Basis is the price difference between a cash or spot price and the price of a related futures contract. In physical commodity hedging, a common convention is basis = cash price − futures price, often using a nearby futures contract; a positive basis means cash trades over futures and a negative basis means cash trades under futures. The number is a relative price, not a directional forecast.
The same price move can produce a different basis
Basis changes whenever cash and futures prices do not move by the same amount. If a cash price rises 10 cents while futures rise 5 cents, basis strengthens by 5 cents under the cash-minus-futures convention; both outright prices rose, but the basis move came from their relative performance. In commodity markets that relative price can reflect local supply and demand, freight, handling, storage, quality, currency, and the match between the cash commodity and the futures contract.
A simple hedge shows why this matters. Suppose a producer expects to sell a commodity later when the local cash price is $4.80 and the relevant futures price is $5.00, giving a basis of −$0.20. The producer sells futures at $5.00. By the time the physical commodity is sold, cash has fallen to $4.30 but futures have fallen to $4.40, so the basis has strengthened to −$0.10. The short futures position gains $0.60, offsetting the cash sale to produce an effective price of about $4.90 before transaction costs. The hedge reduced exposure to the broad price decline, but the 10-cent change in basis altered the final result. This residual exposure is basis risk.
The sign convention is not universal
Researchers must record the calculation convention before comparing basis series. Commodity-futures practice commonly uses cash minus futures, yet some financial-futures material uses futures minus spot. Reversing the subtraction reverses every positive or negative reading and every strengthening or weakening interpretation without changing the underlying economics. “Basis” should therefore never be treated as self-defining in a dataset, chart or research note.
For contracts linked to an underlying cash market through settlement or delivery, convergence tends to compress the comparable cash-futures difference as expiration approaches. That does not imply every local basis becomes zero. A local cash quote can remain above or below the futures benchmark because location, grade, freight, storage or other specifications differ from the contract’s benchmark economics. For practitioners, the useful question is not simply whether basis is positive or negative, but which cash price, which futures month, which sign convention, and which physical or financing frictions are embedded in the spread.