Pork Bellies Trading Defined and Explained
Pork bellies refer to the cut of pork meat obtained from the underside of a hog carcass used for bacon. Frozen pork belly futures contracts (bacon in storage) are influenced by factors that affect the supply and demand for hogs, other pork products and competing meats. Trading Frozen pork belly futures contracts perform the same two primary functions common to many futures contracts guiding inventories and establishing forward pricing.
Frozen Pork Bellies Futures Investing
The pork bellies market is not for the faint of heart unless you have the benefit of either deep pockets or knowledge of the industry. Trading in frozen pork bellies contracts developed as a risk management device to meet the needs of meat packers and meat distributors who have to contend with volatile hog price swings.
Frozen Pork Bellies Prices & Rates
- A frozen pork belly futures contract consists of 40,000 pounds of frozen pork bellies, cut and trimmed, where 1 point = $.0001 per pound ($4.00).
- Historically, wide price swings are not unusual in trading pork belly futures; where trading has been accentuated by speculative interests in the past but do not trade in the large size volume as they once did.
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Frozen Pork Bellies Trading Strategy
There are definite seasonality aspects for pork bellies production and trading. Pork bellies are storable, and the movement into cold storage builds early in the calendar year, peaking about mid-year. Net withdrawals from storage then carry stocks to a low around October. There is no pork belly futures contract for the months between August and February because storage is not a large factor during that period. Demand for pork products in general tends to increase around the winter and Easter holiday season, and no matter what production practices are used, this seasonal demand by consumers still affects the pace of hog slaughter and both cash and futures pricing of pork including pork bellies. Although management methods have improved to keep a constant, year-round supply of hogs, demand side factors still play an important role in pricing in the hog industry. Few commodities offer the profit potential and market action of trading frozen pork belly futures. However, with great profit opportunity often comes risk, and the trading of frozen pork belly futures remains the domain of aggressive, highly speculative individual traders.
Frozen Pork Bellies Major Indicators and indices
Frozen pork bellies are traded at CME Group with five monthly contracts February, March, May, July and August. The last day of frozen pork bellies trading is the first Friday of the delivery month of the underlying futures contract. Reviewing the factors that can affect the final number of hogs slaughtered demonstrates that the quarterly Hogs and Pigs report from the U.S. Department of Agriculture is not a perfect predictor of hog slaughter nor pork belly storage figures. Other factors are not easily quantifiable, such as producer behavior or weather, which also influence hog slaughter.
Frozen Pork Bellies Trading Information
Traders can obtain information regarding hog pricing and trends, depending on the stage in the pipeline they are studying. This data can be obtained from the monthly Livestock Slaughter report published by USDAs National Agriculture Statistical Service, which provides statistics on total hog slaughter by head, average live and dressed weight in commercial plants by state and in the U.S., information about federally inspected hogs, and additional slaughter data. Finally, frozen pork bellies traders can get information in reports published by USDAs Economic Research Service (ERS), including Livestock, Dairy and Poultry Situation and Outlook and Red Meat Yearbook, which provides data on imports and exports and offers monthly, quarterly, and yearly statistics separated out by selected countries on a carcass weight and live animal basis. CME Group also provides seasonal pork bellies pattern and weekly continuation charts.
Frozen Pork Bellies Trading Tips
Frozen pork bellies future trading can involve sharp daily price movements and, therefore, pose a risk to your trading capital. Those involved in pork belly futures trading should be fully aware of this prior to executing even their first trade. The frozen pork bellies trading arena may be best suited for those with a working knowledge of the hog industry or those with sufficient capital to withstand substantial price fluctuations. As a leveraged investment requiring that only a small percentage of the contracts value be posted as a performance bond, frozen pork bellies futures can lose more than the amount of money deposited for the futures position! Therefore, traders should only use funds that they can afford to lose without affecting their lifestyle
Frozen Pork Bellies Trading History
When the public thinks of commodity trading, pork belly futures often come to mind because of attention they received in media reports. In 1961 the CME pork belly contract became the first futures contract based on frozen, stored meats. Chicago Mercantile Exchange, which was established in 1919 as the successor to the Butter and Egg Board that had been established in 1898, later added live cattle and hog futures contracts and then moved from physical pork bellies and livestock contracts into what were described as pork bellies in pinstripes stock index futures and options.