Hedging Against Rising Pork Bellies Prices using Pork Bellies Futures

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The Learn About Futures Insider: Pork Bellies

traderkenny

Active member

Pork bellies – the streaky meat from the underside of a pig – are the source of “American style” bacon. Since the ancient Chinese started preserving and salting pork nearly 1500 BC, it is likely pork is one of the oldest preserved meats. Nowadays, the belly may be flash frozen and stored. These contract specifications refer to the CME contract.

Contract Size: 40,000 lbs

Price Quote & Tick Size: cents per pound; minimum fluctuation is $.00025 per pound ($10 per contract)

Contract Months: February, March, May, July, August

Trading Specs: Floor trading is conducted MON-FRI 9:05 am to 1:00 pm CT; Globex trading MON 9:05 a.m. – FRI 1:55 p.m. Central Time. Daily trading halts 4:00 p.m. – 5:00 p.m. Central Time

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Daily Price Limit: $.03 per pound above or below previous day’s settlement price; expandable to $.045 per pound

Trading Symbols: PB; GPB on Globex

Past performance is not indicative of future results.
***chart courtesy of Gecko Software

A larger percentage of hog production occurs in the Midwestern United States and the largest individual state production falls to Iowa, North Carolina, Minnesota, and Illinois. Early access to the eastern coastal cities of the United States via the Erie Canal may have helped create this farming trend. Although pigs are often said to have large appetites and consume everything in sight, today’s farming practices tend towards careful diets which result in leaner meat. Most of the feed for hogs will contain corn or soybean meal, likely linking this market closely to grain markets. A large percentage of the thiamin in the average person’s diet comes from pork.

Globally, exports, production, and consumption are distributed as follows:

** Data courtesy of USDA

** Data courtesy of USDA

** Data courtesy of USDA

In the US, the per capita consumption of pork compares to beef and chicken as illustrated in the following graph:


Key terms for this market include:

Farrow – a word to describe a litter of pigs or the action of producing a litter of pigs.
Bellies – the boneless cut of meat from the belly of swine


In addition to the following variables, if you are trading any pork product, you will also want to be aware that the USDA issues a Quarterly Hogs and Pigs report that details domestic hog inventories, as well as the birth rate (a farrow is a litter of pigs or, as a verb, means to produce a little of pigs) and litter sizes for breeding sows. Cold storage reports will also detail monthly supplies of pork bellies.

Feed Costs: Higher feed costs – particularly corn – can typically affect the weight and rate at which a farmer will take hogs to market. If farmers were to bring more hogs to market at lower weights to save on overall feed costs, this may increase supply and possibly depress prices.

Domestic and International Demand: Like other meats, there are regional and religious preferences which can impact the demands for pork. Certain advertising campaigns can work to increase consumption and any health concerns associated with one type of livestock can possibly result in a substitutive demand for another. Trade agreements and available markets for US exports are also of fundamental interest as well as the recent suggestion that increasing wealth in developing nations also increases the regular consumption of meat. Adverse reactions may exist when topics such as Swine Flu (H1N1) make headlines.

What is up with pork belly prices?

Pork bellies prices are on fire, scaling past all-time highs set during the porcine epidemic diarrhea virus year of 2020. Last Friday, fresh pork belly prices rose 4.5 cents, nearly doubling the cost of the wholesale pork carcass. Market participants and pork producers are enjoying the boost in prices, but remain optimistically cautious about strong prices.

Bacon is a rock star. No one can deny it. It is honestly a household staple. It makes everything taste better. Right?! However, bacon has taken on a whole new role in food establishments in recent years. Pork bellies are on menus from fast food chains to fine dining restaurants. Consumers are devouring handcrafted food items, and pork bellies play nicely into that scene. Chefs are getting creative. Foodies are demanding more. And pork fits well into the scenario.

So, why the fresh high prices for pork bellies? It goes back to the elementary lessons of supply and demand. According to market analysis, pork bellies’ supply is tight. The latest Cold Storage report by the USDA shows stocks of frozen bellies at a record low. Basically, the bacon stash is depleted, and it is time to restock the freezers.

Like all commodity markets, swings in prices are going to happen. What goes up must come down. For now, hog producers and market participants are just enjoying the ride, but hanging on tight.

Nevertheless, just because pork bellies supplies are tight today, it does not mean we are running out of bacon. Do not start that rumor. America’s pig farmers are doing an excellent job of raising more pork this year, as pork production is anticipated to grow by 3-4%. So, no matter if you enjoy bacon the good old fashion way, chocolate-covered or on top for an ice cream sundae, just keep eating it — America’s pig farmers will make more.

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