Pigs can be purchased in two ways: as a lean hog futures contract (which is a contract for the hog’s carcass) or as pork bellies (traders’ slang for “bacon”).
So, what exactly are hog futures?
Derrell Peel of Oklahoma State University and Ronald Plain of the University of Missouri served as reviewers.
If a pig producer is unfamiliar with futures markets and hedging, he or she may have a lot of questions about how to use this pricing instrument. But the most fundamental question is why would you want to learn about futures markets? To put it another way, why do manufacturers hedge? To respond to this question, you must first define futures markets and hedging. A hog futures market determines the price of hogs that will not be delivered until a later date. Hedging is when a producer utilizes the futures market to forward-price pigs before delivery. Forward-pricing pigs is done for two reasons. For starters, the producer might believe that current futures market prices are greater than cash prices when the hogs are ready to be delivered. Second, even if cash prices are greater at delivery time, a manufacturer may be unable or unwilling to take the risks of prices lower than the present futures price.
What is the best way to trade lean hogs?
Through the equities market, there is no adequate way to get pure-play exposure to lean hog prices. The majority of lean hog farms are privately held or part of larger public enterprises that do other things.
Traders seeking exposure should go to ETFs that invest in futures rather than stocks.
Contracts for Difference (CFDs)
The use of a contract for difference (CFD) derivative instrument is a common approach to trade lean pigs. Traders can bet on the price of lean hogs using CFDs instead of holding the underlying commodities. The difference between the price of lean hogs at the time of purchase and the current price is the value of a CFD.
CFDs on lean hogs are available from a number of regulated brokers throughout the world. Customers make a deposit with the broker to serve as margin. CFDs offer traders the ability to gain exposure to lean hog pricing without having to buy shares, ETFs, futures, or options.
Why are the prices of hog futures so high?
Despite a recent drop in grain prices, corn and soybean prices remain at levels not seen in years.
As a result, animal farmers, notably pork producers, are faced with difficult decisions.
The numbers appear to be promising. According to the current Sterling Profit Tracker, farrow to finish farmers are expecting average profits of $94 per head. While it is still in the positive, it has dropped from last week’s $107 in potential profits. However, the current Profit Tracker is an improvement over the minus $51 per head that producers were experiencing at this time last year, when processing capacity was experiencing substantial constraints.
“Obviously, grain costs are increasing as well,” Amanda Adam, a pork producer in Washington County, Iowa, says. “As a result, the margins are still different than if grain prices were back in the $3 or $4 level.”
Is there an ETF for livestock?
Agricultural commodities exchange-traded funds (ETFs) are funds that invest in firms that produce agricultural products like grains, dairy, and animals. These funds might invest in a variety of commodities or concentrate on a single one.
What is the stock of Lean Hogs?
Lean Hog is a futures contract for hogs (pork) that can be used to hedge and speculate on pork prices.
The Chicago Mercantile Exchange (CME) is where Lean Hog futures and options are traded. Lean Hog futures contracts were first established in 1966. The contracts call for cash settlement based on the CME Lean Hog Index, which is a two-day weighted average of cash markets, and are for 40,000 pounds of Lean Hogs. The contract’s minimum tick size is $0.025 per pound, with each tick worth $10 USD. Price limits of $0.0375 per pound above or below the previous day’s contract settlement price apply to trading on the contract, with the exception that there are no daily price limits in the expiration month contract during the last two Trading Days.
Pork farmers in the United States frequently utilize lean hog futures prices as reference pricing in marketing contracts for selling their hogs. The use of marketing contracts tied to pork futures prices is correlated with the size of the producer and tends to increase. Furthermore, as part of a risk management strategy, hog producers frequently trade pork futures contracts directly.
Both the Bloomberg Commodities Index and the S&P GSCI commodity index, which are widely tracked in financial markets by traders and institutional investors, include Lean Hog futures prices. Because of its prominence in various commodity indices, Lean Hog futures prices have a significant impact on the results of a variety of investment funds and portfolios. Traders and investors, on the other hand, have become important players in the Lean Hog futures market.
As livestock futures contracts, lean hog futures contracts are sometimes lumped in with feeder cattle and live cattle futures contracts. Long feeding times, weather, feed prices, and consumer mood toward meat consumption are all fundamental demand and supply issues shared by these commodities, making grouping them together valuable for commercial talks regarding both the commodities and their futures contracts. This technique has been followed by commodity indices, which have categorized these futures contracts into livestock futures contract groups.
What are futures on orange juice?
The FCOJ-A futures contract is the global frozen concentrated orange juice market’s benchmark contract. The contract specifies the price of physical delivery of US Grade A juice (graded by the US Department of Agriculture) in exchangelicensed warehouses around the United States. The United States, Brazil, Costa Rica, and Mexico are among the permitted countries of origin.
In trade, what are futures?
Futures are a sort of derivative contract in which the buyer and seller agree to buy or sell a specified commodity asset or security at a predetermined price at a future date. Futures contracts, or simply “futures,” are traded on futures exchanges such as the CME Group and require a futures-approved brokerage account.
A futures contract, like an options contract, involves both a buyer and a seller. When a futures contract expires, the buyer is bound to acquire and receive the underlying asset, and the seller of the futures contract is obligated to provide and deliver the underlying item, unlike options, which can become worthless upon expiration.
What is the hog market like?
In September, the average live price for 51-52 percent lean pigs was $68.84/cwt, down for the third month in a row. Prices were $9.75 lower than the previous month, but $20.43 higher than September 2020. In 2020, the 51-52 percent lean live hog price averaged $43.18/cwt, according to the USDA. This year’s average price is expected to be around $69.45/cwt, with a 2022 average of roughly $61.00/cwt.
Will prices remain higher than they were a year ago in fall? There are a number of reasons to believe that they will.
First and foremost, considering that weekly hog slaughter has consistently been below the year-ago level since the end of May, the speed with which this year’s hog price decrease has occurred is remarkable.
The USDA’s September report “According to the “Hogs and Pigs” report, inventory of market hogs weighing 180 pounds or more was down 1.3 percent, while inventory of hogs from 120 to 179 pounds was down 1.42 percent. This meant that hog killing should have decreased by 1.35 percent since September 1. It has actually dropped 2.84 percent. We either missed the slaughter deadline or USDA underestimated the heavy-weight market hog inventory. My guess is that it’s the latter.
According to USDA, the inventory of 50-119 pounders was down 6.04 percent on September 1, and the inventory of under 50 pounders was down 5.57 percent. This means November slaughter will be 2.34 percent lower, December 6.04 percent lower, and January-February slaughter will be 5.57 percent lower. If winter hog slaughter is so low, hog prices should see a significant increase.
Pork is a commodity that consumers are ready to pay a premium for. For the sixth month in a row, retail pork prices hit new highs in September. In September, the average price of a pound of pork in grocery stores was $4.716. This was 6.6 cents higher than August and 66.3 cents higher than September 2020. These all-time high pork prices are a little deceiving. Although September retail pork prices were 16.4 percent higher than last year, the nominal September price was just 10.4 percent higher due to higher inflation. According to preliminary data, per capita pork supply was reduced in September, implying a higher pork price.
On the downside, following the September market, some lean hog futures contracts were limit up “Hogs and Pigs” report, but have since relinquished all of their gains. Before the report was released, the December 2021 contract closed at $76.80/cwt. During the next two trading sessions, that contract earned $6.775. December hogs ended at $73.32/cwt. on Friday, $3.48 lower than the pre-release price.
The February hog market settled at $76.625/cwt on Friday. Contracts for the months of June, July, and August 2022 all closed above $89.00/cwt. The December 2022 contract finished at $70.25 per cwt, $3.07 lower than the closest contract. The futures prices suggest that in 2022, prices will follow an usual seasonal trend, with a lower average than this year.
Retail pork demand was strong from January through April, but has since slowed. The demand for pork from the United States has been strong all year.
Pork exports in the United States were down 0.2 percent in August compared to the same month previous year, while pork imports were up 22.0 percent. Exports accounted for 26.7 percent of total pork production from January to August, while imports accounted for 3.9 percent. Variety meats are not included.
Pork from numerous nations, including Canada, Mexico, Italy, and Hungary, has increased imports to the United States. Exports have remained stable, with more pork going to Mexico, the Philippines, Japan, and Colombia than to China.