How Does the Term Structure of Futures Prices Reflect Basis Risk?

The term structure, which is the relationship between futures prices and their time to expiration, reflects the market's expectation of future spot prices and the cost of carry. A steep slope in the term structure (high contango or deep backwardation) suggests a large difference between the spot price and the far-month futures price, implying higher basis risk for a long-term hedge.

A flat term structure suggests lower basis risk.