Commodity futures is an exchange of a contract between a buyer and a seller of a specified commodity with a set amount of that commodity. Commodity futures provide the most efficient method of bringing together producers and consumers/users, bringing liquidity into the markets.
The seller of a commodity futures contract promises to sell and deliver a commodity on a future date. In contrast, the buyer promises to pay for the commodity upon delivery in the future, as agreed upon in the contract.
The benefit of the commodity futures contract is that it allows the seller to secure a price for a commodity they have not yet harvested, mined, or extracted. In contrast, the buyer secures their delivery of that commodity at a future date to keep up with their demand in whatever finished product they manufacture.
Furthermore, suppose the seller were to become aware that they cannot deliver upon the contract for whatever reason. In that case, they can sell their contract in the open market before the expiration of the contract. Just like the seller, if the buyer cannot purchase the commodity due to economic changes in their business, they can sell their contract in the open market before the expiration of the contract.
The availability of buyers and sellers, with the fungibility of a commodity, allows the commodity futures market to function smoothly.
