1.4.2.4. Strengthening and Weakening Basis
When the basis for a contract month becomes more positive or less negative, the contract is said to have a strengthening basis. A weakening basis is one that becomes more negative or less positive. A shortage of corn, for example, might cause the cash price to increase relative to its futures prices. Since the difference between the cash and futures contract prices has become less negative, the basis is said to strengthen. By contrast, a glut in the local market might bring lower spot market prices and increase the negative difference between the cash and futures prices. This is a weakening basis.
Changes in a commodity’s supply and demand generally account for the changes in basis. A bad harvest can increase prices in the local cash market, and though it will affect forward prices as well, it will do so with gradually diminishing strength from month to month (strengthening basis). Likewise, the threat of a poor harvest due to poor growing conditions may impact futures prices with greater strength than the cash market (weakening basis). We shall see shortly that a strengthening basis works to the advantage of the seller; a weakening basis works to the advantage of the buyer.
Strengthening basis
• Cash price increases relative to futures
• Less negative; more positive
Weakening basis
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