Stock effects and seasonality in the fcoj futures basis

✍ Scribed by William M. Malick; Ronald W. Ward

• Publisher: John Wiley and Sons
• Year: 1987
• Tongue: English
• Weight: 600 KB
• Volume: 7
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990070206

✦ Synopsis

asis theory and storage models deal with the importance of stocks as a deter-B minant of a futures basis where stocks are the connecting link between the present and future. For frozen concentrated orange juice (FCOJ) the effect of stocks on the basis varies with seasonal factors facing the industry. Storage theory sets the condition that the basis equals the marginal costs of carrying stocks through time. When stocks are relatively low, cash prices are pushed up relative to futures prices, thus encouraging stock holders to draw down existing inventories (Brennan, 1958;Weymar, 1966). Some stocks will remain in storage even with a large price inversion because of the convenience yield. That is, futures prices remain inverted (a negative basis) without all stocks being drawn out of storage.

In this article a futures basis model for frozen concentrated orange juice (FCOJ) is estimated that links basis performance to stocks and other industry variables. A constant period from maturity (CPM) model is used to measure seasonality in the FCOJ futures market. Such seasonality has direct implications for establishing trading plans and for understanding unique characteristics of this market.

THE FCOJ INDUSTRY

FCOJ stocks vary seasonally. In the latter months of the citrus harvest seasons, inventories are typically near their maximum levels (Figure 1) (Ward and Kilmer, 1980). To incorporate these stock levels into a basis analysis, they must be normalized in a way to account for seasonal accumulations and depletion of inventories. Normalized stocks are defined as current stocks weighted by the average seasonal stock levels for specific periods within the production year. Stocks may be above