• futures and basis prices often have inverted relationship¹⁾
• mines and refiners need a minimum price for their material to be able to produce²⁾
• when futures are high , basis prices tend to be low³⁾
• purchase when futures price is high and sell once the futures price decreases⁴⁾

But those whose business involves buying or selling physical grains and oilseeds are aware that the cash price in their own local area, or what their supplier quotes for a given commodity, usually differs from the price that is quoted in the futures market.

Basis can be either positive or negative. A negative basis is referred to as being under, in other words, the cash price is under the futures price. A positive basis is referred to as being over, the cash price is over the futures price.

long hedgers benefit from a weakening basis

The farmer is left with basis risk. In the context of commodity futures trading, basis refers to the difference between the spot price of a commodity and the price of a futures contract for that same commodity. Basis risk is usually smaller than outright price risk.

• Basically, the local cash price for a commodity is the futures price adjusted for such variables as freight, handling, storage and quality, as well as the local supply and demand factors
• price difference (cash price – futures price)
• Basis is simply quoting the relationship of the local cash price to the futures price
• Once you establish a hedge, the futures price level is locked in. The only variable is basis
• The only variable that ultimately affects your selling/buying price is basis
• the final outcome of
a futures hedge depends on what happens to the basis between the time a hedge is initiated and offset

• today’s cash market price minus the nearby futures contract price.
• Example: If today is March 1, then use the April Live Cattle futures contract

Shorting the differential between the physical and futures price involves betting that the spread (or difference) between the two prices will decrease over time.

Shorting the differential involves selling the higher-priced asset and buying the lower-priced asset, anticipating that the gap between the two prices will narrow over time.

In a contango market (futures price > physical price): You short the futures (sell the futures contract) and buy the physical (buy the commodity now). If the futures price decreases or the physical price increases, the differential narrows, and you profit.

In a backwardation market (futures price < physical price): You buy the futures and short the physical (sell the commodity you already hold or borrow to sell). If the futures price rises or the physical price falls, the differential narrows, and you profit.

• a weaker-than-expected basis reduces your net selling price
• your net selling price increases with a stronger-than-expected basis
• short hedger benefits from a strengthening basis

• forward cash market quote minus the price of the futures contract month which is closest to but not before the specific time period when he plans to buy or sell the physical product
• Example: In January, if a hedger gets a cash forward market quote for March physical delivery of cattle, they would use the April Live Cattle futures contract price in calculation of the deferred basis, i.e.,
• Cash Forward Price (for March delivery) - April Futures = Deferred Basis

• if the cash contract that is being offered has a better basis than is expected at the time of physical delivery, then they may choose to use the cash contract

* the hedger’s basis is a reflection of his local cash market relative to the global benchmark futures market

• daily or weekly
• participants who track basis weekly may prefer to use data from Tuesday, Wednesday or Thursday, rather than from Monday or Friday, which may have greater volatility.

https://www.lme.com/Market-data/Accessing-market-data/Historical-data

Learn about Basis: Grains (CME Group)