Date of Award

5-2011

Document Type

Thesis

Degree Name

Master of Science (MS)

Legacy Department

Applied Economics and Statistics

Advisor

Isengildina, Olga

Committee Member

Curtis Jr. , Charles

Committee Member

Gerard , Patrick

Abstract

Grain marketing in the United States is a complex system; therefore producers require information on grain markets to effectively manage risk. Futures markets provide the mechanism for price risk management based on the national supply and demand signals. However price risk is managed on the local level, therefore the relationship between local cash price and futures price, basis, must be understood.
The market forces which explain grain basis are the cost of storage and the transportation cost. The current body of research in grain basis uses the storage component of basis as the driving force. This approach is applicable to regions where there is a large volume of production in comparison to demand. There are regions where grain production is deficit to demand. In these regions the driving force is hypothesized to be the transportation cost, in accordance with the Law of One Price. South Carolina is an example of a market where the demand for grain is larger than the grain production.
This study hypothesizes that the harvest grain basis for corn, soybeans and wheat in South Carolina is a function of the local market expectations, transportation cost, and national market size. The local market expectation is represented by the implied basis measured in dollars/bushel, which is the cash forward contract less the harvest futures contract. Second the transportation cost is represented by the nearby home heating oil contract in cents/gallon on the NYMEX. Lastly, the log of open interest in the harvest futures contract measures the percent change in national market size.
This study objective is to provide the producer of South Carolina and other grain deficit markets with the tools needed for successful price risk management and to further the current body of research in grain basis behavior and forecasting.

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