Commodity Futures
Commodity futures are standardized contracts traded on regulated exchanges that obligate the buyer and seller to transact a specific quantity of a physical commodity — such as crude oil, gold, corn, or natural gas — at a predetermined price and date.
Commodity futures markets have their roots in 19th-century American agriculture. The Chicago Board of Trade (now part of CME Group) was founded in 1848 partly to provide grain producers and merchants with a mechanism to forward-price wheat and corn, reducing the devastating price volatility that plagued farm economies at harvest time. Today, commodity futures cover everything from agricultural products (corn, soybeans, wheat, cattle, hogs) to energy (WTI crude oil, Brent crude, natural gas, gasoline) to metals (gold, silver, copper, platinum) to soft commodities (coffee, sugar, cocoa, orange juice).
CME Group operates the primary U.S. commodity futures exchanges, including NYMEX (energy and metals) and CBOT (agricultural commodities). The Intercontinental Exchange (ICE) operates competing markets for several commodities, including Brent crude oil and soft commodities. All these markets are regulated by the Commodity Futures Trading Commission (CFTC).
Most commodity futures contracts specify physical delivery of the underlying commodity — a specific grade, at a specific location, during the delivery month. For WTI crude oil, delivery occurs at Cushing, Oklahoma; for CBOT corn, delivery occurs at approved warehouses in Illinois and surrounding states. In practice, commercial participants who need physical delivery actually take or make delivery, while financial traders close their positions before delivery first notice day to avoid the obligation.
Commodity futures serve critical price discovery and hedging functions. An airline hedging jet fuel costs, a gold mining company locking in future revenues, or a food manufacturer fixing the price of soybean oil for next quarter's production are all using commodity futures for their original designed purpose. Speculators — hedge funds, commodity trading advisors (CTAs), and retail traders — provide the liquidity that makes efficient hedging possible.
For retail investors, exposure to commodity futures is typically gained through commodity ETFs and ETNs, most of which hold near-dated futures contracts and roll them forward as expiration approaches. The roll yield in contango or backwardation markets significantly affects these products' performance relative to the spot commodity price.