Convenience Yield

The implied benefit of holding physical stock rather than a futures contract.

Overview

Convenience yield is the return that owners of physical inventory earn by having material on hand, avoiding production stoppages and capturing local shortages, which a futures position cannot provide. In the cost of carry framework the futures price equals spot plus financing and storage minus convenience yield. When inventories are scarce, convenience yield rises and can exceed carrying costs, flipping the curve into backwardation, and when stocks are abundant it falls toward zero and the curve sits in contango. The idea, developed by economists including Nicholas Kaldor and Holbrook Working in the mid 20th century, underpins the theory of storage linking inventory levels to curve shape.