Answer Key-Updated May 2013
Key
Ag Decision Maker
Understanding Livestock Basis
Files B2-40 and B2-41
Name_______________________________
Answer the following questions from File B2-40
1. What is the formula for calculating livestock basis?
Local Cash Price-Futures Price=Basis
2. Calculate the basis for the following examples. Be sure to include whether
it is positive or negative.
Cash hog price = $69.50
Lean hog futures prices = $73.75
Basis = $-4.25
Cash hog price = $67.30
Lean hog futures prices = $66.80
Basis = $.50
Cash cattle price=$67.00
Live cattle futures price = $68.35
Basis = $-1.35
Cash cattle price=$64.50
Live cattle futures price = $63.60
Basis = $.90
3. How does the futures market differ from the cash market?
The cash market is a current market (it reflects today's supply and
demand). The futures market is an anticipatory market (it reflects
expectations of future supply and demand).
Answer Key-Updated May 2013
Ag Decision Maker Continued…
Understanding Livestock Basis
Files B2-40 and B2-41
4. What are the three ways that you can use basis information?
1. Placing a hedge
2. Lifting a hedge
3. Evaluating forward contract bids
5. Why must you estimate the basis when placing a hedge?
Because the basis translates the futures price into a local cash price.
6. Explain how to calculate the estimated net selling price when placing a hedge.
The estimated net selling price can be calculated by adding the
estimated basis to the futures price.
7. Assume future price is $70.00 and the estimated basis is $-1.50, what is the
estimated net selling price (do not include interest on margin and transaction fees)?
$70.00
-1.50
$68.50
8. How can you use basis information to evaluate a forward contract offered by a
packer?
You can look up the estimated basis and calculate an estimated net
selling price for a hedge. You can then compare this price to the bid
that the packer is offering. You also need to consider the costs of
hedging (commissions and interest on margin money). Also consider
the fact that the actual net selling price of the hedge may be different
than the actual hedge price because the actual basis may be different
than the estimated basis.