【Pricing Fundamentals】What Basis Means in Physical Commodity Trading
Quote from chief_editor on May 24, 2026, 3:30 pmBasis price in physical commodity trading explained. Understand the difference between physical and futures price and why basis changes over time.
Basis in physical commodity trading is the difference between a physical commodity's local cash price and the price of a related futures contract. Basis is expressed as cash price minus futures price — a negative basis means the physical price is below the futures price, and a positive basis means the physical price is above it. Understanding basis is fundamental to physical trading because it explains why a commodity that has the same benchmark reference can trade at different prices in different locations at the same time.
The reason basis changes over time is that local supply and demand conditions shift independently of the benchmark futures price. A surplus of corn in the US Midwest will push local cash prices below the Chicago Board of Trade (CBOT) futures price, widening the negative basis. As transportation bottlenecks ease and corn moves toward export terminals, local prices recover and basis strengthens toward zero.
What Determines Basis in Practice
Basis reflects four primary factors: transportation costs from the local point to the delivery point specified by the futures contract, storage costs, local supply-demand imbalances, and quality differences between the physical commodity and the futures contract specification.
For example, assume a grain merchandiser is evaluating the purchase of soybeans at a US Midwest interior elevator. The CBOT November soybean futures are trading at $13.50 per bushel. The local elevator is bidding $13.20 per bushel. The basis is therefore minus 30 cents — or in market shorthand, 30 under November. This basis reflects the cost of transporting soybeans from the interior to a Gulf export terminal, plus any local supply pressure.
If harvest is larger than expected and local elevators fill up, the elevator may drop its bid to $13.00, pushing basis to 50 under. If an export surge pulls soybeans toward the Gulf and local supplies tighten, the elevator's bid might rise to $13.40, and basis narrows to 10 under.
In metals trading, basis takes a slightly different form. On the London Metal Exchange (LME), the cash-to-three-months spread — the difference between the spot price and the three-month forward price — functions similarly to basis in agricultural markets. When the market is in backwardation (cash price above forward price), nearby physical metal is worth more than forward metal, often because nearby supplies are tight. When the market is in contango (cash below forward), the forward premium reflects the cost of carrying inventory.
Why Basis Risk Matters for Traders
Basis risk is the risk that the relationship between the physical price and the futures price changes unfavorably between the time a trader takes a position and when the position is closed. A trader who buys physical grain and simultaneously sells CBOT futures to hedge price exposure still carries basis risk — the hedge eliminates exposure to the absolute futures price, but not to changes in basis.
For example, a trader who buys corn at 20 under December futures hopes to sell the physical corn later at 10 under December, capturing a 10-cent basis gain. If basis widens further to 30 under before the trader can sell, the trader loses on the basis even while the futures hedge protects against outright price moves.
At futures contract expiry, physical and futures prices tend to converge because traders can deliver physical commodity against the futures contract. This convergence is the mechanism that anchors basis near delivery points at expiration. Away from delivery points, or during periods of supply disruption, basis can move significantly and unpredictably.
Basis is the price signal that local supply and demand conditions send to participants — it tells traders where commodities are needed, where they are in surplus, and what it costs to move them from one point to another.
Basis price in physical commodity trading explained. Understand the difference between physical and futures price and why basis changes over time.
Basis in physical commodity trading is the difference between a physical commodity's local cash price and the price of a related futures contract. Basis is expressed as cash price minus futures price — a negative basis means the physical price is below the futures price, and a positive basis means the physical price is above it. Understanding basis is fundamental to physical trading because it explains why a commodity that has the same benchmark reference can trade at different prices in different locations at the same time.
The reason basis changes over time is that local supply and demand conditions shift independently of the benchmark futures price. A surplus of corn in the US Midwest will push local cash prices below the Chicago Board of Trade (CBOT) futures price, widening the negative basis. As transportation bottlenecks ease and corn moves toward export terminals, local prices recover and basis strengthens toward zero.
What Determines Basis in Practice
Basis reflects four primary factors: transportation costs from the local point to the delivery point specified by the futures contract, storage costs, local supply-demand imbalances, and quality differences between the physical commodity and the futures contract specification.
For example, assume a grain merchandiser is evaluating the purchase of soybeans at a US Midwest interior elevator. The CBOT November soybean futures are trading at $13.50 per bushel. The local elevator is bidding $13.20 per bushel. The basis is therefore minus 30 cents — or in market shorthand, 30 under November. This basis reflects the cost of transporting soybeans from the interior to a Gulf export terminal, plus any local supply pressure.
If harvest is larger than expected and local elevators fill up, the elevator may drop its bid to $13.00, pushing basis to 50 under. If an export surge pulls soybeans toward the Gulf and local supplies tighten, the elevator's bid might rise to $13.40, and basis narrows to 10 under.
In metals trading, basis takes a slightly different form. On the London Metal Exchange (LME), the cash-to-three-months spread — the difference between the spot price and the three-month forward price — functions similarly to basis in agricultural markets. When the market is in backwardation (cash price above forward price), nearby physical metal is worth more than forward metal, often because nearby supplies are tight. When the market is in contango (cash below forward), the forward premium reflects the cost of carrying inventory.
Why Basis Risk Matters for Traders
Basis risk is the risk that the relationship between the physical price and the futures price changes unfavorably between the time a trader takes a position and when the position is closed. A trader who buys physical grain and simultaneously sells CBOT futures to hedge price exposure still carries basis risk — the hedge eliminates exposure to the absolute futures price, but not to changes in basis.
For example, a trader who buys corn at 20 under December futures hopes to sell the physical corn later at 10 under December, capturing a 10-cent basis gain. If basis widens further to 30 under before the trader can sell, the trader loses on the basis even while the futures hedge protects against outright price moves.
At futures contract expiry, physical and futures prices tend to converge because traders can deliver physical commodity against the futures contract. This convergence is the mechanism that anchors basis near delivery points at expiration. Away from delivery points, or during periods of supply disruption, basis can move significantly and unpredictably.
Basis is the price signal that local supply and demand conditions send to participants — it tells traders where commodities are needed, where they are in surplus, and what it costs to move them from one point to another.