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Forecasting Grain Basis Using Kriging Spatial Extrapolation or Markov Chain Techniques: Which is more Accurate?

Ward Nefstead

Summary

Grain basis knowledge is very important in making good marketing decision. The traditional method of forecasting basis is to use historical data and multiple year averages to determine the next year´s basis levels. Knowledge of future basis allows the farm operation to determine the success of hedging and allows evaluation of forward contract bids. The author has experimented with two additional methods of forecasting basis. These are Kriging Extrapolation of Spatial Surfaces for Basis and the use of Markov chains to determine regional basis levels. These additional methods are very important in that historical data on basis is backward-looking and cannot capture the rapid structural changes that are characteristics of some markets such as the current corn market. This presentation will contrast these two methods with the traditional historical approach to determine which is more accurate.

Details

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