Can anyone explain this theory to me?
I especially do not understand the relationship to the insurance theory.
Hedging pressure hypothesis is like the opposite side of the insurance theory, it explains either contango or backwardation depending on which side (longs or shorts) are winning the war!.. I beleive insurance theory only explains backwardation… The text explains it very well, check it out.
Insurance theory:
Producers are looking to buy futures to insure themselves against lower selling prices of their products in the future.
Hedging pressure theory:
Producers are looking to buy futures to insure themselves against lower selling prices of their products in the future. (as above)
In addition consumers are looking to hedge themselves from higher buying prices of the product in the future. This will lead futures prices in the opposite direction. The actual level of futures prices will depend on the relative magnitude of consumer hedging vs producer insuring.