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Often, there is a single contract that people typically refer to—it is the standard, "most important" contract: the benchmark. So when people talk about the “price of a commodity”, they refer to the price of this specific benchmark contract.
In finance, there are various trading contracts that relate to a single commodity - spot, futures, options contracts... Even within each of these categories, there are distinctions; for example, futures contracts can have different maturities (June 2024 futures contract, December 2024 futures contract, January 2025 futures contract etc etc). All of those contracts have different prices.
When we refer to the price of a commodity, which financial contract are we actually discussing?
Often, there is a single contract that people typically refer to—it is the standard, "most important" contract: the benchmark. So when people talk about the “price of a commodity”, they refer to the price of this specific benchmark contract.
The benchmark contracts see the biggest amounts of buying and selling activity. It has the highest liquidity in the sense that, at a certain time, there are the most market pariticpants compared to the other contracts relative to the commodity.
This is clearly visible in the European Carbon Allowance Market where the benchmark contract (Dec Futures contract) has a daily trading volume of around € 3 billion, whereas the spot contract sees this value at around € 61 million.
Although sometimes a physical characteristic of a commodity determines which futures contract becomes the most important and is considered the benchmark (such as the time of year corresponding to the harvest cycles for certain crop commodities), often over time, the benchmark contract becomes a standardized convention accepted by all market participants. This standardization may end up being not directly tied to the commodity itself.
For example, the benchmark contract for carbon allowances is the December one, as mentioned above. If we consider EUAs to behave like a commodity, we could expect that a change in the compliance calendar for carbon allowances could affect which futures contract market participants are most active in.
As a reminder, last year, the EU regulators announced a change in the compliance cycle for carbon allowances. Before 2024, industries and power producers had to surrender carbon allowances to the commission at the end of April every year. From 2024 onwards, industries must fulfill this obligation by September 30.However, the benchmark maturity of the contract did not change; it is still the December one.
In gas markets, the Dutch TTF contract is the benchmark. Dutch TTF stands for Dutch Title Transfer Facility, it is as a transfer point within the Netherlands' national gas transport network. There, gas producers, storage operators, and distribution companies engage in trading physical and financial natural gas. The TTF has become Europe's most liquid natural gas market, with the trading of large volumes and very low transaction costs (thanks to the large number of participants and hence the huge liquidity).
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