What is a connection between commodity price on an exchange and price of the actual commodity?


There is price of, say, grain futures on a commodity market, but, to my understanding, if I bought some of them, nobody is going to deliver 10 tons of grain to me when the futures expire and there is a delivery day. I would be just paid a current “market” price of the grain. It seems that price of a security is completely detached from the actual commodity price.

What is a mechanism that prevents commodity market prices from running away from prices of actual grain on an actual elevator when you can neither ask for delivering of actual commodity from exchange nor can you deliver it yourself to the exchange?

[This question](https://redd.it/aunv8y) touches the topic, but does not explain actual connection. Answers imply that actual delivery to the exchange happens, while in fact trades happen through brokers, and they seem to prohibit keeping securities up to delivery day.

In: Economics

The commodity price is basically a bulk order to be delivered in the future, rather than the retail price of a small quantity that an individual might want to buy now.

The current or “spot” price is the commodity price at the time. So, settling the exchange contract involves getting paid or paying in real dollars what the commodity price is on the exchange contract.

Say you purchased a future contract for 1 cow to be delivered in 1 month and you paid $10 for it. One month later, cows are being sold (actual cows) for $15 a cow (this is the market price). To settle your contract, you will be given $15 which is what you can buy 1 cow for at that time.

If you actually want to buy a cow and wanted protection against cow inflation, then what you have done is spent $10 a month ahead of time to guarantee that you’ll have the money to buy a cow at the end of the month. The other side of the deal is someone who wanted to sell a cow a month from now but believed that there would be cow deflation, so they wanted to guarantee that they’d sell their cow for $10. Who gains and loses depends on whether cows inflate or deflate in that period 🙂