The recent boom in futures trading has sparked in turn a surge in books on speculation in futures contracts, on the historical patterns in commodity prices, and on the mechanics of futures trading. I hope with this book to contribute something different. I have not tried to set up a system that would predict the prices for different delivery dates and locations but have instead concentrated on explaining the patterns among them. I have done so by connecting these patterns to general economic principles rather than by taking an empirical approach. The reader should not expect, therefore, to find interviews with processors and commodity dealers, nor surveys of the ways they use futures markets. Still, I hope it is clear that these handlers of commodities remain the centerpiece of my study, because they, rather than speculators or brokers, have the greatest effect on the patterns in prices and on the viability of futures markets.

This book offers a new explanation of the function of futures markets: that dealers use them as part of an implicit method of borrowing and lending commodities. My argument counters the heretofore accepted wisdom that dealers in commodities employ futures markets to insure their inventories against the risk of fluctuating prices. Futures markets are believed to be most closely related to insurance markets, yet the appropriate analogy should be money markets. Futures prices for different delivery dates serve to express a term structure of commodity-specific interest rates, in much the same way money markets do for money.

Futures markets have too often been examined in isolation from other markets in the economy.