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Commodity Futures Curves: Contango, Backwardation, Roll Yield

One-line definition

Roll yield is the return earned (or lost) from replacing an expiring futures contract with the next-dated one, driven by whether the futures curve is upward-sloping (contango) or downward-sloping (backwardation).

Formula

roll_yield = (near_price - far_price) / far_price

Positive in backwardation (near_price > far_price), negative in contango (near_price < far_price).

Why PMs care

Unlike a bond or equity, a commodity futures index's total return isn't just spot price change — it's spot return plus roll yield. Two commodities with identical spot performance can have very different total returns if one curve is steeply contangoed and the other backwardated.

Worked example

Near contract at $80, far contract at $78 (backwardation):

roll_yield = (80 - 78) / 78 ≈ +2.56% — the position gains from rolling.

Common mistakes

  • evaluating a commodity investment on spot price alone and ignoring roll
  • assuming a curve shape (contango vs. backwardation) is permanent — it reflects current storage costs, convenience yield, and near-term supply/demand, and can flip