Commodity Futures 101: Learn How to Trade Commodity Futures
Ken Trester, April 17, 2009
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How This Works
Here's an example to illustrate my point. Let's say you're a hog farmer who wants to sell some inventory soon. You can sell a futures contract calling for delivery in April or June. Unless the price of the June contract exceeds the price of April by an amount equal to the carrying charges, to compensate for feeding costs, etc., you would sell an April contract.
Long-term contracts usually sell for more than near-term futures, and the difference almost never exceeds the carrying charges. For example, if carrying charges are 2 cents per month, June hogs would sell for 4 cents more than April. But the price of the June contract cannot exceed the April price by more than 4 cents.
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