IDEAS home Printed from https://ideas.repec.org/p/ags/n13413/285792.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/285792/files/Lewis_Manfredo_Altman_Sanders_%20NCCC134-2013.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.285792?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sanders, Dwight R. & Manfredo, Mark R., 2006. "Forecasting Basis Levels in the Soybean Complex: A Comparison of Time Series Methods," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 38(3), pages 513-523, December.
    2. Townsend, John P. & Brorsen, B. Wade, 2000. "Cost of Forward Contracting Hard Red Winter Wheat," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(1), pages 89-94, April.
    3. Bailey, DeeVon & Brorsen, B. Wade, 1998. "Trends In The Accuracy Of Usda Production Forecasts For Beef And Pork," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(2), pages 1-11, December.
    4. William G. Tomek & Hikaru Hanawa Peterson, 2001. "Risk Management in Agricultural Markets: A Review," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(10), pages 953-985, October.
    5. Stringer, Chris & Sanders, Dwight, 2006. "Forward Contracting Costs for Illinois Corn and Soybeans: Implications for Producer Pricing Strategies," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2006, pages 1-8.
    6. Sanders, Dwight R. & Manfredo, Mark R., 2002. "Usda Production Forecasts For Pork, Beef, And Broilers: An Evaluation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), pages 1-14, July.
    7. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-674, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. de Paula Leite, Ana Catarina & Pimentel, Liliana Marques & de Almeida Monteiro, Leandro, 2025. "Hedging in the second-generation biofuels market: Insights from UCOME," Renewable Energy, Elsevier, vol. 245(C).
    3. Mckenzie, Andrew M. & Isbell, Bradley J. & Brorsen, B. Wade, 2019. "The Cost Of Forward Contracting In The Cif Nola Export Bid Market," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 51(1), pages 164-181, February.
    4. Bradley Isbell & Andrew M. McKenzie & B. Wade Brorsen, 2020. "The cost of forward contracting in the Mississippi barge freight river market," Agribusiness, John Wiley & Sons, Ltd., vol. 36(2), pages 226-241, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:kap:iaecre:v:15:y:2009:i:4:p:470-482 is not listed on IDEAS
    2. Sanders, Dwight R. & Manfredo, Mark R., 2003. "USDA Livestock Price Forecasts: A Comprehensive Evaluation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-19, August.
    3. MacDonald, Stephen & Ash, Mark & Cooke, Bryce, 2017. "The Evolution of Inefficiency in USDA’s Forecasts of U.S. and World Soybean Markets," MPRA Paper 87545, University Library of Munich, Germany.
    4. Kexin Ding & Ani L. Katchova, 2024. "Testing the optimality of USDA's WASDE forecasts under unknown loss," Agribusiness, John Wiley & Sons, Ltd., vol. 40(4), pages 846-865, October.
    5. Taylor, Mykel & Tonsor, Glynn & Dhuyvetter, Kevin, 2014. "Structural Change in Forward Contracting Costs for Kansas Wheat," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 39(2), pages 1-13.
    6. Covey, Theodore & Erickson, Kenneth W., 2003. "Evaluating USDA Forecasts of Farm Assets: 1986-2002," 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri 132405, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    7. Kuethe, Todd H. & Hubbs, Todd, 2017. "Assessing the Accuracy of USDA’s Farm Income Forecasts: The Impact of ARMS," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285874, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    8. Kuethe, Todd H. & Hubbs, Todd & Sanders, Dwight R., 2018. "Evaluating the USDA’s Net Farm Income Forecast," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(3), September.
    9. Lewis, Karen E. & Manfredo, Mark R., 2012. "An Evaluation of the USDA Sugar Production and Consumption Forecasts," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 30(2).
    10. Isengildina, Olga & MacDonald, Stephen & Xie, Ran & Sharp, Julia, 2013. "Smoothing in USDA’s Commodity Forecasts," 2013 Conference, April 22-23, 2013, St. Louis, Missouri 285801, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    11. Bahram Sanginabadi, 2018. "USDA Forecasts: A meta-analysis study," Papers 1801.06575, arXiv.org.
    12. Tianyang Zhang & Ziran Li, 2022. "Can a rational expectation storage model explain the USDA ending grain stocks forecast errors?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 313-337, March.
    13. Taylor, Christopher W., 2012. "Market Reactions to USDA Reports: State Analysis of Corn Price Response," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124661, Agricultural and Applied Economics Association.
    14. Sanders, Dwight R. & Manfredo, Mark R., 2004. "Predicting Pork Supplies: An Application of Multiple Forecast Encompassing," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 36(3), pages 605-615, December.
    15. Sanders, Dwight R. & Manfredo, Mark R., 2002. "Usda Production Forecasts For Pork, Beef, And Broilers: An Evaluation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), pages 1-14, July.
    16. Bradley Isbell & Andrew M. McKenzie & B. Wade Brorsen, 2020. "The cost of forward contracting in the Mississippi barge freight river market," Agribusiness, John Wiley & Sons, Ltd., vol. 36(2), pages 226-241, April.
    17. Pruitt, J. Ross & Tonsor, Glynn T. & Brooks, Kathleen R. & Johnson, Rachel J., "undated". "End User Preferences for USDA Market Information," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 143007, Southern Agricultural Economics Association.
    18. Unknown, 2004. "Agricultural Finance Markets in Transition Proceedings of The Annual Meeting of NCT-194 Hosted by the Center for the Study of Rural America, Federal Reserve Bank of Kansas City October 6 - 7, 2003," Research Bulletins 122103, Cornell University, Department of Applied Economics and Management.
    19. Mark R. Manfredo & Dwight R. Sanders, 2004. "The forecasting performance of implied volatility from live cattle options contracts: Implications for agribusiness risk management," Agribusiness, John Wiley & Sons, Ltd., vol. 20(2), pages 217-230.
    20. Xiao, Jinzhi & Lence, Sergio H. & Hart, Chad, 2014. "Usda And Private Analysts' Forecasts Of Ending Stocks: How Good Are They?," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170642, Agricultural and Applied Economics Association.
    21. Olga Isengildina‐Massa & Berna Karali & Todd H. Kuethe & Ani L. Katchova, 2021. "Joint Evaluation of the System of USDA's Farm Income Forecasts," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(3), pages 1140-1160, September.

    More about this item

    Keywords

    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:n13413:285792. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: http://www.farmdoc.illinois.edu/nccc134/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.