Forecasting Returns to Storage: The Role of Factors other than the Basis Strategy

Given the interest in the ability to forecast returns to storage and the incon- clusiveness of the performance of the basis strategy, especially for unhedged storage; this study examines whether other variables enhance the forecast of storage returns. Speci cally, the rate of harvest progress and the ratio of a demand for storage space relative to the supply of storage space are examined. The later variable has not been investigated by previous studies of the basis strategy. Using data for Illinois corn and soybeans over the 1988 through 2012 crop years and a xed e ect seemingly unrelated regression estimation, both variables are found to be signi cant in explaining observed returns to unhedged storage but not to hedged storage. Given the regression results, storage strate- gies based on harvest progress and ratio of demand to supply for storage space are constructed. These strategies do not improve the basis strategy's return and risk for hedged storage. In contrast, these strategies improve the return and risk performance of unhedged storage relative to routine unhedged stor- age. Moreover, net return for the alternative strategies for unhedged storage is higher than net return for the basis strategy for hedged storage but the latter has a lower risk than the former. This nding is the classic return-risk tradeo unhedged, especially by farmers.