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Understanding Risk in Basis Contracts

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  • Wisner, Robert N.

Abstract

Basis contracts are marketing instruments that establish the basis (the difference between the local cash price and futures price) used to determine the price paid for grain or soybeans at a later time. That is the only component of price risk that basis contracts establish or lock in for the producer. The producer or other seller bears the risk of any changes in price level over the life of the contract as reflected by nearby futures prices. He or she also bears any relevant spread risk that may develop over the life of the contract if it uses a later futures delivery month than the nearby contract. Basis contracts add flexibility to producer marketing of grain and soybeans. While they are not useful every year, basis contracts can be a helpful marketing tool at times when the basis is much stronger than normal and when market conditions suggest a further rise in prices is quite likely.

Suggested Citation

  • Wisner, Robert N., 1997. "Understanding Risk in Basis Contracts," Staff General Research Papers Archive 2034, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:2034
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