Intertemporal Basis Behaviour on the Chicago Wheat Futures Market

Abstract

The study consists of an economic analysis of the behaviour of the Chicago wheat basis during the two decades from 1960 to 1980. First, there is a descriptive analysis of changes to the basis between the 1960's and 1970's. Second, an econometric model which can be used to explain observed and possible future movements in the basis is estimated.

The econometric model provides for the direct estimation of both intra- and inter-seasonal movements of the basis. In developing this model a single-equation “quasi reduced-form” model incorporating the theoretically important factors determining the supply and demand for storage and the resulting price from month to month is specified.

Model estimation involves the incorporation of a lagged dependent variable and a set of seasonal dummy variables to account for the cyclical behaviour of the basis. The Generalized Least Squares regression results reveal that the basis lagged one period and the level of Chicago wheat stocks are the main factors explaining the current basis. A negative coefficient on national commercial stocks may be an indication that the variable is a proxy for hard wheat stocks. Changes in these stocks result in opposite movements in the demand for soft wheat (Chicago) stocks and hence the Chicago (soft wheat) basis.

While the estimated model “explains” a relatively high proportion of overall basis variation, it is not entirely satisfactory in predicting the direction of change in the basis. It also exhibits some downward bias when used to make forward predictions of the magnitude of the basis.

Mary of the modelling problems encountered during the analysis probably stem from incorporating intra- and inter-seasonal basis movements into the one model. A more productive approach to an analysis of this type would be to concentrate on estimating and predicting only one type of basis movement rather than both.