can use the tables in estimating profitability from potential hedges

and evaluate the effect of a widening or narrowing basis.


 How A Hog Hedge Works

 Let's assume that as a producer you plan to have 150 hogs ready for

market in December. It is now July. You are concerned that hog prices

may drop and are considering hedging as a risk averting strategy. Following

are the steps to determine if you want to hedge. In addition, tnere is an

explanation of how to use this publication's tables for making the decision.

 Begin by assuming that your hogs will weigh 220 pounds when finished

in the third week of December. The December futures quote is $52.00 so

the futures potential is:

 Step 1. Check the futures potential (Base situation)

 Item Dollars per cwt.

 December hog futures contract quote in July 52.00
 Basis in December (week 50, Table 4) subtract 0.59
 Localized price 51.41


 The basis for week 50 (mid-December) is $0.59 which means that the

futures price for 200-240 pound barrows and gilts historically have

averaged $0.59 above the cash or spot quote. The profit potential from

using the futures market is then:

 Step 2. Determine the profit potential (Base situation)

 Item Dollars per cwt.

 Localized price 51.41
 Feeding costs (including feeder pig cost) subtract 50.00
 Profit potential 1.41