Commodity Futures
Exchange-traded futures contracts on agricultural, energy, metal, livestock, and other commodity markets.
Commodity futures are standardized exchange-traded contracts whose value is tied to an underlying commodity such as crude oil, natural gas, wheat, corn, gold, copper, or livestock. They let commercial firms transfer commodity price risk and let traders take directional or relative-value views through a cleared futures market.
Commodity futures are not the same as buying the physical commodity. The futures contract defines the product, contract size, delivery month, grade, delivery point or cash-settlement method, tick size, and margin requirements. Many positions are closed or rolled before delivery, but the delivery or settlement rule still affects pricing and risk.
Main Uses
| User | Typical use |
|---|---|
| Producer | Sells futures to hedge a possible decline in output prices. |
| Consumer or processor | Buys futures to hedge input-cost increases. |
| Merchandiser | Uses futures and cash-market trades to manage basis exposure. |
| Speculator | Takes long or short exposure without intending physical delivery. |
| Portfolio manager | Uses commodity exposure as part of diversification, inflation, or tactical allocation work. |
The CFTC describes futures markets as serving price discovery and risk transfer functions. See CFTC futures basics and its explainer on the economic purpose of futures markets.
What Drives Commodity Futures Prices
Commodity futures prices are affected by spot prices, inventories, storage costs, financing rates, transportation constraints, seasonality, weather, geopolitics, expected supply and demand, delivery rules, and market positioning. The link between futures and spot is often summarized through basis risk, contango and backwardation, and convenience yield.
Practical Risk Checks
- Match the contract month to the exposure being hedged.
- Confirm whether the contract is physically delivered or cash settled.
- Translate ticks and contract size into dollar risk.
- Check liquidity in the exact month traded, not only in the front month.
- Understand margin calls and mark-to-market settlement.
- Monitor delivery-month rules, position limits, and price-limit events.
Related Terms
- Commodity Futures Contract: Contract specification behind a commodity futures position.
- Futures Price: Quoted futures level used for valuation and trading.
- Spot Commodity: Physical cash-market commodity exposure.
- Hedging: Risk-transfer use case for futures.
- Speculation: Directional trading use case.