commodities - future/spot prices; book5, pg 52 only, structure, increase, current

Flok

I couldn’t get the rationale behind this logic - kindly break it
“Production may occur only if futures prices are below the current spot price, which is associated with a downward-sloping term structure of futures prices.”
Producers increase production if the futures price is high (one of the many reasons for increasing production, other could be on supply/demand). is that wrong? future price has to be less than spot, for production?
TY.

Swanand

It seems like backwardation is a sign of declinging conditions, or at least prices (since future prices are expected to decrease).  However, CPK, you make it sound like it’s a sign of increasing future prices.  Perhaps my generality is misguided, but is there a general sense of what backwardation (or contango) means for that in relation to the industry or even economy?  Good or bad sign of things to come?
Also, when you say converge, does that mean both the spot and futures prices move and converge or just he futures?
Thank you!

LorrinCFA

there are multiple prices that are in effect here
Current Spot price = what you see today
Current Futures price = what you see today for say a 3 month contract
Expected Futures Price = what you would expect to see for a 3 month futures contract 3 months later. (this would be  what you calculate with the risk free rate, storage etc).
If the Expected Futures price is below the Current Spot price - this means that the commodity price is in backwardation (a downward sloping curve).
when it is backwardated - and given the usual term structure of a commodity spot curve which is upward sloping - you could expect that the futures price (in the future) will converge to a higher spot price. This expectation that price in the future WILL rise - (based on expectations) makes the producer want to produce (since he knows or is convinced that the spot price will be higher).