1.4.2.1. Basis and Local Market Conditions
While the futures price represents an anticipated worldwide market price, the local cash price reflects the current local market and varies by local conditions. The local cash price reflects such conditions as the quality of the local product, its local supply and demand, transportation costs, and storage and handling costs. Basis is used as a benchmark for determining the value of a commodity at the local level. It also reflects a commodity’s anticipated cost of carry.
For example, the cost of corn at the Gulf of Mexico will normally have higher transportation costs than the price of corn in Omaha. Elevator storage costs may also be quite different. The prices at Omaha will therefore have a different basis than the prices at the Gulf. The futures market, however, will reflect a single global price.
Basis will also vary locally from month to month. A negative basis will become more negative, for example, during harvest months, when the product is in great supply and cash prices drop. If cash prices drop locally relative to the global market, a negative basis becomes more negative, not o