Warehouse Receipts and Physical Delivery

Most futures traders never take delivery, they close out positions before expiry. But someone has to be able to, or the futures price would drift away from the real cost of the physical commodity. A warehouse receipt is the mechanism: a document issued by an exchange-approved warehouse certifying that a specific quantity and grade of a commodity (copper, aluminum, cotton, cocoa) is sitting in a specific bin or bay, available to whoever holds the receipt. When a futures contract expires and a long position stands for delivery, the exchange matches it with a short position's receipt, and ownership of the physical goods changes hands on paper without the metal or grain ever moving.

Receipts also carry storage costs, the holder pays the warehouse a daily fee, and can be freely transferred, which is what lets them function as a settlement instrument rather than requiring every delivery to involve a truck.

Worked example. A trader holds a long copper futures position into expiry and stands for delivery of 25 metric tons. The exchange assigns them a warehouse receipt from an LME-approved facility, transferring legal title to the copper. The trader now owes the warehouse's daily storage fee, say $0.50 per ton per day, until they either sell the receipt to someone else or arrange physical pickup.