When a buyer offers a price for beans, looking at the futures price does not tell the whole story because it does not take in to account local market factors affecting cash prices. To understand whether or not to take the offer, basis, or the difference between the cash price at a specific market and the nearest futures price, should be considered. The difference takes into account such factors as storage and transportation costs, as well as local supply and demand.
Tracking basis trends can help with the decision of whether to enter into a cash forward contract or hedge with futures and sell later. Understanding these trends, and the difference between cash, and futures prices over time that become an annual trend in a market, can make a big difference in profitability.
Learn more about basis in THIS ARTICLE from USB.
