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Grimes, Glenn

Murra, Gene

Skadberg, J. Marvin

University of Minnesota Digital Conservancy

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Si'. FAUL CAiviF-US LIBRARU:S 
Although most hedgers do not 
actually make delivery on a 
hog futures contract, it is the 
potential for delivery that makes 
hedging an effective market 
risk reduction technique. Nor-
mally, to fulfill the futures 
obligation, a producer buys an 
offsetting futures contract rather 
than making delivery. 
Actual delivery on a futures 
contract should take place only 
when the basis during contract 
maturity is greater than antici-
pated-and greater than the 
delivery costs. 
According to theory, the price 
difference (basis) between the 
futures and the cash markets 
should be the same or less 
than the delivery costs; hence 
no deliveries. But, as is often 
the case, reality may differ from 
theory, and thus there are times 
when the basis is greater than 
the delivery costs. 
Delivery may be feasible in 
some market areas and not in 
others because cash prices 
differ by regions. The futures 
price represents a specific type 
Delivering on a Hog 
Futures Contract 
Producer Marketing Management-
Fact Sheet #7 
By J. Marvin Skadberg, extension economist, 
Iowa State University. 
Reviewers: Glenn Grimes, extension economist, 
University of Missouri, and Gene Murra, extension 
economist, South Dakota State University. 
of hogs at specific markets 
whereas cash prices vary by 
the supply/demand conditions 
in each local area. Therefore, it 
is possible that hedgers in 
some areas may make deliv-
eries because of an adverse 
basis relationship, while in other 
areas the basis may be suffi-
ciently small so that delivery is 
not a good alternative. 
Delivery most likely will be 
made by producers who are 
located near a futures delivery 
point, but any producer whose 
hogs will meet the contract 
specifications can make 
delivery. 
An alternative to delivery of the 
producer's own hogs would be 
for the producer to purchase 
hogs at the market where the 
delivery is to be made and to 
make delivery of those hogs. 
The producer should check 
with a livestock commission 
firm or market representative of 
the market before making this 
decision. 
When to Deliver 
As stated previously, delivery 
should be made only when the 
current basis is greater than the 
delivery costs. The basis is 
determined by subtracting the 
local cash market price from 
the appropriate futures contract 
price. If, for example, the deliv-
ery costs were $2 per cwt. and 
the basis was $3 per cwt., the 
basis would be greater than 
delivery costs and delivery 
should be seriously considered. 
Delivery in this case woul.d net 
the producer an additional $1 
per cwt. ($3 - $2 = $1 ). If the 
basis was only $1 per cwt. and 
the delivery costs were $2 per 
cwt., delivery should not be 
made. Instead, the producer 
should gain $1 per cwt. by 
selling the hogs on the local 
market and buying back a 
futures contract. 
When the difference between 
the basis and the delivery costs 
is less than 50 cents per cwt., 
it is generally advisable to buy 
a contract rather than deliver-
ing. The reason is because the 
delivery costs can only be 
estimated before actual deliv-
NCR Extension Publication No. 217 I March 1986 
Sponsored by the Extension services of Indiana, Iowa, Michigan, Minnesota, Missouri, 
Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin, in cooperation with 
ES-USDA. 
ery. It is possible the delivery 
costs could be larger than 
estimated because of quality or 
weight discounts. 
Size of Delivery Unit 
Delivery on the Chicago Mer-
cantile Exchange must be 
30,000 pounds of barrows and 
gilts, which, depending on the 
weight of the hogs, would re-
quire from 131 to 150 hogs. The 
delivery unit on the MidAmerica 
exchange must be 15,000 
pounds of barrows and gilts 
(approximately 66 to 75 hogs). 
The delivery unit cannot ex-
ceed the weight specified by 
more than 5 percent. 
Delivery Period 
Hogs can be delivered from the 
first of the contract month to 
the last business day of the 
month. Deliveries are not al-
lowed on Fridays, holidays, or 
days preceding a holiday. De-
liveries are optional for the 
short hedger from the first of 
the month until the close of the 
contract (approximately the 
20th of the contract month). 
Delivery is mandatory after 
trading has been closed for 
any contract that has not been 
offset. 
Delivery Costs 
Before making delivery, a 
hedger should estimate the de-
livery costs. The delivery costs 
include the marketing fee, 
transportation costs, shrink 
costs, quality and weight dis-
counts, and delivery point 
discounts. It is important to 
check the current specifications 
on all contracts since the con-
tract specifications are revised 
periodically. 
Marketing Fee 
Hogs delivered on a futures 
contract normally are assigned 
to a livestock commission firm 
at the delivery point market. It 
is this firm's responsibility to 
weigh, sort, and pen the hogs, 
in preparation for grading, and 
to collect the money due on the 
hogs. The firm charges a fee 
for this service. 
The delivery point public mar-
ket charges a fee for feeding, 
weighing, watering, and use of 
the pens. 
The USDA Market News Ser-
vice charges a fee for grading 
the livestock. 
The commission firm pays all 
fees due on the hogs, collects 
the money due, and remits the 
remainder to the deliverer. 
These three factors make up 
the marketing fee, which 
should not exceed $1 per cwt. 
Transportation Costs 
A producer estimating transpor-
tation costs for delivery should 
estimate only the added cost of 
transportation to the delivery 
point. To do this, the producer 
should subtract the cost of 
hauling to the local market from 
the cost of hauling to the 
delivery point, and use the 
difference for the transportation 
cost. 
If, for example, it costs a 
producer 50 cents per cwt. to 
haul hogs to the local market 
and 75 cents per cwt. to haul 
them to the delivery point, only 
the 25 cents per cwt. additional 
cost should be used for deliv-
ery decision purposes. 
Shrink Costs 
Shrink loss for delivery is esti-
mated in a manner similar to 
that used in estimating trans-
portation costs-only the 
added shrink loss is consid-
ered. Assume that a producer's 
shrink loss to the local market 
is 3 percent, while the shrink 
loss to the more distant delivery 
point is 4 percent. By subtract-
ing the local shrink loss from 
the delivery shrink loss, the 
producer obtains an added 
shrink loss of 1 percent 
(4 percent - 3 percent = 
1 percent). 
The 1 percent shrink loss is 
multiplied by the price level per 
cwt. to estimate the shrink cost 
of delivery. If the price level was 
$40 per cwt. and it was multi-
plied by a 1 percent added 
shrink loss, the producer's 
shrink cost of delivery would be 
40 cents per cwt. ($40 x .01 
= 40 cents). 
Quality and Weight 
Discount Estimation 
A producer planning on deliver-
ing should determine if all the 
hogs delivered will meet the 
par contract specifications. If 
some of the hogs are likely to 
be discounted, these discounts 
should be estimated before the 
delivery decision is made. The 
futures contract specifies the 
appropriate discounts for both 
weight and quality. 
Delivery Points and Discounts 
The delivery points for the futures contracts are at public markets 
at the following cities. Delivery point discounts are listed. 
Peoria, Illinois 
Sioux City, Iowa 
Omaha, Nebraska 
St. Paul, Minnesota 
East St. Louis, Illinois 
Kansas City, Missouri 
St. Joseph, Missouri 
Sioux Falls, South Dakota 
(to be added) 
no discount (par) 
25 cents per cwt. 
25 cents per cwt. 
25 cents per cwt. 
(proposed change to 
75 cents per cwt.) 
25 cents per cwt. 
50 cents per cwt. 
50 cents per cwt. 
50 cents per cwt. 
Hogs delivered to delivery points other than the par delivery point 
are discounted from 25 to 75 cents per cwt. depending on the 
specific delivery point. 
Since the designated delivery points and discounts may change, 
a producer considering delivery should obtain the current 
information from a broker. 
Delivery Cost Worksheet Example 
Futures price (appropriate contract) 
Delivery costs 
Marketing fee 
Transportation (added) 
Shrink (added) 
Quality discount 
Weight discount 
Delivery point 
discount 
Total delivery costs 
$1.00 per cwt. 
.25 per cwt. 
.40 per cwt. 
.05 per cwt. 
.20 per cwt. 
.25 per cwt. 
$2.15 per cwt. 
Net futures price (futures price 
minus total delivery costs) 
Rules to Remember 
$48.00 per cwt. 
- $2.15 per cwt. 
$45.85 per cwt. 
Rule 1. If the net futures price is 
the same as or lower than the 
current cash price for hogs, the 
hedger should buy back fu-
tures and sell hogs on the cash 
market. 
Rule 2. If the net futures price 
is higher than the current cash 
price for hogs, the hedger 
should either deliver the hogs 
on contract or delay lifting the 
hedge. 
Delivery Procedure 
A producer intending to deliver 
on a futures contract must 
notify the broker of the number 
of contracts, the delivery point, 
and the delivery date. The 
broker is required to notify the 
clearing house in writing 
(Notice of Intent to Deliver) no 
later than 1 p.m. one business 
day prior to the actual delivery 
date. 
On the delivery date, the hogs 
must be delivered to the deliv-
ery point in sufficient time to be 
weighed, penned, and graded 
with an official USDA Agri-
cultural Products Certificate. 
The producer delivering will 
usually assign the hogs to a 
livestock commission firm at 
the delivery point. The respon-
sibility of the livestock 
commission firm is to weigh the 
hogs, assign them to a pen, 
sort the hogs if necessary, and 
notify the grader about the 
delivery unit. Once the hogs 
have been accepted, the com-
mission firm will collect .the 
money due, subtract the mar-
keting charges, and pay the 
producer for the hogs. In case 
substitutions have to be made 
in the delivery unit, the com-
mission firm will handle these 
transactions. 
It would be advisable for the 
producer intending to make 
delivery to notify the livestock 
commission firm at the delivery 
point about the intention to 
make delivery. By doing this, 
the producer can receive some 
assistance in selecting the ap-
propriate hogs and be ensured 
that delivery is made in suffi-
cient time to meet all the 
requirements. 
Grading and Hog Delivery Worksheet l llllll~l~li~l~l~~liil~llHllililill~~l~[m11111 3 1951 D02 079 676 3 Weight Estimation Use this to calculate your delivery costs. 
Futures price (current 
price, appropriate contract) 
Delivery Costs 
Marketing fee 
Transportation (added) 
Shrink (added) 
Quality discount 
Weight discount 
Delivery point discount 
___ per cwt. 
___ per cwt. 
___ per cwt. 
___ per cwt. 
___ per cwt. 
___ per cwt. 
___ per cwt. 
The USDA Market News Ser-
vice personnel have been 
designated by the exchanges 
as official graders. The grader's 
responsibility is to grade the 
hogs and estimate weights of 
individual hogs that fall out of 
the par weight range. Live 
weight of the total shipment is 
obtained by weighing the hogs, 
but individual hog weights are 
obtained by the grader's es-
timating their weights. These 
estimated weights become the 
official weights and are used in 
computing discounts for indi-
vidual hogs. 
Total delivery costs ___ per cwt. - ___ per cwt. 
Hog grades are also estab-
lished by viewing the live hog. 
The USDA grading standards 
for live hogs are used by the 
grader to establish the grades 
of the hogs delivered. 
Net futures price (futures price 
minus total delivery costs) 
Rules to Remember 
Rule 1. If the net futures price is 
the same as or lower than the 
current cash price for hogs, the 
hedger should buy back fu-
tures and sell hogs on the cash 
market. 
This fact sheet is a product of the North Central Ad Hoc Producer 
Marketing Committee including the following members at the time of 
preparation: Dean Baldwin (Ohio), Gerald Campbell (Wisconsin), Ken 
Egertson (Minnesota), John Ferris (Michigan), Darrel Good (Illinois), Glenn 
Grimes (Missouri), Hugh McDonald (North Dakota), Gene Murra (South 
Dakota), Mike Sands (Kansas), Marvin Skadberg (Iowa), Bill Uhrig 
(Indiana), Al Wellman (Nebraska), and Ken Bolen (Nebraska), Admin-
istrative Liaison. Partial funding support provided by the Farm Foundation. 
Reproduction and Publication 
These fact sheets were intended for a variety of educational programs. 
Reproduction is permitted, but the authors should be properly cited. We 
request that Producer Marketing Management, NCR Extension Publica-
tion No. 217, be identified as the source. 
Programs and activities of the Cooperative Extension Service are 
available to all potential clientele without regard to race, color, sex, 
national origin, or handicap. 
In cooperation with NCR Educational Materials Project 
Issued in furtherance of Cooperative Extension work, Acts of Congress of 
May 8 and June 30, 1914, in cooperation with the U.S. Department of 
Agriculture and Cooperative Extension Services of Illinois, Indiana, 
Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, 
South Dakota, and Wisconsin. Robert L. Crom, Director, Cooperative 
Extension Service, Iowa State University, Ames, Iowa 50011. 
___ per cwt. 
Rule 2. If the net futures price 
is higher than the current cash 
price for hogs, the hedger 
should either deliver the hogs 
on contract or delay lifting the 
hedge. 
ISUP-93 


Delivering on a hog futures contract

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Delivering on a hog futures contract

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