What does roll yield refer to in commodity futures?

Roll yield is fundamentally associated with the returns that arise from the differences in the prices of near-term and farther-out futures contracts for a commodity. This phenomenon occurs due to the term structure of commodity futures, which may be in contango (where future prices are higher than the spot price) or backwardation (where future prices are lower than the spot price).

When a trader rolls a futures contract—meaning they sell a nearing contract and buy a longer-dated contract—there can be a profit or loss that reflects the structure of the futures market. If the market is in backwardation, the trader can potentially make a profit as they buy at a lower price for future delivery than what they sell for the imminent delivery. Conversely, if the market is in contango, the roll yield can be negative as the trader may lose money when rolling from a higher-priced near contract to a lower-priced distant contract.

The yield that emerges from this rolling process is specifically what is referred to as roll yield, making it an important consideration for investors in commodity futures. It showcases how market conditions and futures pricing can impact returns, a key component in the analysis of commodities as an investment class.