Executive summary

Basis is the difference between a specific physical price — a particular place, grade or delivery month — and the benchmark futures price. Once a trader hedges the flat price on the exchange, basis is what's left. For a physical trader, basis is frequently where the entire profit and loss lives.

In plain English

Basis = cash price − futures price. There are three flavours: location basis (Rotterdam vs the benchmark hub), quality or grade basis (a high-sulphur crude vs the spec grade), and time basis (this delivery month vs another — the calendar spread). Each is a structured, usually smaller and more predictable, piece of the price.

Location basis

Price difference between a physical location and the benchmark — driven by freight, logistics and local supply/demand.

Quality / grade basis

Price difference between a specific grade and the deliverable spec — sulphur, protein, ICUMSA, etc.

Calendar spread

The time basis: the price difference between two delivery months of the same contract.

Basis risk

The risk that the basis moves against you between the time you buy and the time you sell.

Why traders care

When you hedge flat price with futures, you are deliberately swapping a big, volatile risk (flat price) for a smaller one (basis). You no longer get paid the headline price move — you get paid the basis. That makes basis the merchant's actual margin, and basis risk the risk that actually matters once the flat price is hedged.

Operator connection

Every operational choice is a basis decision. Which load port, which grade, which delivery month, which route — each one sets your location, quality and time basis. Freight and demurrage feed straight into location basis. The operator is, in effect, trading basis with every nomination.

Further reading

• CME Group — 'Learn about Basis: Grains' and 'Learn about Grain Convergence'.
• CME Group — self-study guides to hedging with grain and oilseed futures (basis chapters).