How a crop producer should use basis in marketing strategies. For livestock, basis refers to the difference between local supply and demand in a local location and supply and demand for the aggregate market. Basis contracts can be formulated for livestock just as they can for grains. Thus, understanding the basis can help farmers and agribusiness personnel evaluate forward contracting and hedging decisions. However, livestock commodities cannot be stored like crops.
Basis is a crucial factor in hedging through the use of futures.
Table 2 shows the gain or loss to a hedger when basis strengthens or weakens. Long hedgers, seeking to protect against increasing price, prefer that the basis weaken. That is, hedgers pay less in the cash market relative to the futures market and may gain more from their position in the futures market. Direction and impact of basis movement for short and long hedger. Basis loss Basis gain Short hedgers, seeking to protect against decreasing price, gain from a strengthening basis.