Developed by: Texas A&M Extension Agricultural Economics
Basis is the difference between a cash price and the futures price of a particular commodity on a given futures exchange.
The futures price represents the price offered for a futures contract. A futures contract is a legal agreement that calls for delivery of a specified quantity and quality of grain at a specified place in a designated month in the future. Futures contracts are offered for various months of the year. Each month relates to the seasonality of harvest, marketing or consumption patterns of cotton through the year. A futures price is locked in when a contract is bought or sold; otherwise, futures prices fluctuate based on market supply and demand information. The cash price and the futures market price tend to converge as the contract delivery month approaches. It is vital to know the basis for your particular area, as this basis affects a growers’ bottom line.