Agriculture is heavily dependent on government policies, weather, prices, and other factors that provide uncertainty for farmers. Therefore, managing risk is a major aspect of operating a productive farm business. Basis contracts are a tool farmers use to mitigate risk by controlling one of the three components of price risk. A basis contract allows an individual to lock in a basis that is potentially more favorable now than one that will exist later in the commodity’s maturity. Basis is the difference between the local cash price and the nearby futures contract price. 

Basis levels generally can be predicted with more accuracy than either futures or cash price levels....