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.