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There are two categories or types of traders within a given futures market: hedgers and speculators.
Hedgers utilize futures contacts for protection against adverse price movements in the underlying cash commodity. The concept of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.
Hedgers are business entities that range from small farmers to large international conglomerates, who at some point or another, deal in the underlying cash commodity.
For example, take a business that produces candy. If the price of sugar increases the business will have to pay more for the product, thus, lowering their profit margin. To protect itself against an increase in sugar prices the candy producer will buy (go long) sugar futures. Since cash and futures prices tend to move in tandem, the futures position will profit about the equivalent amount on any increase witnessed in the cash market. Typically, at that point, the sugar producer would close his long futures position, collect his profit and then purchase sugar in the cash market.
Speculators are the second group of futures traders. This group doesn’t deal in the cash commodity whatsoever. Speculators only motivation for trading futures contracts is for the ability to profit.
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