivery of a product requires only a fraction of thevalue of the product paid out in margins. This allows a businessperson tocontrol the same amount of resources with much less capital. This, in turn,has some added benefits in the form of reduced fixed capital investmentand interest charges, since the businessperson may be able to reduce thesize of storage facilities.➥ Fourth, for products that are inventoried or stored, hedging can substantially reduce the costs of storage, because futures prices for differentmonths will tend to reflect such costs. “Carrying charge” hedges are151
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designed for just such purposes. See Chapter 17, “Commodity Hedgingin Action,” for an example.➥ Fifth, fixing of costs and prices in advance facilitates business planning.➥ Sixth, the benefits that can be reaped from an effective hedging programshould increase the borrowing capacity and creditworthiness of a business.A bank will be more willing to offer its best terms against an inventoryintelligently and effectively hedged than it will with one not hedged.All of this means that to the extent hedging reduces the cost of marketing,society and the national economy benefit.
COMMODITY CHARACTERISTICS AND HEDGINGIn considering the applicability of the different types of hedges to a particular commodity and in trying to understand the price relationships between cash and futuresmarkets (the essence of hedging), you should study the production and marketingcharacteristics of the commodity involved. Some commodities are perishable,some storable, some semi-storable, some continuously produced, and some seasonally produced.A little reflection on the types of hedges and the commodity characteristicsmentioned above should make it obvious that only certain types of hedges areapplicable to particular commodities. For example, a carrying charge hedge, thetraditional hedge used by grain elevators for hedging the seasonally produced andstorable grains, is not applicable to non-storable commodities, such as cattle orhogs. The forward pricing hedge is most applicable here.It follows that the key to hedging in any of the categories mentioned aboveis the playing off of price relationships in two different markets so that losses fromyour position in one market (cash or futures) are offset by gains from your position in the other market (cash or futures). The essence of these two price relationships is called the basis.
THE CFTC AND HEDGINGThe Commodity Exchange Act authorized the Commodity Futures TradingCommission to establish limits on the number of transactions and the size of positions that any speculator can maintain or control in any futures. The act requiresthat hedgers be exempt from such regulations. Because of this exemption, theCFTC must define who is a hedger and institute a procedure for granting the appropriate exemption from trading and position limits.152
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The CFTC has established such speculative limits for many traditional commodities (e.g., cotton, potatoes, eggs, soybeans, corn, wheat, oats, barley, andflaxseed) and for purposes of granting exemptions has defined hedging for thosecommodities. Generally, the level at which limits are set is sufficiently high sothat only very large traders are constrained by them. For most financial products,limits do not exist.The definition established by the CFTC for hedging is conceptually similar(but more complete) to the definition given earlier in this chapter. Specific transactions for which exemptions from the limits are automatically granted by theCFTC generally fall in the following categories:a. Sales of any futures that offset the ownership or fixed price purchase ofthe same commodity.b. Purchases of any futures that offset the fixed price sale of the same commodity or its equivalent byproducts.c. Certain types of cross-hedges and anticipatory hedges. A cross-hedge isone where the commodity being hedged is not the same as the commodity represented in the futures contract, e.g., sweet corn being hedged inthe Chicago corn contract. An anticipatory hedge is a purchase or sale ofa futures contract to protect the price of a cash commodity you do notyet own or have not yet sold but anticipate that you will own or haveavailable for sale, e.g., a farmer who has wheat planted but not yet harvested or a processor who will need corn for his milling plant. The CFTChas special filing requirements and may impose special restrictions onsuch positions.The CFTC also recognizes a wide variety of other transactions as hedges. Forthose transactions to qualify for exemption from the speculative limits, however,the trader must obtain permission in advance from the CFTC.Generally speaking, the procedure for obtaining the exemption is quite simple. Contact the CFTC office nearest you, and the staff will provide you with allthe information for filing.
HEDGING IS NOT AN AUTOMATIC REFLEXMore and more businesspeople are coming to recognize that decisions on hedgingare not and should not be made in isolation from their tax strategies, accountingmethods, and financing strategies.A hedge transaction that, viewed alone, seems like a good idea may indeed beunnecessary or even unwise when its full implications are considered in light of itseffect on taxes or in light of the hedger’s ability to bear the risk without hedging.153
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The steps in making the decision of whether to hedge are quite straightforward and apply equally well to farming, merchandising, banking, etc. A managermust address the following questions:a. How much risk exposure do I have, i.e., how much money could I lose ifprices go against me?b. What is the probability that I will suffer a loss, i.e., is there a 30 percentchance? a 40 percent chance? a 50 percent chance? that the price willmove adversely by 10 percent? by 20 percent? by 40 percent?c. What will it cost me to hedge, i.e., interest on margin, commissions, basisvariation, spread between the bid and the ask price?d. Can I afford not to hedge? Should I carry this risk myself?In answering these questions managers have to have a good understandingof their operating costs, their market prospects, their tax strategies, and the overall nature of their risks. It is very possible that in the total operation of a firm onerisk will be offset by another, thus obviating the need to hedge either of them individually. (For example, under LIFO accounting methods for valuing inventories,one may find different net exposure than under FIFO.) Sometimes a careful reviewof market prospects and calculation of the potential adverse price move indicatesthat the risk of loss is quite small compared to the cost of hedging. If the firm iswell-capitalized and can stand that risk quite easily, it may decide not to hedge. Onthe other hand, even if the risk is small and the firm poorly capitalized, then itwould be wise to hedge.Further, timing of the hedge position can be important. As pointed out earlier, technical market analysis can be a useful means of identifying the proper timeto hedge. Consequently, it behooves hedgers to have good charts of prices. It is verypossible that, given the outlook for prices and the chart signals, a hedger couldafford to carry a certain risk for a short period of time until the market has movedto a more appropriate level for hedging.Tax rules with respect to hedgers are somewhat different than they are forspeculators. The Supreme Court, in the Corn Products Regining Co. case, ruled thathedging transactions that are an integral part of manufacturing or are done for thepurpose