Optimal Length of Moving Average to Forecast Futures Basis

Futures prices when combined with a basis forecast provide a reliable way to forecast cashprices. The most popular method of forecasting basis is historical moving averages. Given therecent failure of longer moving averages proposed by previous studies, this research reassessespast recommendations about the best length of moving average to use in forecasting basis. Thisresearch compares practical preharvest and storage period basis forecasts for hard wheat, softwheat, corn and soybeans to identify the optimal amount of historical information to include inmoving average forecasts. Only with preharvest hard wheat forecasts are the best movingaverages longer than 3 years. The differences in forecast accuracy among the different movingaverages are small and in most cases the differences are not statistically significant. Therecommendation is to use longer moving averages during time periods (or at locations) whenthere have been no structural changes and use last year’s basis after it appears that a structuralchange has occurred.