How do the practicalities of futures contracts for commodities work?

Question

I know in principle how future contracts work (and correct me if I'm wrong):

Essentially, provides a contract holder with the right to buy a commodity in the future at a given price.

This part, and numerous examples of "Farmer goes to futures market to hedge his wheat produce for later in the season" are plentiful on youtube. What most resources fail to describe, is the practicalities surrounding the commodity trade once a futures contract is to be delivered on. Here are my questions, as follows:

As I understand, there are two ways to buy a commodity (and I'm lacking details here too): Through the spot market, where you buy x quantity for today's price.

Q1) Where is spot price trading done? Does CME, COMEX etc. facilitate spot trading in some way, or is that essentially B2B deliveries between producing companies and buyers?

Next, there is the futures market, which to my understanding grants a contract holder the right to buy a commodity in the spot market in the future for a given price (?).

Q2) Due to the volume I imagine being traded in commodity futures contracts, how are the practical deliveries done when the contract expires, and a buyer/holder has to fulfill their obligations?

Q3) Finally, who can even enter as valid producers for a commodity to be linked to a futures contract? Given for example organical produce such as agricultural or livestock commodities, I imagine there are strict requirements for quality and quantity to any candidates? Can anyone "sell" their produce on the futures market? What are the limitations, and processes for becoming granted the right of buying/selling future contracts as industrial parties - with the intent of handling the physical goods in some way?

Answer 1

Here are some general points based on my experience in London some years ago:

• Futures are an obligation to buy/sell. Options are the right without the obligation.
• 98% of all contracts are cash settled.
• Delivery is defined by an agreed date at a predefined quality level at a predefined location as laid out in the contract. It's really up to the person with the obligation to work out how to deliver, financially and logistically. The recipient is also obliged to take possession (hence why the cash settlement is a preferred option).
• It can also be awkward for the buyer if they somehow managed to avoid cash settlement.
• The required settlement commodity can be bought on the equity/non-derivative market if required to settle a contract due to lack of actual goods of the required volume & quality but it really doesn't matter how they're acquired so long as it is legal.
• "So isn't it just gambling?". The spot prices will tend to stabilise around this market (due to its very existence) smoothing it out and giving the market as a whole some kind of baseline.