How a Basis Contract Works
Your cash price is always futures plus basis. With a basis contract, you deliver the grain and lock the basis, say ten cents under December futures at your elevator, but you do not set the futures level yet. You have until a contract deadline to price the futures side, often by watching the market or placing target orders. Some contracts pay you a partial advance on delivery, with the balance settled once you price. From the elevator's side, they own grain with an unpriced futures leg, which is why the contract carries deadlines and sometimes service charges.
When a Basis Contract Makes Sense
- Strong local basis: harvest pressure is over or local demand is hot, and you doubt basis will get better.
- Bullish futures view: you think the board has room to rally and want to stay long the futures side.
- Storage is full or costly: you want to move grain now but are not ready to finalize the flat price.
Compare that with the alternatives. A cash forward locks everything. An HTA locks futures and leaves basis open. A basis contract does the opposite. Choosing between them is really a judgment about which half of the price is more attractive today.
The Risks, Stated Plainly
Once you deliver under a basis contract, you have sold the grain but not the price. If futures fall before you price, you lose money on every bushel, and there is no protection built in. You are effectively speculating on the futures market with your crop already gone. Margin is generally not required since the elevator holds the grain, but some buyers limit how long you can wait or charge storage-equivalent fees. As with any private contract, counterparty risk sits with the buyer, and title to the grain has passed, so an elevator failure can leave you as an unsecured creditor. If you use basis contracts regularly, spread them across buyers and keep the unpriced window short enough that a market break stings rather than sinks you. A deadline you set yourself beats the one the contract sets for you. Futures trading involves substantial risk of loss and is not suitable for all investors.