Contrast theories explaining commodity futures returns
The idea
Three theories explain why futures prices may differ from expected spot prices, and so why long futures investors might earn a return. Insurance theory, Keynes's normal backwardation, says producers hedge by selling futures and must pay speculators a premium, so futures sit below expected spot and longs earn a risk premium. The hedging pressure hypothesis adds consumers who hedge by buying futures: when their demand dominates, futures sit above expected spot and longs earn less. The theory of storage ties the curve to inventory: futures = spot × (1 + r) + storage − convenience yield. Scarce stocks, with a high convenience yield, therefore produce backwardation. The trap is assuming backwardation is the natural state for every commodity.
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