(emphasis mine) [my comment]

China Shouldn't Get Fooled by Soybean Futures: Andy Mukherjee
Commentary by Andy Mukherjee

…
[Although this article is from 2008, US soybean and sugar futures are today in backwardation, just as described below.]

Futures contracts on both soybean and soy meal are in ``backwardation'' on China's Dalian Commodity Exchange [and now here in the US too], meaning that longer-dated futures are progressively cheaper than nearer- term contracts.

Backwardated Contracts

Soybean futures for delivery in January 2009 are 21 percent cheaper than those that mature next month; for soy meal, the difference is about 14 percent.

China is the world's biggest buyer of soybeans, which are crushed to make cooking oil and the protein-rich soybean meal. The latter is mostly fed to hogs, poultry and cattle.

A steeply backwardated market typically suggests that soybeans are in extremely short supply. As stocks get replenished by new harvests, the deficit will ease.

Such a view may not always be correct.

One can't rely on the futures contract for a pure estimate of the expected spot price tomorrow.

The futures price subtracts, from today's expectation of tomorrow's price, a risk premium that hedgers have to pay to speculators to buy insurance.

When inventories are too low to absorb shocks to the demand- supply equilibrium, spot prices rise more than futures (because tomorrow's stocks can't be consumed today) and cause backwardation.

Risk Premium

In such instances, the risk premium also often tends to rise and makes the futures contract cheaper -- in relation to today's price -- even when there's no drop in the expected spot rate for tomorrow.

…

The downward-sloping shape of the futures curves in soybeans -- or copper, for that matter [or sugar] -- suggests supplies are now tight; yet they don't confirm that shortages are expected to ease.

The Chinese authorities shouldn't allow themselves to become complacent.

Backwardation in US Sugar futures

Backwardation in US Soybean futures

My reaction: Backwardation in soybean and sugar is proof that both commodities are in extremely short supply.

1) A steeply backwardated market typically suggests that soybeans are in extremely short supply.

2) One can't rely on the futures contract for a pure estimate of the expected spot price tomorrow.

3) The futures price subtracts, from today's expectation of tomorrow's price, a risk premium that hedgers have to pay to speculators to buy insurance.

4) When inventories are too low to absorb shocks to the demand- supply equilibrium, spot prices rise more than futures (because tomorrow's stocks can't be consumed today) and cause backwardation.

5) The risk premium also often tends to rise and makes the futures contract cheaper -- in relation to today's price -- even when there's no drop in the expected spot rate for tomorrow.
The downward-sloping shape of the futures curves in soybeans, copper, or sugar suggests supplies are now tight; yet they don't confirm that shortages are expected to ease.

Conclusion: Watch soybean’s September contract and sugar’s October contract. These are the two which are most likely to default.

What a default would look like in soybean and sugar futures

LME reports about 2006 Backwardation Limit for Nickel.

16/08/2006
LME Imposes Backwardation Limit for Nickel

At 1700 hours today, The London Metal Exchange (LME) announced that the Special Committee has imposed a backwardation limit of $300.00 per tonne per day in the nickel market and that there will be a suspension of the Lending Guidance in respect of those with nickel positions.

After taking account of all the relevant factors, and following consultation with LCH.Clearnet, the Special Committee has resolved that:

1. Backwardation limit

Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery and/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day

2. Lending Guidance

The Lending Guidance in respect of nickel shall be suspended with immediate effect such that those with dominant long positions in nickel shall not be obliged to lend in accordance with the Lending Guidance until further notice.

Commenting on the announcement, Simon Heale, LME Chief Executive said:

“Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults. [LME prevented defaults on Nickel contracts by saying shorts didn’t have to deliver. What do you think the reaction would be if they try to do this in soybean and sugar? It should be interesting.]

“The Special Committee has been constantly monitoring nickel stocks, the effect of those trading for the nearby prompt dates and conditions in the nickel market. The Committee will keep this under constant review and will remove the backwardation limit and reintroduce Lending Guidance as soon as it considers it prudent to do so.”