Editing Contango (section)

{{Short description|Situation when futures prices are above the expected spot price at maturity}}
[[File:Contangobackwardation.png|thumb|upright=1.5|This graph depicts how the price of a single [[forward contract]] will typically behave through time in relation to the expected future price at any point in time. A futures contract in contango will normally decrease in value until it equals the spot price of the underlying commodity at maturity.{{citation needed|date=December 2017}} This graph does not show the [[forward curve]] (which plots against maturities on the horizontal).]]

'''Contango''' is a situation in which the [[futures contract|futures price]] (or [[forward contract|forward price]]) of a [[commodity]] is higher than the [[spot price]].<ref name="investopedia_contango_normal_backwardation">{{cite web|url=https://www.investopedia.com/articles/07/contango_backwardation.asp |publisher=[[Investopedia]]|title=Contango vs. Normal Backwardation|access-date=21 June 2020}}</ref> In a contango situation, [[arbitrage]]urs or [[speculator]]s are "willing to pay more for a commodity [to be received] at some point in the future than to purchase the commodity immediately. This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today."<ref>{{cite journal | url=https://www.sciencedirect.com/science/article/pii/S1366554518304885 | doi=10.1016/j.tre.2018.11.007 | title=Crude oil contango arbitrage and the floating storage decision | year=2019 | last1=Regli | first1=Frederik | last2=Adland | first2=Roar | journal=Transportation Research Part E: Logistics and Transportation Review | volume=122 | pages=100–118 | s2cid=158786810 | url-access=subscription }}</ref><ref name="CEC2008">{{cite report|url=http://ec.europa.eu/economy_finance/publications/publication13765_en.pdf|title=Is There a Speculative Bubble in Commodity Markets?|date=21 November 2008|publisher=Commission of the European Communities|location=Brussels|number=SEC(2008)2971|work=Task force on the role of speculation in agricultural commodities price movements}}</ref> On the other side of the trade, [[Hedge (finance)|hedge]]rs (commodity producers and commodity holders) are happy to sell futures contracts and accept the higher-than-expected returns. A contango market is also known as a ''normal market'' or ''[[carrying cost|carrying-cost]] market''.

The opposite market condition to contango is known as [[backwardation]]. "A market is 'in backwardation' when the futures price is below the spot price for a particular commodity. This is favorable for investors who have [[long position]]s since they want the futures price to rise to the level of the current spot price".<ref name="investopedia_contango_normal_backwardation" />

In industry parlance, contango may refer to the situation when futures prices (or forward prices) are above the ''current'' spot price, or a far-dated futures price is above a near-dated futures price, and the expectation is for the spot price to rise to the futures price at maturity, or the near-dated futures price to rise to the far-dated futures price.<ref name=OxfordDictEcon2008>{{cite encyclopedia|url=http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-3523?rskey=KFzJUD&result=531|series=A Dictionary of Economics|edition=3|title=Contango|editor1=John Black|editor2=Nigar Hashimzade|editor3=Gareth Myles|publisher=Oxford University Press|date=2009|isbn=9780199237043}}</ref><ref name="investopedia_contango">{{cite web|url=http://www.investopedia.com/terms/c/contango.asp |publisher=[[Investopedia]]|title=Contango|access-date=22 July 2013}}</ref>

The futures or [[forward curve]] would ''typically'' be upward sloping (i.e., "normal"), since contracts for further dates would typically trade at even higher prices. The curves in question plot market prices for various contracts at different [[maturity (finance)|maturities]] (cf. [[term structure of interest rates]]). "In broad terms, backwardation reflects the majority market view that spot prices will move down, and contango that they will move up. Both situations allow speculators (non-commercial traders)<ref>"A non-commercial trader is a trader that is not commercially engaged in business activities hedged by the use of the futures or option markets (CFTC classification). The non-commercial classification does not include swap dealers and commodity index trading is generally considered as commercial"</ref> to earn a profit."<ref name="CEC2008" />

Contango is normal for a [[nonperishable]] commodity that has a [[cost of carry]]. Such costs include [[warehousing]] fees and [[interest]] forgone on money tied up (or the [[time value of money]], etc.), less income from [[leasing]] out the commodity if possible (''e.g.'', [[gold]]).<ref>{{cite web | first = Izabella | last = Kaminska | title = It's the BIS| url = http://ftalphaville.ft.com/blog/2010/07/08/281601/the-bis/ | work = [[FT Alphaville]] | date = 8 July 2010 | access-date = 2010-09-01 }}</ref> For perishable commodities, price differences between near and far delivery are not a contango.<ref>Symeonidis, L., Prokopczuk, M., Brooks, C., & Lazar, E. (2012). [https://www.sciencedirect.com/science/article/pii/S0264999312002489 Futures basis, inventory and commodity price volatility: An empirical analysis.] Economic Modelling, 29(6), 2651-2663.</ref> Different delivery dates are in effect entirely different commodities in this case, since fresh [[Egg (food)|eggs]] today will not still be fresh in six months' time, ninety-day [[Government bond|treasury bills]] will have matured, etc.