An empirical investigation of the cotton basis for the southern high plains of Texas

The general objective of this study was to investigate and identify factors that affect the cotton basis for the West Texas region and to examine the causes of fluctuations in the basis level over time. A GARCH model assuming fourth order autocorrelation, heteroscedasticity, and error-term non-normality was estimated to accomplish this objective.

The basis used in this study was calculated using the West Texas DSCQ base cash price and the corresponding NYCE futures price for the December contract. The bases were calculated for each day in each marketing year, and were then averaged to determine a monthly basis. All of the data used in this study were monthly time-series data.

Results of this study indicated that U.S. cotton production, U.S. beginning stocks, and the first difference in the price of rayon directly affected the level of the cotton basis for the West Texas region over the time period ranging from 1980 to 2000. The Texas beginning stocks and the opportunity cost of storage were found to inversely affect the level of the West Texas cotton basis for the same time period. Further, results suggested that the basis was wider during months when harvestmg and marketing occurred. The level of the basis was found to be narrowest during the 1985 farm pohcy when compared with the 1980 and 1996 farm policy time periods. However, the volatility of the West Texas cotton basis was reduced during the 1996 farm policy.