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Contango

Definition

This is a condition in the futures market where the costs of holding an asset today exceed the long term benefits -- essentially meaning that the futures price is higher than the spot price available in the market.

Using the term Contango :

A non-perishable commodity is often (appropriately) in contango. This is because such a commodity has a cost of ownership (aka a cost of carry). These may be opportunity costs (i.e. lost interest) or real costs such as costs of storage. Properly, the contango equal the cost of carry, so that there is parity between the futures and spot price. Commodity purchasers can otherwise compare the futures contract price versus the spot price plus cost of carry and will always purchase the cheaper. When there are disruptions in the normal market shortages may emerge and reverse the contango into a state called backwardation . When a market is in backwardation, buyers are willing to pay a large premium for commodities available for immediate delivery. Again, this is the opposite of contango, which often indicates that there is reasonable (or perhaps a large) supply of the commodity available in the market today.

Pay Special Attention To :

Please note that for many soft (perishable) commodities, differences in commodity prices between spot and future delivery do not represent a contango. These is because the commdities will spoil in the future.

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Related terms

Backwardation