Effects of Location Basis Variability on Hedging of Slaughter Hogs in The South

Abstract

The location basis variability aspect of hedging commodities in futures should be of especial concern to Southern hog producers who might contemplate hedging in the live hog futures market. Location basis variability affects hedgers who, like Southern hog producers, are distant from designated futures contract delivery points and cannot, as a practical matter, make (or take) physical delivery to discharge their obligation under a futures contract. To liquidate hedges, Southern producers would have no real alternative but to market hogs locally and purchase offsetting futures contracts. Any change in the spatial relationship of hog prices between the time a hedge was placed and when it was lifted causes a disparity between the intended and actual outcome of the hedge, hence, the term location basis variability. Hedgers with access to a delivery-point market are more or less insulated from its effect, because of the delivery option. Since hedging is presumably conducted to reduce the effects of price variability on the enterprise, location basis variability stands as a potential barrier to the usefulness of hedging to Southern hog producers.