Farm406

farm finance farm406 12 The "harvest-period basis" is calculated as: Harvest Basis = (Local Spot Price – Harvest Month Futures Price) The harvest month futures price refers to the price of the futures contract for which the expiration date is closest to the month during which a crop is harvested. For hard red winter wheat, this is the July Kansas City (KCBT) HRW futures contract. For hard red spring wheat, this is the September Minneapolis (MGEX) HRS futures contract. Therefore, the harvest period basis may be a more useful informational tool for understanding what market conditions are currently being anticipated at the time that producers are harvesting and delivering a large proportion of their crop. Why should I use different basis for wheat that has different levels of protein content? Because northern U.S. producers grow, and grain elevators procure, wheat with different protein levels, different prices are offered for wheat with different protein levels. As such, just as separate markets (and prices) exist for different wheat classes (e.g., hard red spring wheat class, hard red winter wheat class), so do separate markets, prices, and basis exist for wheat with different protein levels. What can I learn by examining basis volatility? Volatility describes the stability of a measure over time. Larger basis volatility (i.e., large increases and decreases of basis within a period of time) can indicate uncertainty in the market about the pricing of a particular product. Lower basis volatility (i.e., small increases and decreases of basis within a period of time) can indicate a relatively stable market in which both the buyers and sellers of grain agree on the valuation of a specific product. The www.montana.edu/basis tool calculates volatility as the coefficient of variation (CV), which is the ratio of the standard deviation of basis within a certain time period and the average of basis during that same time period. Calculating volatility using the CV allows for standardized comparisons of basis volatility across different years and within different times of a marketing year. The online tool provides basis volatility measures based on one week, one month, six months, one year, and three years of basis data. This provides an opportunity to assess relative basis volatility within a short-run, medium-run, and long-run horizons. How can I use historical basis information to help inform me about what local cash prices might be in the future? There has been extensive literature in agricultural economics related to developing commodity price forecasting models. The consensus is that a model that can first predict basis (and then use this prediction to forecast prices) leads to much better price predictions. Consider the following: If someone asked you to predict the price of wheat in your local market three months from today, what would be your response? One reasonable strategy might be to determine the local price last year or take an average of several previous years. However, you would only be using information about what already occurred, without incorporating expectations of what will occur in three months. A second approach could be to look at the price of a futures contract expiring three months from today and assume that to be the most likely price. However, although the futures price accounts for local, regional, national, and international expectations about future wheat prices, directly using futures prices to characterize local market conditions and prices will almost always lead to errors. Both approaches, therefore, are likely to contain inaccuracies.

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