If the local harvest exceeds storage capacity, the market basis is expected to do what?

If the local harvest exceeds storage capacity, the market basis is expected to do what?

• A. Narrow
• B. Widen
• C. Reverse
• D. Stabilize

Answer: (B)

Basis is the difference between the local cash price and the futures price. When a local harvest is larger than storage can hold, most of the new crop must be sold in the cash market right away, loading the near-term supply onto the market. This extra near-term supply pushes the local cash price down, while the futures price for delivery later doesn’t move down as quickly. The result is a larger gap between cash and futures, or a widening basis. If storage were ample, producers could store more and sales could be timed with futures expectations, helping the basis stay narrower.

Basis is the difference between the local cash price and the futures price. When a local harvest is larger than storage can hold, most of the new crop must be sold in the cash market right away, loading the near-term supply onto the market. This extra near-term supply pushes the local cash price down, while the futures price for delivery later doesn’t move down as quickly. The result is a larger gap between cash and futures, or a widening basis. If storage were ample, producers could store more and sales could be timed with futures expectations, helping the basis stay narrower.