Futures markets evolved to resolve the centuries-old commercial problem of how to arrange for supplies of goods needed at future dates.
In the 1700s, Japanese traders on the Osaka Rice Exchange first developed rules for forward contracting, or arranging for the delivery of rice in the future.
The first commodity markets in the United States were the "spot" or "cash" markets which sprang up in the 1800s when farmers would take their grain and livestock to regional centers about once a year to sell them to processors and consumers. The word "spot" was shorthand for "on the spot," referring to an immediate, cash-and-carry safe.
Those early cash markets did not attempt to resolve some basic problems of supply and demand. As a result, processors generally would bid as low as possible for goods at the post-harvest markets because more goods would be offered then than could be used in the short term.
In good harvest years, crop that were not sold at market would be thrown out. In bad years, of course, prices would be somewhat higher than usual if there were not enough food to go around for the short term.
Months later, of course, when processors ran out of supplies but the next crops were still in the ground, agricultural prices would be strong because there were few, if any, goods for sale.
To resolve the problem of how to obtain future supplies, farmers and processors began to forward contract with each other. Farmers would offer only part of their crops at the annaul market and would store the rest on their property until the future delivery time came around. This stablized the harvest price somewhat, but did not resolve the price problem for the future supplies.
In the late 1800s, formal commodity exchanges were created. The members of the exchanges developed trading practices, standardized contracts, rules of conduct, clearing and settlement procedures and grades and specifications of traded commodities. To resolve the price dilemma, they adopted an auction-type format. This usually resulted in a compromise price between what was bid by the processor and what was asked by the grower.
While the standardized futures contracts provided for actual delivery of everything from wheat to hogs to soy-beans, they soon became financial contracts as well, to be traded along the fundamental bases of shares of stock or bonds.
Future contracts, then as now, are traded by two classes of market participants: speculators and hedgers. And there are two types of futures contracts: long and short.
Speculators play the market strictly for financial gain. They have no use for the physical commodity upon which the contract is based and have no intention of taking delivery of it at the expiration date of the contract.
They are strictly speculating that the price will either rise - if they are holding a "long" contact, or one which permits them to buy the physical commodity upon the contract's expiration - or that it will fall - if they are holding a "short" contract, or one which requires them to deliver to another party the physical commodity upon the contract's expiration.
Hedgers, on the other hand, are using the futures market to protect their actual supply needs for the physical commodity.