A Spatial Approach to Estimating Factors that Influence the Corn Basis

It is well known that supply and demand fundamentals at any location affect the local basis. Because grain markets are tied together by spatial arbitrage, the local basis may also be affected by the supply and demand factors at neighboring locations. Whether or not this is the case, the corn basis is highly clustered across the United States; as such, OLS estimates of basis determinants may be inconsistent. We apply a spatial econometrics framework to adequately control for spatial effects, and find that the county-level corn basis is characterized by spatial spillovers: supply and demand factors in a given county affect its own basis, but also radiate out over space affecting the basis at neighboring counties. We find that unobserved basis determinants are also spatially correlated.