Futures market

The news is filled with stories about oil speculators driving up the price of oil and thus gasoline. Some ask why we allow speculators. To answer that, assume you are farmer Jones up in North Dakota. It is spring and you are figuring your cost for the coming year and you realize that you have to get $3 per bushel for your wheat or you won’t make enough to live on. You are also aware of all of the many things that can happen during a crop year that can affect your wheat. You go to the futures market where there are individuals who are willing to pay a set price for your crop next fall. Mr. Smith is a commodities trader and he feels that wheat will be selling for $3.10 per bushel next fall. His full time job is to check factors around the world and come up with the price. He is just the guy you have been looking for since he will guarantee the price you need to live. You sign a futures contract with him and you agree to deliver 50,000 bushels of wheat on November 1st and he agrees to buy your wheat at $3 per bushel.
Meanwhile Mr. Smith has contacted Cargill and they agree to buy 50,000 bushels at $3.10 from him on November 1st. Mr. Smith will not take delivery on the wheat but will arrange for Farmer Jones to ship it directly to Cargill. Now one day Mr. Smith hears from his friend, who works in the agriculture department in Argentina, that there is an insect problem that will hurt the wheat crop and Argentina is a big wheat producer. He will soon be offering $3.20 then $3.30 and so on driving up the price. Smith immediately starts to buy as many contracts as he can and that brings us to margin requirements. Currently Smith only has to have five dollars in cash to buy 100 dollars in wheat contracts. The present margin requirement is 5%. One thing than can be done and is done on a regular basis is to raise the margins and that limits speculation.
Wheat is like oil in that it is traded on the world markets as a commodity and margin requirements can be changed by regulators at any time and that time may be near.