That is, basis tends to follow historical seasonal patterns and by understanding these patterns a producer or agribusiness person can make better management decisions and reduce risks involved in those decisions. Commodity basis is the difference between a local cash price and the relevant futures contract price for a specific time period. Figure 1 is used to describe basis movements. A basis that becomes more positive or less negative over time is said to narrow or strengthen. A basis that become less positive or more negative over time is said to widen or weaken.
Basis describes two separate relationships for grain and livestock.
Therefore, these enterprises are separated in the discussion below. Grain For grain, basis is typically used as an indication of current local demand. Weak basis indicates that the market doesn't want grain now, but the market may or may not want it later. Strong basis indicates the market wants the grain. Basis is best used in deciding how to sell.