The theory of storage predicts that basis will differ for varying production regions because cash price differs by location, primarily due to transportation costs.  In general, commodity prices decline as distance to the market increases because transport costs increase (Benirschka and Binkley, 1995).  Therefore, basis should be weaker (i.e., cash price lower relative to futures price) the farther a commodity is from major consumption points.

In today’s global market, cotton is either consumed domestically or exported (primarily to the Pacific Rim).  Domestic textile mills, located in the Southeast region of the U.S., typically consume approximately 33% of the annual U.S. harvest as estimated by cotton merchants.

Arkansas agricultural producers face two types of risk daily, yield or production risk and price risk.  The first data that any producer needs to help control this risk exposure to the sustainability of their family business is price basis.  Producers need this information to fix an “effective price” for their commodity at their farmgate.  In Arkansas, cotton price basis varied as much as 115% over the period 2002 - 2006.  This creates a moving marketing target to try to hit.

Cotton basis calculated using a futures contract maturing late in the crop year is expected to be weakest at the time of major harvest, and to strengthen as the crop year progresses. While the cotton harvest in the U.S. begins at a few locations in August and September, the predominant harvest period is October through November.  Consequently, based on theory, cotton basis is expected to be weakest during the predominant Beltwide harvest period (October and November) and strongest just before significant quantities of the new crop are harvested (August).

The objective of this study is to analyze six years of basis data to determine if generalizations can be drawn.

 References

Benirschka, M., and J. K. Binkley. (1995, August). “Optimal storage and marketing over

space and time.” American Journal of Agricultural Economics 77, 512S524.