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Mykel Taylor, Randy Fortenbery, & Glynn Tonsor
Presentation to Agricultural Commodity Futures Conference
Kansas City, KS
April 11, 2019
Wheat basis trends in Kansas 2001 to Present
Forward contracting by farmers
Variable storage rate (VSR)
Impacts of the VSR on cost of forward contracting for wheat
-1.4000
-1.2000
-1.0000
-0.8000
-0.6000
-0.4000
-0.2000
0.0000
0.2000
0.4000
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
HRW Wheat Basis - Salina, KS
What is a forward contract?
Pre-harvest agreement between local grain elevator and a farmer
Sets price to be paid (received) at harvest for a fixed amount of grain
Removes uncertainty of price for farmer
More popular today because of crop insurance
Forward contract protects farmer from price and basis risk
Harvest price is fixed
Hedging with a futures contract still exposed to basis risk
Ability to predict based on historical basis levels is reduced
Hard for elevators to price forward contracts
Elevators will hedge all contracted grain
Previous studies
Cost of forward contracting wheat
Taylor, Dhuyvetter, & Kastens (2003): 9¢/bu
Townsend & Brorsen (2000): 6-8¢/bu
Brorsen, Coombs, & Anderson (1995): 2-5¢/bu
Findings
Year-to-year variation in cost is low
Costs decline as approach harvest
As more information is available, basis risk declines
Forward contract bids offered
18 Kansas elevator locations
Week 1 to week 25 of the calendar year
2001 to 2012
Harvest period: 4th week of June
Unbalanced panel
69 to 172 observations per elevator
2,111 total observations
Andale
Bartlett
Beloit
Bird
City
Brewster
Burlington
Columbus
Florence
Garden City
Goodland
Great Bend
Haddam
Hope
Minneola
Ottawa
Sabetha
Scott City
Topeka
KS Forward Contract Data Sources: 2001-2012
Calculate the
harvest basis at the
time the forward
contract is offered
Time between FC
purchase and harvestSubtract actual
harvest basis from
basis calculated at
time of FC purchase
Result = the cost of forward
contracting paid by the farmer
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
8 10 12 14 16 18 20 22
Ris
k P
rem
ium
($
/bu
)
Week
2001 to 2007
2008 to 2012
0.110.16
0.020.07
0.12 0.10
-0.03
0.25
0.32
-0.22
0.83
0.29
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ris
k P
rem
ium
($
/bu
)
Year
-1.4000
-1.2000
-1.0000
-0.8000
-0.6000
-0.4000
-0.2000
0.0000
0.2000
0.4000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
HRW Wheat Basis - Salina, KS
Source: https://www.cmegroup.com/trading/agricultural/files/vsr-timeline.pdf
Source: https://www.cmegroup.com/trading/agricultural/files/vsr-adjustments.pdf
-1.4000
-1.2000
-1.0000
-0.8000
-0.6000
-0.4000
-0.2000
0.0000
0.2000
0.4000
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
HRW Wheat Basis - Salina, KS
Fixed storage rate Fixed seasonal
storage rates
VSR
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
$/b
ush
el/d
ay
Storage Rate - Actual
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
$/b
ush
el/d
ay
VSR-hypothetical Storage Rate - Actual
0.110.16
0.020.07
0.12 0.10
-0.03
0.25
0.32
-0.22
0.83
0.29
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ris
k P
rem
ium
($
/bu
)
Year
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
$/b
ush
el/d
ay
VSR-hypothetical Storage Rate - Actual
-1.4000
-1.2000
-1.0000
-0.8000
-0.6000
-0.4000
-0.2000
0.0000
0.2000
0.4000
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
HRW Wheat Basis - Salina, KS
Non-convergence in basis is costly to farmers
Higher forward contracting risk premiums for those who choose to contract
Exposure to lower seasonal price patterns for those who choose not to contract
Economic tradeoffs of VSR
Adds uncertainty for the cost of storage
Decreases basis convergence uncertainty and the cost to farmers of forward contracting, an important component of their marketing plans
Mykel Taylor, Randy Fortenbery, & Glynn Tonsor
Presentation to Agricultural Commodity Futures Conference
Kansas City, KS
April 11, 2019
