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East-Central Ontario | "Basis is the difference between local cash price and a nearby futures price, quoted in common currency. For example, if the nearby futures price is $4.75, and cash is $4.55, then basis is $0.20 under (-$0.20). If the futures price is $4.75 and cash is $4.95, basis is $0.20 over (+$0.20).
Basis is typically measured against the nearest futures month after a cash transaction. For example, a cash corn transaction occurring in March will be measured against the May futures price; a forward price for November will be matched to the December futures, etc.
The basis measures local supply-and-demand conditions relative to the futures delivery region. The basis in regions with surplus production will have a more negative basis (or less positive); in deficit production regions, the basis will be more positive (or less negative). Many factors can influence basis, notably changes in local supply-and-demand balance and transportation costs. Basis also represents the portion of price risk that cannot be mitigated by hedging."
from http://www.omafra.gov.on.ca/english/busdev/facts/08-053.htm
Also note the possible currency conversion in basis. In Canada, the basis also covers the conversion in currency between US and Canadian dollars. If Minnesota was to adopt a state currency called the lutefisk, the basis in Minnesota would include the conversion of US dollars to lutefisk. | |
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Explanation of Basis
