Abstract
The increased commodity market price volatility in the 1970s and early 1980s has sharply increased risks in commodity procurement and inventory management for food-processing and distribution, firms. Firms dealing in commodities that have futures contracts can use them as procurement or inventory management tools. Even though most wholesale meat products have no futures market, established futures trading in live hogs and cattle may provide hedging opportunities for firms handling large volumes of related meat products (Miller). The objective of this note is to evaluate the basis risk in using the live hog futures market as a risk management tool for hedging several wholesale pork products. Although either pork belly or live hog contracts could be considered for hedging wholesale pork products, we considered only live hog futures because (a) the seasonal demand patterns for bellies and some cuts are dissimilar
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