Basis Terms

BASIS:
The value difference between the futures price and the cash price of a commodity. Example: CBOT December corn futures are worth $2.40. The corn bid delivered to the elevator is $2.10. In this example the corn basis delivered to the elevator is - 30Z. $2.40 minus $2.10 equals thirty under the December corn futures.

BASIS NARROWING:
When the cash price increases more than the increase in the futures. Example: CBOT November bean futures are up 3 cents on the day. The bean bid delivered to the elevator is up 5 cents on the day. In this example the basis narrowed 2 cents at the elevator. Keep in mind that the basis can also narrow in a lower market. Example: The bean futures go down 6 cents and the cash bid at the elevator is only down 5 cents. In this example the basis narrowed 1 cent.

BASIS RISK:
The potential loss in value that you may incur if the basis widens, (if you are long the basis) or narrows (if you are short the basis).

BASIS TREND:
The movement of the basis in one direction for several days or longer. The basis can develop a narrowing trend when it continues to gain value faster than the futures do. The basis can develop a widening trend when it does not gain value as fast as the futures do.

BASIS WIDENING:
This is just the opposite of the basis narrowing. Example: KCBOT wheat futures are up 4 cents. The wheat bid delivered to the elevator is only up 1 cent. Therefore, the basis widened 3 cents. The basis can also widen when the cash bid goes down more than the futures do.

CARRYING COST:
The actual cost of holding on to grain. This includes interest, storage or shrink, quality deterioration, as well as the lost opportunity of what the cash proceeds from the sale of such grain could be netting you. It is very important to know what your actual carrying cost is so that you know where your actual profit opportunity begins.

FUTURES SPREAD:
The difference in price between futures contracts of two different months in the same commodity. Example: CBOT December corn futures are at $2.40 and the CBOT March corn futures are at $2.47. In this example the December vs. March corn spread is 7 cents.

LONG THE BASIS:
When you own the cash commodity and have an offsetting quantity of futures sold against it. Example: You have 20,000 bushels of corn in the bin or in store at the elevator that you own. You also have four futures contracts, (20,000 bushels), sold at the CBOT. In this example you are long the basis 20,000 bushels.

SHORT THE BASIS:
When you have a sale contract in place for grain that you have not yet harvested, and you have hedged it by buying the futures. Example: You want to make a sale contract right now for delivery in November because you believe that the basis will widen as harvest gets underway. Therefore, you make a "basis only" sales contract now, locking in the November basis bid, and sell an offsetting quantity of futures against your sale.

John Berry, Agricultural Marketing Agent
Penn State Cooperative Extension

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