Futures contracts for lean hogs are critical hedging tools for the pork industry due to the volatility of hog prices. Trading these contracts often attracts many speculative positions. The term “lean hog” is another term for “pork” that is traded on the Chicago Mercantile Exchange (CME) futures and options exchanges.
Contract Specifications
Some important characteristics of the lean hog futures contract are as follows:
- Contract symbol: LH
- Exchange: CME
- Trading hours: 9:30 AM to 2:05 PM Eastern Time
- Contract size: 40,000 pounds
- Contract months: February, April, May, June, July, August, October, and December
- Price quote: Cents per pound
- Tick size: $0.00025 per pound = $10
- Last trading day: The 10th day of the contract month
Fundamentals
Most hog production takes place in the Midwest. Iowa, Minnesota, and North Carolina are the largest hog-producing states. The United States is the largest exporter of pork in the world. It typically takes six months to raise a hog from birth to slaughter. Hogs are usually ready for market or slaughter when they weigh about 280 pounds.
A market-ready hog weighing 280 pounds typically yields about 140 pounds of packaged bone-in meat. This meat consists of an average of 35 pounds of smoked ham, 35 pounds of bacon, 29 pounds of ribs and loin meat, and 14 pounds of pork loin.
Pork bellies, which were previously traded on the Chicago Mercantile Exchange, are primarily used to make bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to lack of liquidity.
Seasonal factors indicate that hog prices tend to rise from May to July, which is the primary grilling season in the United States.
Corn and Hogs
Corn prices are closely correlated with lean hog futures because hogs are fed corn. If corn prices rise significantly, farmers tend to sell their hogs at lighter weights (smaller) to avoid high feed costs. During these times, the price of lean hog futures typically declines due to increased supply.
One can estimate future hog production by monitoring the hogs and pigs report. When the number of piglets is down from previous quarters, it is likely that hog production will be lower six months later when they are ready for market.
Reports
The hogs and pigs report is issued quarterly. The hog report provides data on hog inventory in the United States, including stock numbers and weights. It highlights current supply and projected future supply. The CME lean hog index is a two-day weighted average of cash prices.
Developments Over Recent Years
Pork is considered one of the main animal protein sources worldwide. Over recent years, the lean hog futures market has experienced a lot of price volatility.
On March 18, 2014, lean hog futures reached an all-time high of over $1.33 per pound when the porcine epidemic diarrhea virus (PEDv) led to the death of over seven million baby pigs, resulting in a pork shortage and significantly increasing animal protein prices. Effective vaccinations have prevented further outbreaks of PEDv. In the summer of 2016, the price of lean hog futures fell to 60 cents per pound.
In 2013, a Chinese company acquired Smithfield Foods, the largest pork processing company in the United States. Despite some opposition, the sale was eventually approved by Congress, and now China controls a significant portion of the pork market in the United States and globally.
Purchase
Smithfield Foods is another example of China’s appetite for commodity resources around the world. Pork is a vital animal protein and an essential part of the diet for many people.
The world’s population is growing massively, and competition for food will continue to undermine the fundamentals of fattening pigs and other foods when supply shortages occur. Demographics are likely to cause a new spike in food markets during periods of shortage.
Source: https://www.thebalancemoney.com/lean-hogs-profile-809279
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