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Risk Premiums and Forward Basis: Evidence from the Soybean Oil Market

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  • Lewis, Karen E.
  • Manfredo, Mark R.
  • Altman, Ira
  • Sanders, Dwight R.

Abstract

Soybean oil is a primary ingredient in a number of food products, and is also one of the primary oils used in the production of biodiesel. Thus the price volatility of soybean oil represents a major input price risk to food and energy companies. Forward pricing is often extended to end-users by soybean oil processors where the forward price quote is a function of futures price and basis. If the end-user locks in the basis component, the processor assumes the risk of any basis fluctuations. This research examines if soybean oil processors extract a premium for assuming this risk. Using forward basis quotes and realized basis values for soybean oil provided by The Trade News Service, Inc., it was found that soybean oil processors do not charge an embedded cost for their forward pricing services. Furthermore, the results suggest that the absence of a statistically significant embedded cost may be due to the inability of soybean oil processors to adequately forecast soybean oil basis levels.

Suggested Citation

  • Lewis, Karen E. & Manfredo, Mark R. & Altman, Ira & Sanders, Dwight R., 2013. "Risk Premiums and Forward Basis: Evidence from the Soybean Oil Market," 2013 Conference, April 22-23, 2013, St. Louis, Missouri 285792, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13413:285792
    DOI: 10.22004/ag.econ.285792
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