Backwardation

Backwardation is a market state in which the spot price or nearby futures price is higher than the price for later delivery.

Backwardation is the market’s way of saying it needs supply immediately, not later. Buyers pay more for prompt delivery than for material arriving in a few months, which discourages storage and pulls inventory out of warehouses. It is the usual shape during shortages, and a persistent backwardation is one of the clearest signs of a tight physical market.

The premium for prompt material is sometimes called a convenience yield: the benefit of having the goods on hand when a factory or mill cannot wait. Copper on the London Metal Exchange often flips into backwardation when exchange stocks fall and a single buyer holds a large share of them.

When cocoa prices climbed sharply in 2024, the nearby contract traded well above later months because West African beans were scarce and chocolate makers needed them immediately. That episode is described in the 2024 cocoa spike. For holders of futures, backwardation produces a positive roll yield. See contango and backwardation.