The price gap was a decision tool
A grain farmer faced a choice after harvest: sell at the local cash price, or pay to store the crop and sell later. A futures contract—a market agreement to buy or sell grain at a set price for a later date—offered a reference point for that decision. The difference between the local cash price and the futures price is called the basis.
That gap mattered because storing grain cost money: there could be charges for bins, handling, insurance, and the cash tied up in unsold crops. A later futures price had to offer enough to cover those costs before storage made sense. But the basis could also change. If local cash prices strengthened relative to futures, a farmer who held grain might earn more than a simple comparison of today’s cash price and a later contract suggested.
Hedging was only part of the story
A farmer could sell a futures contract to reduce the risk of a price decline while keeping grain in storage. That is a hedge: the futures position is meant to offset changes in the value of the crop. But farmers could also choose how much risk to take based on what they expected the price gap to do. Holding grain without fully offsetting that exposure—or changing a hedge as conditions changed—meant making a speculative bet, even if the farmer’s main business was growing crops.
Economist Holbrook Working’s contribution was to recognize that these choices were not merely protection against bad luck. Farmers were responding to price relationships and anticipated changes in them. In practice, the market’s signal was not simply “grain will cost more later.” It was whether the expected gain from waiting seemed worth the expense and risk.
That made the futures market useful at the farm level long before computer screens: a farmer could compare two prices and decide whether to sell, store, or take a chance on the spread moving favorably.
