A commodity futures contract is a legally binding agreement, traded on a regulated exchange, to buy or sell a set quantity of a raw material at a fixed price on a specific future date. Commodity futures exist so that producers, processors, and traders can lock in prices in advance and protect themselves from swings in the cost of things like crude oil, corn, or copper. Speculators trade the same contracts to profit from those swings, and in doing so they provide the liquidity hedgers rely on.
Every detail of a futures contract is standardized by the exchange, which is what lets the market function at scale. You are not negotiating with the person on the other side of the trade. You are buying or selling a product the exchange has already defined down to the ounce or the bushel.
What’s Actually in a Futures Contract
A standard corn contract on the Chicago Board of Trade covers 5,000 bushels, and the exchange accepts only No. 2 Yellow corn at the contract price, with premiums or discounts for No. 1 Yellow and No. 3 Yellow.1CME Group. Corn Futures – Contract Specs A crude oil contract on NYMEX covers 1,000 barrels of West Texas Intermediate, a specific light sweet blend.2CME Group. Crude Oil Futures – Contract Specs Delivery locations are preset too: crude oil delivery centers on Cushing, Oklahoma, and wheat contracts specify licensed elevators at particular port cities.
Expiration is also fixed. Corn futures stop trading on the business day before the 15th of the contract month.1CME Group. Corn Futures – Contract Specs Crude oil contracts stop three business days before the 25th calendar day of the month preceding the contract month.2CME Group. Crude Oil Futures – Contract Specs
Because the exchange sets all of this, any contract for a given product and delivery month is interchangeable with any other. That uniformity makes futures highly liquid. You can buy a contract from one party and sell it to someone else minutes later, and no one needs to inspect the goods.
Who Trades Futures and Why
Two groups drive these markets, and the difference between them shapes everything from position limits to tax exemptions.
Hedgers use futures to protect a real business interest. A wheat farmer worried about falling prices before harvest can sell wheat futures now, locking in today’s price. If the market drops, the profit on the futures position offsets the lower price received for the physical grain. A bakery chain facing the opposite risk, rising wheat costs, can buy futures to cap its input costs. In both cases the contract works as insurance.
Speculators have no grain, oil, or cattle to protect. They trade futures to profit from price movement. They accept the risk hedgers want to shed, and in doing so they supply the counterparties that make hedging practical. Without speculators willing to take the other side, hedgers would struggle to enter or exit positions at fair prices.
The distinction is not just descriptive. Federal rules cap how many contracts a single trader can hold in a given commodity, but bona fide hedgers who can show their positions offset genuine commercial price risk can qualify for exemptions.3eCFR. Title 17 CFR Part 150 – Limits on Positions
What Commodities Are Traded
Futures markets split broadly into two categories.
Hard commodities are mined or extracted. Crude oil and natural gas dominate by trading volume, and gold, silver, copper, and platinum are also heavily traded. Prices in this group tend to respond to geopolitical events, mining output, and energy policy.
Soft commodities are grown or raised. Wheat, corn, and soybeans account for the largest share, with coffee, sugar, cocoa, and cotton rounding out the agricultural side alongside livestock contracts for live cattle and lean hogs. Weather, disease, and crop reports move these markets in ways metals and energy don’t experience. A single drought in a major producing region can move corn futures more in a week than months of normal trading.
Margin, Leverage, and the Risk of Losing More Than You Deposited
This is the part newcomers most often misunderstand, so it’s worth being clear about.
Futures trade on margin, which is a good-faith deposit representing a fraction of the contract’s total value. Initial margin typically runs from about 2% to 12% of the notional value, depending on the product and current volatility. A contract controlling $100,000 worth of crude oil might require $5,000 or $6,000 to open. That leverage is what makes futures attractive to speculators, and it cuts both ways with equal force.
Once you hold a position, you must keep your account above a minimum balance called the maintenance margin. If the market moves against you and your equity drops below that floor, the broker issues a margin call for additional funds. If you don’t meet it in time, the broker can liquidate your position at a loss, and you remain liable for any resulting deficit.
Daily mark-to-market settlement means gains and losses hit your account every single trading day, not at the end of some longer holding period. A string of bad sessions can drain your margin fast, and the broker is not required to wait for your response before closing you out. In a fast-moving market the liquidation price may be far worse than anyone expected. You can lose substantially more than the amount you originally deposited, and the required risk disclosure says so plainly: “You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts.”4eCFR. 17 CFR 1.55 – Public Disclosures by Futures Commission Merchants
How You Actually Place a Trade
You can’t trade futures directly on an exchange. You need an intermediary called a futures commission merchant (FCM), registered with the Commodity Futures Trading Commission.5GovInfo. 7 USC 6d – Dealing by Unregistered Futures Commission Merchants Prohibited Some traders also work with a commodity trading advisor, who gives advice on which trades to make but routes orders through an FCM.6National Futures Association. Who Has to Register
Opening an account means handing over your annual income, net worth, investment experience, federal tax ID, and government-issued photo ID. The FCM uses this partly to evaluate whether futures fit your financial profile. Before the account opens, federal rules require the FCM to give you a written risk disclosure, which you sign and date to acknowledge receipt.4eCFR. 17 CFR 1.55 – Public Disclosures by Futures Commission Merchants
Once funded, you place orders through an electronic platform or directly with a broker. The two most common order types:
- Market order: executes immediately at the best available price. You get speed but give up control over the exact price.
- Limit order: sets a price boundary, a maximum when buying or a minimum when selling. The trade only executes if the market reaches your price or better.
Electronic order books show the bid-ask spread in real time. Tighter spreads generally mean more liquid contracts.
Rolling Over and Settlement
As a contract approaches expiration, most traders close their position and open a new one in a later-dated contract. This is called rolling over, and it avoids the logistics of actually taking or making delivery of physical goods.
Contracts settle one of two ways. Physical delivery means the actual commodity changes hands at a designated facility, which matters mainly for commercial participants who need the goods. Cash settlement adjusts your account balance based on the difference between your entry price and the final settlement price, with nothing physical changing hands. The vast majority of individual traders close through offsetting trades well before the delivery window opens.
What It Costs to Trade
Futures involve several layers of fees that eat into returns, especially for active traders.
- Exchange fees, charged per side (both when you buy and when you sell). On CME Group exchanges these range from as low as $0.20 per side for lumber futures to $4.80 per side for S&P 500 E-mini futures, depending on the product and whether you’re a member.7CME Group. CME Fee Schedule
- NFA assessment fee, a flat $0.02 per side on every futures contract regardless of size, which funds the National Futures Association’s regulatory work.8National Futures Association. NFA Assessment Fees FAQs
- Brokerage commissions, charged by your FCM on top of exchange and NFA fees. Rates vary by broker, account size, and volume, so comparing offers is worth the effort.
A round-turn trade, opening and closing a position, triggers fees on both sides. For an active trader placing dozens of trades a week in equity index futures, exchange and NFA fees alone can run several hundred dollars a month before commissions.
Regulation and the Clearinghouse
Commodity futures trading in the United States is governed by the Commodity Exchange Act, codified at 7 U.S.C. ยง 1 and the sections that follow.9Office of the Law Revision Counsel. 7 USC 1 – Short Title The CFTC, an independent federal agency, has exclusive jurisdiction over futures and swaps.10Office of the Law Revision Counsel. 7 USC Ch. 1 – Commodity Exchanges Day-to-day oversight of industry professionals falls to the National Futures Association, a CFTC-designated self-regulatory organization that handles registration, audits member firms, and enforces ethical standards.11National Futures Association. National Futures Association The NFA also runs a free public database called BASIC where anyone can look up the background and disciplinary history of a futures professional before handing over money.
The piece of this that matters most for how futures actually work is the clearinghouse. Every trade executed on an exchange passes through one. The clearinghouse steps between buyer and seller and becomes the counterparty to both sides, so you never depend on the financial health of the specific person on the other side of your trade. It manages that risk through the same daily mark-to-market settlement that affects your margin: at the end of each session every open position is revalued, losing accounts are debited, and winning accounts are credited. Losses can’t quietly accumulate across a long holding period, because they’re collected every day.
How Futures Are Taxed
Commodity futures that trade on U.S. exchanges qualify as Section 1256 contracts under the Internal Revenue Code, and the tax treatment is unusual in two ways.
First, the 60/40 rule. Regardless of how long you held the position, 60% of any gain or loss is treated as long-term capital gain or loss, and 40% as short-term.12Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market Since long-term capital gains are taxed at lower rates than short-term for most taxpayers, this blended treatment can be a meaningful advantage over trading stocks held for less than a year.
Second, mark-to-market year-end accounting. Even if you haven’t closed a position by December 31, the IRS treats it as if you had. Any unrealized gain or loss on open contracts is recognized as of the last business day of the year.12Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market You can’t defer a gain by holding a position into the next calendar year.
Gains and losses from Section 1256 contracts are reported on IRS Form 6781.13Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles Net Section 1256 losses can also be carried back up to three years against prior Section 1256 gains, a treatment not available for ordinary stock losses. If you’re trading futures actively, a tax professional familiar with these rules is worth the cost.