Price Discovery and the Basis Effects of Failures to Converge in Soft RedWinter Wheat Futures Markets

Wheat futures contracts failed to converge to spot prices at delivery locations in 2008–2009. By analyzing basis at nondelivery locations surrounding this episode, we study the spatial pattern of failures to converge. We find that basis fell as distance from delivery location increased and remained tightly connected to basis at the delivery location during the nonconvergence episodes. This finding is uniform throughout the delivery zone. We conclude that nonconvergence did not affect the economic relationship between delivery and nondelivery locations’ spot prices but only affected the connection between futures prices and spot prices.