What is 'In Sight'

In sight describes deliverable grades of commodities held in approved delivery facilities near terminals, centralized locations or production areas.

BREAKING DOWN 'In Sight'

In sight commodities offer holders of futures contracts increased certainty regarding the delivery of the underlying asset, since the quantity and quality of the commodity are easier to determine. Contract holders can assume that delivery of in sight commodities will be prompt, and that the quantity and quality will be precise rather than estimated.

Physical delivery of commodities

Futures contracts typically specify the quantity and quality of a commodity to be sold. The vast majority of futures contracts settle for cash, however, as their holders close out their long or short positions for cash. Nevertheless, futures contracts that involve physical delivery of an underlying asset include a first notice day on which the contract holder must give notice of intent to take delivery of the commodities specified in the contract.

Futures contracts also specify the minimum quantity and quality of the commodity to be delivered. Commodities exchanges produce guidelines outlining the different grades of commodities involved in futures contract exchanges. Inspectors or panels examine the commodities prior to final delivery to ensure they meet the appropriate criteria. Such grades may justify the rejection of a delivery or an adjustment in value if the product arrives in better or worse condition than expected.

The longer the time between the sale of the futures contract and the physical delivery of the underlying commodity, the less visibility a purchaser has into eventual availability of a given commodity in the quality and quantity desired. Futures contracts establish a minimum quality and quantity for each commodity, so closing brokers must match the commodity in the warehouse with the delivery requirements outlined by the contract. Many factors can play into the actual quantities and qualities of a commodity that will ultimately become available for physical delivery. For example, a farmer may commit to selling a certain quantity and quality of wheat long before harvest. Adverse weather, diseases or pest infestations could potentially change the yield or the quality of the final crop. Clearing brokers who must coordinate physical delivery of the commodity cannot know with certainty whether a shipment meets the necessary criteria before it arrives at a delivery facility for grading.

Once the commodity arrives at a facility where experts can grade it and quantify it, futures markets consider it in sight. At that point, clearing brokers have significantly better visibility into the actual quantity and quality of the commodity, as well as an assurance that they can order delivery promptly to fulfill a given contract.

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