Understanding Backwardation: Spot vs. Futures Prices

Backwardation occurs when the spot price is higher than the future price, or in other words, investors are willing to pay a premium to hold the commodity now.

This causes a downward sloping futures price curve.

For example, a famine could have caused corn to be in short supply for the current season, but extended forecasts are calling for above-average rainfall to cause a surplus during the upcoming growing season.

That would make corn more expensive in the near term and cheaper further out along the price curve.