Most milk that isn't price under a federal order is priced under a state order like California, for example. Most basis risk is due to changes in premiums and discounts received. Even in California, there is a strong relationship between the BFP and California producer milk prices. The role of basis risk when undertaking a hedging strategy can be seen in the Understanding Hedging section. Click here to return to this section.
Basis is calculated by cash price minus futures price.
For farm milk, the mailbox price minus the BFP futures price is the basis. However, what cash price is compared to what BFP futures price differs regionally. This is because of how milk is utilized and priced. Milk used for soft manufactured dairy products like ice cream, yogurt and cottage cheese. Milk used to make nonfat dry milk.