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Futures Basis for Cotton: Impact of Globalization and Structural Change

Author

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  • MacDonald, Stephen
  • Meyer, Leslie A.

Abstract

A model of commodity futures contract basis was developed based on Working’s theory of the price of storage. An error-correction model was estimated for the basis for the InterContinental Exchange (ICE) #2 cotton contract maturing in December during 2000-08. The model was also extended to incorporate the impact of changes in market activity that evolved as financial markets and commodity price behavior underwent significant changes after 2005. The model captured the inversion of basis following the collapse of China’s crop in 2003, but the shock realized during 2008 may have been in part driven by one-time events not included in the model. Estimates from the error-correction model suggest an extended period for the return of basis to equilibrium, spanning from about 1 ½ to 2 months.

Suggested Citation

  • MacDonald, Stephen & Meyer, Leslie A., 2009. "Futures Basis for Cotton: Impact of Globalization and Structural Change," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49269, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49269
    DOI: 10.22004/ag.econ.49269
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    References listed on IDEAS

    as
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