Table 1 shows what a grain producer should do given certain market situations. For instance, assume you are a corn producer who believes the corn price is high and basis is strong relative to historical patterns. Livestock For livestock, basis refers to the difference between supply and demand in a local location and supply and demand for the aggregate market. Like grains, basis contracts can be formulated for livestock. Thus, understanding the basis can help farmers and agribusiness personnel in evaluating forward contracting and hedging decisions.
Basis is a crucial factor in hedging using the futures.
Table 1 is used to describe a gain or loss to either a short or long hedger when basis strengthens or weakens. For the long hedger, the hedger prefers for the basis to weaken. That is, the hedger pays less in the cash market relative to the futures market and may gain more from their position in the futures market. For the short hedger, the hedger gains from a strengthening basis. That is, the hedger realizes a cash price increase relative to the futures price and may gain more from their position taken in the futures market.