The livestock farming raw material products belong to the group of agricultural commodities. Trading with pork-products at the futures exchange markets takes place in form of living animals (lean hogs) and in the form of pork bellies.
Lean hogs are killable hogs at an age of about half a year and a weight of 220 to 240 lbs. (= 99.8 – 108.9 kg). A contract comprises 40,000 lbs. (18.14 tons), which matches about 165 animals.
Livestock producers face a great deal of risk. One is uncertain weather, which affects feed costs (like corn, cereals), the availability of feed and forage, rates of gain, conception rates, survivability of young animals, and shipment. All these components affect the price of a futures contract. Another risk (and one more component which can affect the contract-price) is the constant threat of disease and epidemics (such as BSE, hog cholera, bird flue) which impinge not only on the affected meat-group, but also create a mutual substitution effect on all kinds of meat. Livestock producers know that staying on top of animal health requires the best management in agriculture. Producers have managed such production risk with top-notch husbandry practices. But no amount of husbandry can address market risk – the uncertainty of prices at market time, owing to shifting supply and demand factors. That’s where the futures market comes in.
Chicago Mercantile Exchange (CME) live hog futures were introduced in 1966 and have undergone considerable improvements over time, including a new name – lean hogs – that became effective in February 1997. Along with a new name, new and improved specifications make this contract an even more viable hedging tool for producers and packers throughout the United States. The new cash settlement feature also makes the lean hog futures contract a viable hedging tool for international producers and pork importers/exporters.
Contrary to the storage of deep-frozen pork bellies or compared to the cattle-market, the breeders have fewer options at command to react on price fluctuations at which they kill the hogs some months earlier or later.
92 million tons of pork meat are produced worldwide per year. Most important producer is the People’s Republic of China with almost 50 %. Biggest exporter however is the EU, followed by Canada and the U.S.A. Most important import-country is Japan, followed by the U.S.A., Russia and Mexico.
Lean hog futures are traded at the Chicago Mercantile Exchange (CME). The quotation takes place in U.S. Cent per American pound (lb.), whereby a contract comprises 40,000 lbs. The daily price-fluctuations are provided with a limit of 2 Cents – upwards as well as downwards – in comparison to the closing call from the day before. The stock exchange can expand the margin under specific circumstances. Speculators can trade hog futures in hopes of profiting from changes in the price of hogs.
Most important stock exchange centers: CME
Contract-cycles: February, April, May, June, July, August, October, December.
Contract-size: 40,000 lbs.
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