Dynamic Interrelationships in Hard Wheat Basis Markets

Basis values for hard red spring (HRS) wheat have escalated radically, experienced extraordinary levels of volatility (risk), were subject to a squeeze during 2008, and all these have important implications for market participants. These are particularly important to marketers in the Northern Great Plains in the United States, as well as for Canadian marketers as they confront deregulation in wheat marketing and will be exposed to these risks. The purpose of this paper is to analyze the dynamic relationships and interdependencies among terminal market basis values for milling. Specifically, we seek to identify factors impacting basis values for 13%, 14%, and 15% protein HRS wheat in addition to the intermarket wheat spread between Minneapolis and Kansas City wheat futures. We specify a vector autoregression (VAR) model to explore these relationships. Exogenous structural variables are specified in addition to dynamic interrelationships including seasonal and intertemporal variability and dynamic interdependencies among these markets and relationships. Results of interest are that: (1) basis values for these markets have been trending up and have become more volatile; (2) factors impacting this variability are the protein level in HRS, production of hard red winter (HRW), and Canadian wheat (on high protein basis); (3) HRW protein supplies are not significant in the basis equations, but, do impact the intermarket wheat futures spread; (4) quality factors have a significant impact on basis values, notably vomitoxin, falling numbers, and absorption. Dynamic interrelations are also important in that all prices converge quickly toward a long‐term equilibrium. In addition, there are seasonal impacts, dynamic basis interactions, trends, and lagged impacts of protein levels.