Establishing a price that covers production costs before a crop is planted or before livestock are born is important in reducing financial risk. The CBOT and CME are the major commodity trading organizations that deal with future contracts for future delivery. The cash market is where firms such as country elevators, processors and terminals handle the physical grain and livestock. Many farmers sell directly to the elevators on the cash market. The price paid to the farmer equals futures price minus basis.
Basis is the difference between the futures market and the cash grain bid.
Historically, basis varies throughout the growing season, being closest in the spring and summer, and widest in the fall. Basis depends on location, transportation costs, and transportation availability. A farmer living closer to Chicago or major river terminals will receive a higher cash grain bid than a farmer living in Central Iowa, since the farmer near Chicago is closest to the market. Producers wanting to use strictly cash marketing have the opportunity to use forward contracts with individual elevators. Forward contracts guarantee a certain price on a specific date, for a specific type of commodity.