Futures Pricing for Goods Not Yet Produced
Summary
For goods that have not yet been produced, futures pricing may depend on expected future supply and demand as well as carrying costs. The simple spot-plus-carry relationship applies most directly when the commodity can be stored and delivered, and does not fully describe every contract or market.
The discussion distinguishes exchange-traded futures from over-the-counter agreements. Exchange clearing and collateral can reduce counterparty risk, keeping prices closer to spot plus carry, while a direct agreement with a producer may incorporate additional credit risk. It also describes risk premiums between futures prices and expected spot prices: their existence and direction remain unsettled, and normal backwardation is presented as a contested theory rather than a rule. Contract design and the specific commodity therefore matter; the document offers conceptual guidance, not a general pricing formula or empirical estimate.
Key ideas
- For unproduced goods, expectations can affect futures prices beyond storage and carry costs.
- The spot-plus-carry relationship is most straightforward for storable commodities.
- A futures risk premium may place the contract price above or below expected spot, but its sign is debated.
- Exchange clearing and collateral can limit counterparty risk, while direct producer agreements may reflect it.
Tags
Full text
# What is the relation between spot price and future price if the goods are not produced yet? # What is the relation between spot price and future price if the goods are not produced yet? I read on the Internet that future price = spot price + carrying cost. What if I buy a future before the goods/assets are even being manufactured. Will I get a discount on the spot price since I commit in advance? Or it still depends on the expectation of price in the future? ## Answer by nbbo2 (score 1) https://quant.stackexchange.com/a/70392 In these cases, for example an agricultural crop which is not produced yet, expectations enter into the pricing and it is no longer just spot_price+carrying cost like it is for a storable commodity. Textbooks love (and perhaps overemphasize) the 'store and deliver case' because it is so simple, but it is not the only consideration in general. The existence and sign of a Risk Premium that would cause the futures price to be slightly below or slightly above the expected spot price, is an unsolved research issue on which there is no agreement. The (controversial) theory of Normal Backwardation claims the futures price is normally slightly below the expectation. (Because the Producers (short sellers of futures) are more active in hedging than the Buyers of the commodity). ## Answer by André Bittencourt (score 0) https://quant.stackexchange.com/a/70395 Well, how do you know if the good were already produced? In fact, probably most of soft commodities for long dated contracts weren't produced yet. This "extra risk" is a type of credit risk, the risk of not receiving the payment or good. If it will affect the price or not is a matter of contract specificities. If the contract is traded in a exchange, the credit risk is small, as the exchange will bear this risk and will demand collateral or insurance from buyers and sellers. In this scenario, the future price should be close to spot + carry. If the contract is an over-the-counter between trader and producer, this relation might deviate to include the credit risk.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.