Futures For You by Carley Garner
In futures industry language, what does “contango” mean?
Commentators often use contango in reference to the commodity markets because it sounds exciting. The true meaning of the word is less than thrilling; in fact, it is downright normal. Contango is a scenario in which spot (current delivery) commodity prices are trading at a discount to prices displayed in the futures markets (future delivery).
To fully understand the word’s meaning, you must recognize what causes such a price relationship. There are essentially two separate, yet related, markets in which commodities are traded: the cash market and the futures market. The cash market refers to buying and selling of the physical commodities; the price and the product exchange occurs in the present. On the other hand, the futures market deals with buying or selling of future obligations to make or take delivery of a commodity. In general, speculators find the futures market a more efficient means of facilitating trades. A futures trader can speculate on the price of corn (not an artificially indexed tradable, like an exchange traded fund) without transporting, storing, or even seeing the underlying commodity.