The futures price in the formula is for a contract for the same time the cash price represent. The quality of the product in the futures contract price is standardized. For example, in June the wheat basis would be calculated using the current cash price minus the July futures contract price. With livestock, only the nearby basis needs to be considered for hedging and cash sale purposes because, unlike grains, live-stock are a perishable commodity and cannot be stored for any length of time. Figures 1 through 3 on the following page show different types of basis data that can be calculated and used in marketing decisions.
Basis reflects local supply and demand for a commodity relative to the futures market.
This is an example of a basis calculated using a deferred futures contract. The improvement in basis from harvest until the contract expires in July represents the market's payment for storing soybeans. Multi-year average basis calculations computed off a deferred futures contract are useful in evaluating the potential profitability of grain storage. This text was extracted from the publication, MF-1003.