Return Components of Commodities

At times, I have referred to terms before defining them in this blog.  This happened in an earlier post about commodities.  Returns for commodities are composed of the spot return, the roll return and collateral interest.  The spot return is the percentage change in spot prices of the commodity.  As commodity futures approach their expiration date, investors sell them and buy futures contracts that have a later expiration date.  This is called rolling their positions.  The gain or loss is the change in the prices of the contracts.  If the commodity forward curve is sloping downward i.e. contracts with a later expiration date are less expensive, then the market is in backwardation.  If the contracts with a later expiration date are more expensive, then the market is in contango.  To establish a futures position, the investor has to put a small amount of margin - usually 5% to 15%.  This varies depending on the commodity contract.  The remaining cash is invested in Treasury bills, TIPS, money markets and other, safe, liquid assets and used for collateral for the remainder of the position.  The interest earned on these assets is the collateral interest.  Commodity futures have a implicit leverage due to the structure of the markets.  In addition, an investor can apply another layer of leverage by borrowing money to establish the position.