Expert Chaslau Koniukh
  • Companies
  • Global investment
  • Investors
  • Terminology
  • Economy
  • Stock Market
  • World exchanges
  • Tech and Marketing
Backwardation
Market terminology

Backwardation and contango: two states of the commodity market

15.08.2022
2 min read

The difference between backwardation and contango: the peculiarities of the markets

The futures market has its own peculiarities, which should be taken into account when planning activities. And the situation can unfold in different ways, and you should be prepared for that. For example, it happens that the price of the commodity exceeds the futures rates, and there may be much more futures with a long lead time for the shipment of products with a short lead time. A backwardation is then said to be observed. This market condition occurs as a result of a serious shortage of goods available when their delivery terms expire in the near future. In this case, the market is inverted, or inverted, and then the premium on products can skyrocket.
The onset of backwardation increases the amount of speculative activity on commodity platforms. In addition, there is a decrease in hedging and a decrease in price stability. This situation is mainly inherent in the segment of perishable goods, such as agricultural products.
Backwardation is not a normal market condition. Usually, the price of futures on commodity exchanges is higher than at spot rates. In addition, the size of futures for longer maturities exceeds contracts for close dates. This distribution is called contango. It occurs when the supply volume of a commodity can cover demand and there is enough product inventory to adjust the price for near-dates.Backwardation and contangoContango characterizes segments with products with a long shelf life, such as cereals, soybeans, coffee, meal, sugar, oil, and others. This state of the market is also inherent in metals, oil, and petroleum products. At the same time, unlike the backwardation, the size of the premium for the sale of contracts with a long execution period is limited. It should not be higher than the costs associated with the goods, for example, its storage, delivery, insurance, and others. If the premium exceeds the number of costs, then the goods will be unprofitable to sell. Then it will be possible to buy products and leave them in storage until the contract arrives, which will give an opportunity to cover costs and make a profit.
It should also be kept in mind that the prices of cash commodities and futures are closely related. They are influenced by the same factors, both internal and global. The dynamics are straightforward – spot prices increase, futures prices also increase, and vice versa, which allows you to keep the balance between profits and losses on both the one and the other markets.
The closer the term for the futures contract, the more its value aligns with that of the cash commodity. This is due primarily to the fact that storage costs are reduced.

Tags: Market terminology
0
Previous Post Pfizer pharmaceutical corporation buys migraine drug maker Next Post How the world's largest retail chain WalMart appeared: the story of its founding

You Might Also Like

Wyckoff's methods
Market terminology
Wyckoff Methods: overview of market processes from the Richard Wyckoff concept
13.04.2021
mean reversion
Market terminology
Mean reversion: features of a trading strategy
02.07.2021
Basis point description
Market terminology
Basis point: an overview of one of the basic concepts of finance
24.09.2022
Advantages of preferred shares
Market terminology
Advantages of preferred shares over ordinary securities
30.09.2021
Types of market strategies
Market terminology
Types of market strategies in trading activities and their features
29.11.2021
oscillators in trading
Market terminology
Oscillators in trading: advantages and disadvantages of instruments
23.01.2021

Recent Posts

  • 1Merck
    Merck announced a deal with Imago
    04.02.2023
  • 2slowdown in inflation in Germany
    Germany and other countries recorded a slowdown in inflation
    03.02.2023
  • 3John Craig Venter
    Who is John Craig Venter and his contribution to science
    02.02.2023
  • 4Mitsubishi
    Japanese Mitsubishi Corporation: history of creation
    01.02.2023
  • 5soft market
    Soft market: its impact on sellers and buyers
    31.01.2023

Popular Posts

  • Businessman Chuck Feeney: the man who gave the world Duty Free
  • Field of activity of the American Monsanto Company Corporation
  • Skolkovo analysts: the Russian energy market is suffering losses
  • National Stock Exchange of India: an inside look

Social media

Editor's Picks

Chaslau Koniukh
Analytics

American bankers from JPMorgan and Goldman Sachs advise to invest in gold: review by Chaslau Koniukh.

Press Secretary
17.08.2020
Expert Chaslau Koniukh
Analytics

Chaslau Koniukh on the analysts’ opinion on the key stake size change soon

Press Secretary
18.06.2020
expert Chaslau Koniukh
Analytics

Chaslau Koniukh: Internet trade market in Russia may reach 2.78 trillion rubles.

Press Secretary
30.05.2020
Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh
Analytics

Will the U.S. oil shale industry be able to quickly recover from the crisis: A Review by Chaslau Koniukh

Press Secretary
16.05.2020

Latest Posts

Merck
Merck announced a deal with Imago
04.02.2023
slowdown in inflation in Germany
Germany and other countries recorded a slowdown in inflation
03.02.2023
John Craig Venter
Who is John Craig Venter and his contribution to science
02.02.2023

Chaslau Koniukh

Expert Chaslau Koniukh

Chaslau Koniukh – an expert in marketing and project management, IT consulting, international investments, investor, financial analyst. A commodity trader, private consultant, entrepreneur, lecturer, author of several articles on the stock market.

Popular Posts

  • Businessman Chuck Feeney: the man who gave the world Duty Free
  • Field of activity of the American Monsanto Company Corporation
  • Skolkovo analysts: the Russian energy market is suffering losses
  • National Stock Exchange of India: an inside look
  • Economy of modern China: annual results of GDP data
Expert Chaslau Koniukh
  • Facebook
  • Twitter
  • Instagram
  • Biography

Chaslau Koniukh – an expert in marketing and project management, international investments, financial analyst.

Social media

Menu

  • Biography
  • Companies and corporations
  • Global investment
  • Investors and Entrepreneurs
  • Economy
  • Market terminology
  • Stock Market
  • World exchanges
  • Tech and Marketing
  • Analytics