Forecasting Crop Basis: Practical Alternatives

Being able to predict basis is critical for making marketing and management decisions. Basis forecasts can be used along with futures prices to provide cash price projections. Additionally, basis forecasts are needed to evaluate hedging opportunities. Many studies have examined factors affecting basis but few have explicitly examined the ability to forecast basis. Studies have shown basis forecasts based on simple historical averages compare favorably with more complex forecasting models. However, these studies have typically considered only a 3-year historical average for forecasting basis. This research compares practical methods of forecasting basis for wheat, corn, milo (grain sorghum), and soybeans in Kansas. Absolute basis forecast errors vary seasonally for all crops and are highest at critical production time periods. Thus, producers need to realize that in addition to increased price variability during these time periods there is also significantly more basis forecasting risk. Using an historical 4-year average to forecast basis for wheat was the optimal number of years. For corn, milo, and soybeans a longer-term average (5-7 years) was optimal. Incorporating current market information, such as futures price spreads or current nearby basis, into a basis forecast improves the ability to forecast basis 4-12 weeks in advance but for longer time horizons simple historical averages are better.