Answer: the convenience yield is high.

## Explanation Commodity futures backwardation occurs when the futures price is **below** the spot price. This typically happens when: 1. **Convenience yield is high** - The convenience yield represents the benefit of holding the physical commodity rather than the futures contract. When this yield is high, market participants are willing to pay a premium for immediate access to the commodity, which drives up spot prices relative to futures prices. 2. **Storage costs are low** - High storage costs would typically lead to contango (futures price > spot price) because futures prices need to compensate for storage costs. 3. **Interest rates are low** - High interest rates would typically lead to contango because futures prices need to compensate for the cost of financing. ### Key Relationships: - **Futures price ≈ Spot price + Storage costs - Convenience yield + Interest costs** - When convenience yield > (storage costs + interest costs), backwardation occurs - High convenience yield is the primary driver of backwardation in commodity markets ### Real-world examples: - Agricultural commodities during harvest season - Energy commodities during supply disruptions - Industrial metals during periods of high demand Therefore, option C is correct because a high convenience yield is the most direct cause of commodity futures backwardation.

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