What is Price Basing?

Price basing is a way to use the prices of futures contracts to determine the retail prices of commodities.

How Does Price Basing Work?

Price basing happens all the time in the media when it comes to gasoline prices. For example, if the futures price of crude oil goes up, many people speculate that the retail price of gasoline will also go up. Similarly, if the futures price on pork bellies go up, price basing suggests that the price of bacon at the grocery store would also go up soon.

Why Does Price Basing Matter?

The commodities markets involve a lot of very large players that trade in large quantities and can efficiently use the futures markets. Smaller commodities retailers and suppliers can use the information from the futures markets to predict or interpret the direction of prices of their own products. Accordingly, if a retailer is dependent on selling a certain type of commodity, investors in that retailer will in turn be very interested in price basing.