Arbitrage

Arbitrage is the practice of buying a commodity in one market, form, or time period and selling it in another to profit from a price gap, with little risk.

Arbitrage keeps prices for the same commodity consistent across locations, forms, and time. If a bushel of corn is priced higher at a Gulf export terminal than the cost of buying it inland and shipping it there, traders will buy inland and sell at the coast until the gap narrows to the cost of freight. The same logic links a futures price to the underlying spot price: if futures trade far above what storage and financing actually cost, someone can buy spot, store it, and sell the futures, an act that itself pushes the gap back toward the true cost of carry.

Arbitrage is rarely riskless in practice. Moving a commodity from one market to another takes time and money, and prices can move before the trade is complete. Persistent price gaps that resist arbitrage usually mean a real barrier is at work, such as a port bottleneck, a tariff, or a lack of storage.