Contango is understood as that situation in which stock exchange or in the market, where the price of a product in cash or in cash is lower than the deferred price. Or, put another way, a situation in which the futures price of a product or commodity exceeds the spot price.
As a consequence, the reason for buying futures will be based on a cost comparison. You may be interested in paying a premium for owning an asset in the future, if the costs of that asset or raw material they are lower than the costs that would have been incurred buying the product in cash. We are talking about warehouse costs, transport costs, possible losses of perishable products, etc.
When the market is in contango, net short positions are much more advantageous than net long ones. In this case the futures curve slopes upward. In case future prices stay the same and do not converge, investors with short positions can benefit from arbitrage.
The situation of contango is precisely the opposite of the situation ofbackwardation. That is, there is backwardation when the spot price is higher than the futures price. The consequences are also the opposite of those mentioned above. This type of market is the most common for basic products.
Both the contango situation and the backwardation situation affect the goods or commodities on which the futures operate, that is, the so-called underlyings, such as raw materials. Contago occurs mainly in non-perishable goods. It is the situation in which precious metals are usually found, which also have the role of active shelter.
Why is raw material worth more in the future? In general, it is due to the costs of storage and transport, to which we have referred. But also, to the expectations of investors, and the behavior of interest rates.