Dynamic Inter-relationships in Hard Wheat Basis Markets

The basis values for hard red spring wheat (HRS) have escalated radically, experienced extraordinary levels of volatility (risk), have been subject to a squeeze during 2008, and all these have important implications for market participants. These observations are particularly important to marketers in the Northern Great Plains in the United States, as well as for Canadian marketers. The purpose of this paper is to develop a model to explore the dynamic relationships and interdependencies among terminal market basis values for milling quality higher-protein wheat. Specifically, we seek to identify factors impacting basis values for 13, 14, and 15% protein HRS wheat in addition to the intermakret wheat spread between Minneapolis and Kansas City wheat futures. We specify a vector autoregression (VAR) model to explore these relationships. Exogenous structural variables are specified in addition to dynamic inter-relationships including seasonal variability, inter-temporal variability and dynamic interdependencies among these markets and relationships. The results of interest are that: 1) basis values for these wheat markets been trending up, and have become more volatile; 2) factors impacting this variability is primarily the protein level in HRS, and production of HRW and Canadian (on high protein basis); 3) HRW protein supplies are not significant in the basis equations, but, do have an impact on the interrmarket wheat futures spread; 4) Quality levels.