Basis contracts allow producers and consumers of grain to de-couple various pricing components of a commodity, providing greater flexibility and risk management control.

 

Generally, the components of price that combine to provide the total value of a commodity include an underlying futures market or reference price, a calculation related to foreign currency conversions (if applicable) and the ‘basis’.

 

The ‘basis’ refers to the value which links a local price to an underlying reference value, most commonly an underlying futures market. The explanations below provide a little more detail.

 

Underlying reference price	Generally a commodity futures exchange such as the Chicago Board of Trade or the Australian Stock Exchange (ASX) grain futures
Currency conversion	If the underlying reference value is denominated in a foreign currency (most commonly US dollars), then the currency component can be considered as a separate part of pricing
Basis	Basis refers to the value differential between the contract delivery point and the underlying reference price. Basis is generally made up of things like freight differentials, quality differences, regional supply and demand influences, and related market differentials. The basis is the component that links your local price to an underlying reference price.