Commodity Indexes

Which of the following theories of the commodities futures price curve is Anne _most likely_ describing in her discussion with Daniel?

That's it! The insurance theory states that the curve of the commodities futures curve reflects the use of futures markets by producers as a form of commodity price insurance. So to entice speculators and lock in prices, producers sell forward at a discount, referred to as normal backwardation.

Incorrect. The theory of storage states that the curve of the commodities futures curve reflects the level of commodity inventories. Commodities that are regularly stored should have a higher price in the future (contango), so supply dominates demand. However, a commodity consumed along a value chain that allows for just-in-time delivery and use (minimal inventories and storage) can avoid these costs. And so demand dominates supply, and current prices are higher than future prices (backwardation).

Incorrect. The hedging pressure hypothesis states that the curve of the commodities futures curve reflects both sellers and buyers seeking certainty (insurance), and that the intensity of either side will push markets into either backwardation or contango.

Insurance theory

Theory of storage

Hedging pressure hypothesis