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A futures contract is an agreement to deliver a particular commodity, such as wheat, pork bellies, or coffee, at a specific date, time, and place. For example, a farmer might sell his oats before they are sowed (known as hedging) because he or she cannot predict what kind of price he will be able to demand later on. If the weather is favorable and crops are good, the farmer will have competition, which will drive prices down. If there is a flood or drought, oats will be scarce, driving the price up. The farmer wants to ensure a fair price to protect the business and limit risk, because the future is uncertain.
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