The location basis variability aspect of hedging commodities in futures should be of especial concern to Southern hog producers who might contemplate hedging in the live hog futures market. Location basis variability affects hedgers who, like Southern hog producers, are distant from designated futures contract delivery points and cannot, as a practical matter, make (or take) physical delivery to discharge their obligation under a futures contract. To liquidate hedges, Southern producers would have no real alternative but to market hogs locally and purchase offsetting futures contracts. Any change in the spatial relationship of hog prices between the time a hedge was placed and when it was lifted causes a disparity between the intended and actual outcome of the hedge, hence, the term location basis variability. Hedgers with access to a delivery-point market are more or less insulated from its effect, because of the delivery option. Since hedging is presumably conducted to reduce the effects of price variability on the enterprise, location basis variability stands as a potential barrier to the usefulness of hedging to Southern hog producers.

A stochastic budget simulator and generalized stochastic dominance are used to compare the risk management properties of grazing contracts to futures and option contracts. The results show that the risks of backgrounding feeder cattle are reduced significantly for pasture owners in a grazing contract. However, the risks of the cattle owner in a grazing contract are not significantly reduced. The results also show that generally risk averse pasture owners prefer grazing contracts to integrated production when traditional hedging is used to manage price risks. In addition, grazing contracts compare favorably with put option contracts for some pasture owners.

Location basis variability is a matter of potential concern to livestock producers who contemplate the use of livestock futures contracts as hedging devices and who are removed from a designated futures contract delivery point. Recent attention has been given this problem by Heifner in an analysis of minimum-risk hedging ratios for cattle and hogs, among other commodities, in which measures of risk-shifting effectiveness were generated for comparison among locations.

Backgrounding of feeder cattle is a growing specialty operation in the so-called “Fescue Belt” grasslands of the South (Bradford et al.). Backgrounding is largely a seasonal enterprise, consisting of the purchase of weaned calves that are placed on pasture and supplemental feed for several months and then resold for placement in feedlots. Since feeder calf and feeder cattle prices are among the most volatile of all classes of cattle, backgrounders face considerable price risk (Russell and Franzmann). In principle, hedging could shift this risk, but there has been a question whether hedging can be worthwhile, given the additional costs and financial obligations involved.

Restrictions which prevent monopolization of spatial markets are imposed on the plant location problem for agricultural processing industries. The antitrust laws are assumed to be the source of these restrictions. Restricted and unrestricted solutions for an example problem and for the fluid milk processing industry in the state of Washington are compared. The restraints are shown to alter spatial organizations in such a way as to increase industry costs, but they also reduce the latitude for spatial price discrimination which may exist in unrestricted organizations.