OCCES

Investors in commodities futures need to understand the concepts of backwardation and contango. When commodities futures are in backwardation, the futures price is lower than the spot price. Investors in commodities futures (and total return commodities indices) sell down their position immediately before actual delivery and buy a further-dated futures contract. Although they are long the commodity, they never receive delivery. They roll forward their futures position. When a commodity is in backwardation, an investor can sell his or her near-dated future for a premium to the cost of the further-dated contract. This results in a positive roll yield. The reverse position, in which futures prices are higher than spot prices, is known as contango. In this case, rolling forward the futures position creates a loss for the investor or index, a negative roll yield.