[hpkuarg]

Why would anybody want to trade with Mr. Smith's contract in particular when a market for the contract still exists, with market makers and other participants providing bids and offers that is better what Mr. Smith can do? At least, assuming you are talking about a regulated commodities futures contracts like those which trade on the CME.

[bluGill]

Mr Smith has a real for delivery contract, not a more common contract to own for some amount of time but no clue who is on either end. As such if you buy from Mr Smith you get real goods, while from someone else you may discover that you created a short squeeze, and not actual material is available: they may have to pay you a ton of $$$ to get out of the contract, but you don't actually get anything delivered.

If you really want the actual good and not the dollars, then you should by buying contracts backed by real goods that cannot be shorted. By contrast if you just want to make money there is more money in buying the contact that is a short with no material behind it. Of course knowing when a short squeeze will happen is left as an exercise for the reader - meaning I have no idea when this plan can work out only that once in a while it does.

[londons_explore]

If most buyers buy ahead like Mr Smith, then the liquidity in the spot market can dry up, especially in times of supply constraint.

Mr Smith and many people like him might happily sell on his steel for 10x the price he paid for it to someone desperate for some steel.

Yet, as things stand now, whenever there is severe market disruption, you frequently find goods aren't available for any price. Thats simply because Mr Smith and people like him continue to take delivery of the steel he ordered 6 months ago, and doesn't actually need right now, because he isn't aware of the guy down the street who really reeds it right away and will pay a lot.

If all goods are always 'for sale', then goods can be allocated efficiently to whoever needs them most.