Commodity Term Structure

Key Takeaways

1. 1The term structure is the shape of futures prices across contract months — it reveals market expectations about supply, demand, and carry costs at a glance
2. 2Contango: futures prices rise as you move further out in time, reflecting storage, financing, and insurance costs — a typical slope runs 0.5–2.5% annually in stable markets
3. 3Backwardation: futures prices fall as you move further out, signalling physical scarcity or urgent immediate demand — the market is paying a premium for the commodity right now
4. 4Convenience yield is the hidden value of holding physical inventory — the forward price equals spot plus carry costs minus convenience yield, explaining why backwardation persists even when carry costs are positive
5. 5Roll yield is the practical consequence: rolling contracts in contango is costly, in backwardation it is profitable — persistent contango can drain 2–5% annually from buy-and-hold investors
6. 6Calendar spreads exploit term structure changes by betting on the curve steepening or flattening, without taking an outright directional view on price
7. 7The curve responds within hours to new information — supply disruptions, inventory data releases, and interest rate changes all shift the shape rapidly
8. 8Agricultural curves shift dramatically between harvest and planting seasons as physical supply accumulates and then tightens, making seasonal patterns a key analytical tool
9. 9Extreme backwardation is generally unsustainable — supply eventually catches up — but the curve primarily reflects genuine supply-demand balance rather than acting as a simple contrarian indicator