← Futures · lesson 1 of 12
By the end of this one you'll know why farmers invented futures in the 1800s, what problem the first contracts solved, and why every futures market today still runs on that same handshake.
Back in the 1800s, farmers hauled corn into Chicago every fall, and since everybody harvested at the same time, the market flooded and prices crashed right when farmers needed money most. Some years corn was worth so little that farmers dumped it rather than pay to store it. So farmers and the mills that bought corn started shaking hands in the spring: I will sell you my corn in October at this price, no matter what happens between now and then. That handshake meant the farmer could plant knowing what his crop would bring, and the mill could plan knowing what its corn would cost. That spring handshake is the whole invention, a promise to trade at a set price on a future date, and people started calling them futures. Everything traded this way today, oil, gold, even bitcoin, is that same corn field handshake wearing a fancier shirt.
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example, a small farmer has 20 bushels coming and shakes hands in May to sell them in October at $5 a bushel, so $100 is promised no matter what.
If October corn drops to $4, the open market would only pay him $80, but the handshake still pays $100.
If corn jumps to $6, the market would have paid $120, but he still gets his $100.
He gave up the chance at more to be certain of enough, and that swap is the entire reason futures exist.
A letter from the propane company lands on the kitchen counter in July, right between a permission slip and a pizza coupon. They're offering to lock your whole winter at $2.50 a gallon if you sign by Friday. Last winter you burned about 500 gallons, and you have no idea what this winter will bring.
Pick your move. Then peek at the other roads if you're curious.
That propane letter is a futures contract in work clothes, a promise to trade at a set price on a future date, swapping the chance at more for the certainty of enough.