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Understanding the Dynamic Relationship Between Spot and Future Prices of Agricultural Commodities

Table of Contents

1 . The spot price: Explained 2 . Locking-In Prices: The Link between Futures and The spot prices 3 . Future Price. Vs The spot price

In agri commodity exchange, you often hear the terms future and spot prices. What are these? How are they different? Let’s explore the relationship between the future and the spot prices in agricultural commodities. This comprehensive guide touches on the basics of an agricultural commodity exchange by explaining spot and future price concepts.

The spot price: Explained

The spot price is the current market rate or price of a commodity, security or currency under consideration. It’s available for immediate delivery and settlement. In simpler words, the spot price is the value of an asset that both a buyer and seller agrees on.The spot price varies depending on region and time, but they’re fairly homogenous across financial markets. This price uniformity in different financial markets doesn’t allow traders to exploit opportunities that come from price disparities in different financial markets.

Locking-In Prices: The Link between Futures and The spot prices

Spots are considered in the context of futures and forwards contracts. The reason for these financial contracts is to reserve a desired spot price of an asset at a future date because commodity prices change due to supply and demand fluctuations. The spot price is an essential variable that determines the futures contract price. It also helps indicate the changes in future prices of a commodity.

Future Price. Vs The spot price

The difference between futures and the spot price is that the latter is used for immediate selling and buying, whereas the futures prices can delay the delivery and payment to a future date. Another difference is that the spot price is lower than the futures price. A market situation named contango is a common occurrence in non-perishable goods with storage costs. Compared to that, when the spot price increases the futures price, it refers to backwardation. In both situations, the futures price is projected to converge with the current price. Studies also confirm that spot prices are discovered in futures markets. The changes in futures prices can change the spot prices more than the opposite. That’s because commodity price changes are first discovered in futures markets. Later, this information is communicated to spot markets. That said, the relationship between the spot and futures prices is bidirectional, with futures markets having more effect on spot returns than the contrary.

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Disclaimer: Please note that this content has been proofread manually and through grammar checkers to eliminate all spacing errors. Any spacing errors you may come across are due to compatibility issues in Microsoft Word.

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