Foghorn gave you a really good answer. My 2 cents, using your corn example. Today, I can either buy or sell a corn contract. If Im a cattle feeder I may buy one, as a corn grower I may sell one. The contract is written for me to make or take delivery at some future date. We make a deal and its done. In many cases the farmer, and always the speculator, doesnt actually make or take delivery of the physical contract. He simply buys or sells the opposite position just before the due date.
If I sell a 6.50 a bushel corn contract and the corn market is 6.00 at delivery then I sell my physical corn for 6.00 and buy a 6.00 corn contract to cancel my sale making the 50 cents back on the contract. If however the market is 7.00 at delivery I make the 50 cents on my physical corn and lose 50 cents when I have to buy the 7.00 contract to cancel my sale. In either case, I've guarenteed my sale price.
What eats peoples lunches are shorts and margin calls. If I bought that sold that 6.50 contact and corn goes to 7.00 I have to have money on deposit to cover that 50 cent spread. Over many contracts and with no physical goods to cover the sale margin calls can get big quick. Thats what ruined the Hunts in silver back in the early 80's. They couldnt cover their margin calls and the exchange began to liquidate their positions at a loss driving down the market even more. Shorts, as you mentioned are the same situation. You still have to cover the loss. If you are making physical delivery you have to buy it and sell at a loss. If you are making paper delivery then you lose on the contract spread. If you are in the money you arent necessarily wiped out, out of the money and with no insurance and you take a big financial hit. Some of the major players who make or take physical delivery have a force majeur clause written. This typically costs extra but covers them from having to make physical delivery, but they still have to take the paper loss.
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Today's Featured Article - Harvestin Hay: The Early Years (Part 2) - by Pat Browning. The summer of 1950 was the start of a new era in farming for our family. I was thirteen, and Kathy (my oldest sister) was seven. At this age, I believed tractor farming was the only way, hot stuff -- and given a chance I probably would have used the tractor, Dad's first, a 1936 Model "A" John Deere, to go bring in the cows! And I think Dad was ready for some automation too. And so it was that we acquired a good, used J. I. Case, wire tie hay baler. In addition to a person to drive th
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