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.
Pork bellies serve for production of bacon and are offered in frozen form. The trade with pork bellies decreased during the last years extremely heavily. The futures-turnovers only claim 10 % compared to the marks during the 1980’s.
Influence-factors of the supply- and demand side as well as the price development are to find at the base product. The demand for hog meat increases during the summer-months which tendentially leads to higher rates from spring. 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. However, the end consumer’s respective demand behavior can be steered through the storage of frozen pork bellies. 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.
The Chicago Mercantile Exchange (CME) began trading Frozen Pork Belly futures in 1961 – the first futures contract based on frozen, stored meats. Trading in Frozen Pork Belly contracts was developed as a risk management device to meet the needs of meat packers who processed pork and had to contend with volatile hog prices as well as price risks on processed products held in inventory. Thus, the futures contract was designed to help processors and warehouse operators manage these price risks. The Frozen Pork Belly futures contract performs the same two primary functions common to many futures contracts – that of guiding inventories and establishing forward pricing.
Most important trading place for pork bellies is the CME. The quotation takes place in U.S. Cent per American pound (lb.), whereby a contract comprises 40,000 lbs. The tick-size is 0.00025 U.S. Dollar/lb. (10 U.S. Dollar/contract).
Most important stock exchange centers: CME (Chicago Mercantile Exchange)
Contract-cycles: February, March, May, July, August.
Contract-size: 40,000 lbs.
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