Commodity futures contracts have been used by commodity producers and consumers alike since the beginning of commerce. These days, more and more investors have started trading in such contracts to benefit from the volatility of commodities prices.

A commodity futures contract is a binding agreement between a buyer and a seller who agree to buy and sell a specific quantity (or amount) of an underlying commodity at a future date and at a predetermined price. Both parties are obligated to fulfill the terms of the contract when the predetermined date arrives. This predetermined price, known as the 'settlement price', plus any additional costs such as brokerage, is dependant upon the open market at that time.

Trading in futures contracts works similarly to stock market trading, with the only difference being that the underlying assets are commodities rather than stocks. Traders in a commodity futures market buy a long position in the contract if they believe the price of the commodities will rise. On the other hand, if they believe the price of the underlying commodity will decrease, they will take a short position.

The high leverage of commodity futures can result in significant gains and losses which is why these derivatives should be used with caution. It is important to understand the settlement price of a futures contract so that the day-to-day changes in the market can be monitored and adjustments can be made in the positions to minimize risk. Traders should also understand the tax implications of commodity futures trading, of which the IRS requires a specific form when reporting gains and losses from commodity futures contracts: Form 6781.

In conclusion, commodity futures contracts are a useful way for producers and consumers to protect a position in commodities, speculate on the direction of the market, and gain exposure to the commodities markets. The use of leverage associated with these contracts, however, can lead to large losses if not used with caution.