The basis refers to the price difference between the local or regional spot price for a commodity (eg local price of wheat, canola price, corn price, diesel price). The basis is determined by the following formula:
Base = Local spot price - futures price
The basis is usually positive (premium to the market price), but can also be negative (discount). A good understanding of your own basis is very important for an effective risk management, since the basis as opposed to the market price can not be hedged in financial markets.
