Factors Affecting Corn Basis in Southwestern Ontario

Abstract

Pricing performance of futures markets for seasonally produced, storable commodities often has been evaluated in part by determining whether or not th~ basis at the delivery point reflects the theoretical factors expected to affect it. 1 These factors include marginal net storage costs (Working, Brennan, and Weymar), market liquidity (Gray 1960 and 1967, Martin andStorey) and market characteristics unique to a specific commodity (Ward and Dasse).Futures markets for these commodities also are used to establish current prices at nondelivery points. Following the argument of Ward and Dasse, if pricing performance at nondelivery points is satisfactory, local basis should reflect market characteristics unique to the local area because it is a measure of the value of a commodity relative to the delivery point.Futures markets also are used to forward price grains at nondelivery points either by hedging or forward contracting. In either case, expectations of basis are important in establishing forward prices. Most extension literature stresses the importance of understanding the local basis and asserts that local basis is affected by local market conditions (e.g., Kenyon and Blakely). Yet for the few cases in which analyses of local basis have been undertaken, relatively naive models have been used to explain basis variations, such as moving averages or basis at the time a hedge is initiated (Kenyon and Blakely, Driscoll and Blakley, and Heifner 1966). The ability to explain nondelivery point basis using variables reflecting local market conditions is important for evaluating pricing performance and for providing local traders and hedgers an understanding of the factors which cause variations in the local basis.In this paper an analysis of nondelivery point basis is undertaken with the objective of providing information for these two purposes. The analysis is carried out by constructing a hypothetical model to explain variations in local basis and then testing it by applying it to basis data for southwestern Ontario.

Can Cattle Basis Forecasts Be Improved? A Bayesian Model Averaging Approach

“…The earliest studies examining basis forecasts used structural models. For instance, storage and transportation costs, excess local supply, existing stocks, and seasonality are found to affect basis (Martin, Groenewegen, and Pidgeon, 1980;Garcia and Good, 1983). Moving historical averages, commonly referred to as naïve forecasts, have been the most typical approach to forecast basis (Hauser, Garcia, and Tumblin, 1990).…”

An empirical test of the effect of basis risk on cash market positions

“…See Peck (1975) for eggs; Ederington (1979) for wheat, corn, GNMAs, and T-bills;Figlewski (1984) for S&P 500 index futures; Castelino (1992) for wheat, corn, T-bills and Eurodollars; and Moser and Helms ( 1 990) for British pounds, Canadian dollars, Deutsche marks, and Swiss francs. 'Vdlink and Raikes (1977) analyze the live cattle basis, showing that basis risk exists because the basis does not move as expected at the delivery point and during the delivery period; Tilley and Campbell ( I 988) analyze determinants of the wheat basis; Martin, Groenewegen, and Pidgeon (1980) the determinants of the corn basis in Southwestern Ontario; and Ward and Dasse (1977) the determinants of the frozen concentrated orange juice basis, showing that basis risk exists in this market, especially during a freeze scare. Garcia, Leuthold, and Sarhan (1984) analyze the random component of the livestock basis, identifyng variables that can indicate periods of high basis risk, and Figlewski analyzes factors influencing the S&P 500 index basis risk.…”

Basis Pricing, Futures‐Cash Price Transmission and Appropriate Hedge Ratios: The Case of the Soybean Market in Ontario

“…Conventional results in the literature show that changes in the Ontario basis are determined by changes in the relative supply and demand equilibrium between the local cash market and the futures market delivery point (Meilke 1984;Martin, Groenewegen and Pidgeon 1980;Martin and Hope 1984). Both the results of these studies and the industry's rather widespread use of the Chicago Board of Trade futures to hedge the cash price risk seem to point to a reasonable degree of futures-cash market integration.…”