Persistent gaps between futures and spot prices arise when economic and practical frictions prevent the theoretical link from closing. As explained by John C. Hull, University of Toronto, the classical cost-of-carry relationship ties futures and spot through storage costs, financing rates and expected dividends or yields. When those inputs are uncertain or costly to act upon, the observed basis (futures price minus spot price) can remain persistently positive or negative.
Causes
Key drivers include the cost of carry and convenience yield. Storage and insurance costs raise futures relative to spot, while a high convenience yield from holding physical goods lowers futures relative to spot. Holbrook Working originally framed convenience yield as compensation producers accept to hold inventories, but liquidity and market structure also matter. Reduced market depth, high margin requirements or concentrated ownership create liquidity and counterparty risks that deter arbitrage. Regulatory or delivery constraints can block physical settlement arbitrage; for example, location-specific delivery costs or limited storage capacity make transporting commodities costly and sometimes impossible in practice. Funding pressures and collateral scarcity in stressed markets can force holders to sell physical or financial positions, amplifying divergence.
Speculative flows and hedging imbalances produce a persistent risk premium embedded in futures. When large hedgers need protection or speculators crowd positions, futures may reflect compensation for bearing price or basis risk rather than pure expectations of future spot levels. Seasonal and territorial factors, such as harvest cycles or regional infrastructure bottlenecks, introduce systematic differences across maturities that lift or depress the basis for extended periods. Environmental shocks like droughts or hurricanes create sudden spot scarcity that futures cannot instantly or fully price in because delivery logistics and local social responses delay arbitrage.
Consequences and nuances
Persistent divergence matters for producers, consumers and policy. For hedgers, a nonvanishing basis creates basis risk that reduces hedge effectiveness and can alter production or storage decisions, affecting local food security and livelihoods in agricultural regions. For financial markets, sustained dislocations can signal liquidity stress or inadequate market design and may prompt regulatory review. Arbitrageurs earn profits when frictions ease, but in some territories transport, cultural storage practices or environmental constraints mean divergence is structural rather than transient. Recognizing the mix of economic theory and real-world frictions is essential for interpreting price signals and designing contracts that reflect human, cultural and geographic realities. As noted by Robert E. Whaley, Vanderbilt University, understanding liquidity and market microstructure is critical to explaining why theory and practice diverge.