Basis Contracts, Explained

What a basis contract is

A basis contract locks the basis — the local premium or discount to futures — while leaving the futures price unpriced. You and the buyer fix, say, "20 under the December," deliver the grain, and you choose later when to set the futures side. Your final price is whatever futures level you eventually pick, minus the 20 cents you already locked.

It's the mirror image of a hedge-to-arrive, which locks futures and floats basis.

When it makes sense

Basis and futures move for different reasons and on different calendars — the classic setup is strong basis, disappointing board:

• A local processor is short bushels and bidding basis up, but futures are sitting in a hole you don't want to sell into.
• You want to clear bins ahead of harvest (capture the strong old-crop basis, free the space) while staying long the market into a weather window.

A basis contract lets you harvest the local strength without calling the top or bottom of the futures market.

What to watch

• You're still long futures. An unpriced basis contract is a bullish position — if the board slides, your final price slides with it. Decide up front what rally you're waiting for and what date or price makes you pull the trigger anyway.
• Delivery usually happens before pricing. Like delayed pricing, you've typically given up the grain and hold a contract; understand where you stand if the buyer fails before you've priced.
• Pricing deadlines are real. Most basis contracts require the futures leg set by a date (or they roll with a fee). Rolling an unpriced position because "it has to come back" is how a basis win turns into a flat-price loss.

The honest framing: a basis contract doesn't remove risk, it chooses which risk you keep. Keep the one you actually have an opinion about.