Cost to Carry

Costs associated with holding the physical commodity until the determined delivery date. These costs include storage and insurance of the commodity before it gets delivered. The price of a commodity in a cash market differs from the price of the same commodity in the futures market as a direct consequence of the difference in timing of its delivery. Therefore, under normal market conditions, the spot price would be lower than the futures price due to the cost to carry. In the same manner, the near-month futures price would be lower than the futures price of the distant expiring contract of the underlying commodity. This is referred as normal carry charge market or contango. Under abnormal circumstances such as shortage of supply of a commodity in the short term, the contango can be reduced or even reversed. In this case the spot price can become higher than the futures price. This process is known as backwardation.