Dynamic Interrelationships in Hard Wheat Basis Markets

Basis values for hard red spring (HRS) wheat have escalated radically, experienced extraordinary levels of volatility (risk), were subject to a squeeze during 2008, and all these have important implications for market participants. These are particularly important to marketers in the Northern Great Plains in the United States, as well as for Canadian marketers as they confront deregulation in wheat marketing and will be exposed to these risks. The purpose of this paper is to analyze the dynamic relationships and interdependencies among terminal market basis values for milling. Specifically, we seek to identify factors impacting basis values for 13%, 14%, and 15% protein HRS wheat in addition to the intermarket 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 interrelationships including seasonal and intertemporal variability and dynamic interdependencies among these markets and relationships. Results of interest are that: (1) basis values for these markets have been trending up and have become more volatile; (2) factors impacting this variability are the protein level in HRS, production of hard red winter (HRW), and Canadian wheat (on high protein basis); (3) HRW protein supplies are not significant in the basis equations, but, do impact the intermarket wheat futures spread; (4) quality factors have a significant impact on basis values, notably vomitoxin, falling numbers, and absorption. Dynamic interrelations are also important in that all prices converge quickly toward a long-term equilibrium. In addition, there are seasonal impacts, dynamic basis interactions, trends, and lagged impacts of protein levels. Les ecarts sur les marches du ble de force roux de printemps ont augmente radicalement, ont affiche des degres de volatilite exceptionnels (risque) et ont subi des compressions en 2008, et tous ces evenements ont d'importantes repercussions sur les participants au marche. Ils sont particulierement importants pour les negociants du nord-est des grandes plaines des Etats-Unis de meme que pour les negociants du Canada qui font face a une dereglementation de la commercialisation du ble et qui seront exposes a ces risques. La presente etude vise a analyser les relations dynamiques et les interdependances entre les ecarts sur le marche terminal de gros dans le cas du ble de qualite meuniere a teneur elevee en proteines. Nous cherchons tout particulierement a determiner les facteurs qui influencent les ecarts sur le marche du ble de force roux de printemps dont les teneurs en proteines sont de 13, 14 et 15 % et les ecarts commerciaux sur les contrats a terme du ble des marches de Minneapolis et de Kansas City. Nous avons defini un modele d'autoregression vectorielle pour examiner ces liens. Nous avons defini des variables structurelles (exogenes) et des interrelations dynamiques, y compris la variabilite saisonniere et inter-temporelle et les interdependances entre ces marches et ces relations. Les principaux resultats de notre etude sont les suivants: 1) les ecarts sur ces marches affichent des tendances a la hausse et deviennent plus volatiles; 2) les facteurs qui influencent la variabilite comprennent la teneur en proteines du ble de force roux de printemps, la production de ble de force roux de printemps et le ble canadien (a forte teneur en proteines); 3) les teneurs en proteines du ble de force roux de printemps ne pesent pas lourds dans l'equation des ecarts, mais ont des repercussions sur les ecarts des contrats a terme normalises du ble entre les marches; 4) les facteurs de qualite, notamment la presence de vomitoxine, le temps de chute de Hagberg et l'absorption, ont des repercussions considerables sur les ecarts sur les marches. Les interrelations dynamiques sont egalement importantes etant donne que tous les prix convergent rapidement vers un equilibre a long terme. Il faut egalement tenir compte de l'impact saisonnier, des interactions dynamiques sur les ecarts, des tendances et l'impact retarde des teneurs en proteines.