Premiums
Simply put, a premium market indicates that the front month of a commodity is trading at a higher price than the next month out.
Chart 1 - CMEgroup.com
Chart 1 is from Corn in 2020. May was trading at 327/bushel and July was trading at 332/bushel. Each subsequent month was trading at a higher price than the previous month. This is because there are extra costs incurred in future months due to storage, insurance, interest and others.
When a front month trades at a higher price than the next month, the market is said to be trading at a premium. This is a very bullish condition and is also quite rare. The important thing about trading premium markets is that the strongest time to enter a long trade is as the premium is starting to come on, not after the premium is already in place.
Here are a few charts to illustrate this point:
Chart 2 - Wheat premium
In Chart 2, the top half of the chart shows the price for the May Wheat contract for the first part of 2020. The bottom half of the chart shows the spread between the May contract and the next contract out (July). The spread is simply the difference in price between May and July. Below zero means May trades for less. Above zero and we have a premium and May trades at a higher price than July.
Notice from early February until mid March the spread was increasing as the May Wheat price was falling. This means that although May's price was falling, it was falling slower than the later months. This tells us that there is very strong buying of the May contract even though later months are getting cheaper by comparison. This is very bullish. Somebody wants this market and is buying it in a big way. This buying is usually done by the commercials. The commercials are the smart money in the commodity world and if they are buying while prices are at a premium, you can bet even higher prices are to come.
By the time late March comes along, Wheat prices take off and have a $0.75 move to the upside.
Chart 3 - Coffee
Chart 3 - Coffee
In Chart 3 is another example, this time in the Coffee market. The first 3 weeks in March 2020 saw prices decline as the spread increased to positive. Shortly after, a big rally in Coffee was underway.