Commodity Futures Contract

A commodity futures contract is an agreement between a buyer and seller (often via a clearing house) where it’s agreed that a certain amount of something will be sold from seller to buyer on a certain date in the future.

Basically, it’s a really specific IOU.

Why bother with commodities futures contracts? Well, some people like to use them to make a profit. If they think the price of a commodity will go up, they can enter a futures contract on that commodity at the current, lower price. In the near future, the seller will be giving the buyer the goods at lower-than-market price (if the buyer was right in their speculation). This can be risky though, since speculating using short positions in futures can lead to a downward spiral of money loss.

More often, those dealing in commodity futures contracts care about the commodities, like raw materials for business and manufacturing. In that case, commodity futures contracts benefit both buyers and sellers, because they offer stability in price. Whether the prices go up or down, buyers and sellers are both guaranteed steady, fixed prices. The seller gets to sell a steady amount of the commodity, and the buyer gets a steady amount of the commodity incoming. When you’re in business, stability is worth it.