Livestock Basis Forecasts: How Beneficial Is The Inclusion Of Current Information?

Successful risk management strategies for agribusiness firms are contingent on the ability to accurately forecast basis. There has been substantial research on the actual use of basis forecasts, yet little research has been conducted on actually forecasting basis. This study evaluates the effect incorporating current basis information into a historical-average-based-forecast has on forecasting accuracy when forecasting live cattle and feeder cattle basis. Furthermore, the optimal weight to place on this current information is evaluated in an out-of-sample framework. Root mean squared errors are generated for both commodities and evaluated to determine the significance of these issues. Results suggest that livestock basis forecasters should consider incorporating a proportion of the difference in current basis and the historical average of the current week when making their projections. The optimal amount of current information to include declines as the time interval between the week the forecast is being made and the week being forecasted increases.