Back Months

What Are Back Months?

In the commodity futures markets, the term "back months" alludes to the futures contracts whose delivery dates are relatively far later on. On the other hand, alleged front months are those closest to the current date.

How Back Months Work

The commodity futures markets are a large and important part of the global financial system. Through them, users of commodities —, for example, manufacturers who depend on commodities to create their items — can plan ahead by buying several months' worth of materials ahead of time. Moreover, traders can utilize the commodity futures markets to speculate on commodity prices or to participate in risk hedging.

Contingent upon their specific requirements, buyers could have a preference for contracts that are relatively close within reach or far later on. The contracts that have delivery dates farthest into the future are known as the back month contracts for that commodity. These contracts are indistinguishable from the other months' contracts with respect to the quantity and quality of the commodities that underlie them. Be that as it may, their prices are frequently unique, fundamentally due to the increased vulnerability associated with back month futures contracts.

Given the wide assortment of factors that can influence commodity prices — including production delays, weather conditions, and, surprisingly, political risks — it's a good idea that futures with delivery dates further into the future would generally be more costly. This dynamic is additionally built up by the way that back month contracts will generally have less trading volume than front month contracts. This relative illiquidity adds to their riskiness, and will in general add to their price. Of course, assuming market participants accept that the price of the commodity will decline after some time, then, at that point, back month contracts may be less expensive than front month contracts, regardless of these factors.

Illustration of Back Months

To outline, assume that you are in the market to purchase wheat futures. It is April 15, and the next wheat futures contracts terminate on May 30. You expect the price of wheat to increase in June, so rather than buying the front month contract of May, you buy a contract as far out as could really be expected — in this case, November.

In this scenario, the November contract would be viewed as a back month contract, and you would be committed to take delivery of the wheat around then except if you sell out of the futures contract in advance.

Features

• Back month contracts will quite often be more costly than front month contracts, since they consolidate extra risk premiums due to time and relative liquidity.
• Back month futures contracts are those whose delivery date is among the most recent that anyone could hope to find.
• They are something contrary to front month futures contracts.