How do commodity futures work?

In commodity futures trading, a contract is made between a buyer and a seller to buy or sell a specific amount of a particular commodity at a predetermined price and date in the future. The buyer of the contract agrees to take delivery of the underlying commodity on the specified future date, while the seller agrees to deliver the commodity.

Futures contracts are traded on commodity exchanges, where traders can buy or sell them on the basis of their outlook on the future price of the underlying commodity. The price of a futures contract is determined by the market forces of supply and demand, and reflects the consensus view of market participants on the future direction of the commodity price.

The use of futures contracts enables producers and consumers of commodities to hedge their price risk. For example, a farmer who produces a commodity can use futures contracts to lock in a price for their future production, while a manufacturer who uses a commodity as a raw material can use futures contracts to secure a price for their future purchases. Futures contracts are also used by speculators who seek to profit from price movements in the commodity markets.