What are Commodity Futures?

Malcolm Tatum

Commodity futures are agreements of contracts that are utilized to purchase or sell a specified amount of a given commodity. The agreement will commit the buyer and the seller to a fixed price that will be in effect on a specified future date. When this future date arrives, the buyer is expected to have paid the agreed upon price for the futures, and the seller will have delivered ownership of the commodities to the buyer.

Some food items, like corn, are sold as commodities.
Some food items, like corn, are sold as commodities.

Commodity futures are based on physical commodities that include items such as gold, silver, other precious metals, and grains. Various types of food items, such as corn or pork bellies, are also considered to be commodities. Commodity futures are based on the perceived worth of the goods today and at some future point in time.

Pork bellies are a common commodity.
Pork bellies are a common commodity.

Futures on these types of goods recognize two key factors. First, the physical commodity already exists. Second, there is an anticipation on the part of the buyer that the commodity will increase in value over time. When this is the case, a buyer will choose to enter into a commodity future agreement with a seller. The price that is ultimately paid is considered to be sufficient for the seller to make a profit from the venture. At the same time, the buyer is anticipating that the value of the goods will rise beyond the sale price and thus ultimately generate a return on the investment.

Commodity futures are one of the most active forms of investment trading today. Some investors choose to engage solely in commodity futures as a means of generating revenue from an investment portfolio. Others choose to vary investments somewhat, including stock and bond options along with commodity futures in their investment strategies. While carrying some degree of risk, commodity futures often are less volatile than some other forms of investments. Without the occurrence of some catastrophic event that greatly diminishes the physical commodity, the performance of commodity futures tends to be predicted with relative ease.

Some investors choose to engage solely in commodity futures as a means of generating revenue from an investment portfolio.
Some investors choose to engage solely in commodity futures as a means of generating revenue from an investment portfolio.

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