Normal Backwardation, Forecasting, and the Returns to Commodity Futures Traders

Two theories are advanced to explain the returns of speculators in commodity futures markets. One, the ‘theory of normal backwardation,’ views speculative returns as directly linked to the bearing of risk; the other, which we shall call the ‘forecasting theory,’ considers returns to be determined by the ability of speculators to forecast prices accurately. Although competitive, these theories are not mutually exclusive. This paper presents evidence on the extent to which each of these competing explanations may have been operative in United States commodity futures markets from 1947 to 1965.