A futures commodity contract is an obligation to buy, or sell, a fixed amount of a commodity, at a pre-assigned price, on a fixed delivery date.  For example, if the spot price of wheat in the Chicago Commodity Exchange is US$ 7.50 per bushel today, an investor could enter into a contract to buy a certain quantity of wheat at US$ 8 per bushel 60 days from now.  If the spot price rises to US$ 8.25 by that delivery date, then such an investor would make a profit of 25 cents per bushel, because he would be able to buy at less than market rate; he could buy at US$ 8.00 and sell for US$ 8.25 on the same day.

A futures contract is between one who commits to buy and one who commits to sell. The buyer gains if the actual price rises above the pre-assigned contract price. The seller gains if the price does not increase that much by the delivery date, as he would get a price that is higher than the spot price in the market.  Thus, the futures market involves betting on how high prices would rise.

Through futures trading, speculators (those not involved in production or distribution of the commodity but are only trying to make a quick buck) attract sellers by offering high prices in the future. These high offers raise everybody’s expectations about future price increase. Higher price expectations in turn affect the decisions of those who actually have stocks of the commodity on hand – it influences them to postpone their sales in order to get a higher price. In other words, high future prices encourages hoarding in the present, and leads to actual rise in prices as a result. 

The more actual prices rise, the higher do the speculators bet, and the higher they bet, the more do prices rise.  A vicious cycle is thus created, feeding on itself, driving commodity prices sky high. The result is that various speculators pocket windfall profits, at the expense of the actual consumers of the commodity concerned. They have to pay much more than the value of the commodity as a result of the price spiral fueled by futures trading. Those who pocket maximum profits from this activity are big institutions such as investment banks, hedge funds, and various corporate entities.

Following the steep increase in commodity prices this year, the Government of India has temporarily banned futures trading in selected commodities. This is an admission that futures trading is indeed fueling the soaring prices of commodities.  The point is:  why not ban all futures trading permanently?  This would only hurt the speculators, the big institutions and corporations that want to gain by gambling with the people’s future.