of this tool requires careful planning and analysis. The intent of this

circular is not to outline a detailed planning strategy. Rather, it con-

centrates on the basis, an aspect fundamental to successful use of the

market.

 Consider an example where a decision is made to feed hogs out to a

marketable weight range of 200-230 pounds. The producer may implement

production plans and four months later sell hogs on the cash market.

Obviously, the risk of a low price must beborneby the producer. Alter-

natively, if the same producer were to forward price the hogs by selling

futures contracts, the price risk would theoretically be zero. The hogs

could simply be delivered against the forward commitment.

 In actuality, the trading procedure is not quite as simple as des-

cribed above. Delivery points are sometimes inaccessible to local pro-

ducers, and hog grades frequently do not adequately match up with those

characteristics outlined in the contract. Under these circumstances the

producer has only one option, which is to reverse the futures position

when the hogs are ready for the market. The futures contract is bought

back and hogs sold are sold in the cash market. The realized returns from

hog production then depend on what happens when the futures position is

terminated. The success of these activities ultimately depends on the

closing "basis," i.e. the spread or difference between the cash price

and the futures price.

 The "realized price" will always equal the initial forward price

less the closing basis (the closing basis is the basis when an offsetting

contract is bought back or the hogs are delivered). The price risk now

lies in the basis change and not just with the cash market. One would

expect the cash and futures prices to be highly related if both