Effects On Commodity Delivered Or Purchased

Futures prices are typically higher than cash prices, a status known as "contango," because:

  • The investor holding the contract is earning interest on the full price of the contract, minus the small margin deposit; and
  • The investor is spared the storage costs.

Contango occurs in typical markets, but not all markets. If inclement weather ruined last year's crop but good weather this year leads to predictions of a fulsome harvest, futures prices may be below cash prices, resulting in a positive basis. This is called "backwardation."

LOOK OUT!
When discussing agricultural commodities, the authors use the term "cash" rather than "spot" to describe the market counter to futures trading. The reason is that grain and livestock are seasonal businesses and it is not always possible to deliver in the off-season. The cash market for these commodities, rather, is a forward market which pays up-front for later delivery. This is distinct from the futures market in which delivery and payment occur at a later date.




Implications For Financial Markets

Related Articles
  1. Investing

    Got A Commodity ETF? Watch Out For Contango!

    With more investors seeking commodity exposure through ETFs, being familia with the concept of contango is critical.
  2. Investing

    What Does Contango Mean?

    Contango​ is when the futures price of a commodity is higher than the expected future spot price.
  3. Investing

    Commodities Trading: An Overview

    Even non-professional traders can participate in the commodities markets. Here's how:
  4. Investing

    Contango Versus Normal Backwardation

    It’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
  5. Investing

    DBC: PowerShares DB Commodity Tracking ETF

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  6. Trading

    Contango Vs. Normal Backwardation

    Learn about the futures curve and what its shape means for hedgers and speculators.
  7. Financial Advisor

    When Will it Be Safe to Buy Commodities?

    When will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
  8. Investing

    Commodity Funds 101

    These funds make investing in gold, oil or grain an easier prospect.
  9. Investing

    Why Investing in Commodities Can Be Tricky

    While some exposure to commodities can enhance a portfolio, it is key to understand the investment vehicle you've chosen, or you could be in for a rude awakening.
  10. Investing

    Crude Oil Prices: Comparing Future Price Vs. Current Market Price

    Discover the differences between oil futures market prices and oil spot market prices and what leads to the differences between the two.
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center