The Effects of Hurricane Katrina on Corn, Wheat and Soybean Futures Prices and Basis

Hurricane Katrina caused considerable damage to transportation infrastructure, grain export facilities, and to some crop areas in 2005. Assuming that financial market participants considered the disruption of the grain transportation system by Katrina as having an important impact on fundamental supply and demand factors, futures and/or national basis would subsequently adjust. The objective of this research was to determine the reaction in corn, wheat, and soybean futures and basis due to Katrina using an event study methodology. One parametric (Constant mean return) and one nonparametric procedure (Corrado's rank test) were used to define whether there were statistically significant abnormal returns. During Katrina abnormal returns were larger on the wheat futures market than on the corn and soybean futures markets, which could be partially explained by the timing of the Katrina's landfall with the grain export activities. However, there were only a few statistically significant daily abnormal returns in the futures prices due to the hurricane. There was some evidence of significant cumulative abnormal returns in the corn and wheat futures markets prior to and surrounding the Katrina's landfall. In conclusion, the majority of the corn market reaction to Katrina's damage occurred in the basis and not in the futures market. For the soybean market there was weak evidence of significant reaction in both basis and futures prices. In the case of wheat, the basis was not evaluated and wheat futures prices reacted to the disruption caused by Katrina. The reaction in the corn, wheat and soybean futures prices due to Katrina could have being moderated by the presence of large stocks and large expected production levels of these grains in 2005 or simply by the fact that the damage caused by the hurricane did not affect fundamental supply and demand factors; rather, they only affected transportation logistics.