Lean Hogs Futures and Commodities
Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices, the futures often attract plenty of speculative positions.
Some important characteristics of the lean hog futures contract are as follows:
- Ticker Symbol: LH
- Exchange: CME
- Trading Hours: 10:05 a.m. to 2:00 PM EST
- Contract Size: 40,000 pounds
- Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
- Price Quote: price per pound
- Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
- Last Trading Day: The tenth business day of the contract month
Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world's largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.
A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).
Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year prior to processing. The contract was discontinued due to a lack of liquidity.
Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.
The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.
One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.
The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.
Developments Over Recent Years
Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.
In 2014, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2016, the price of lean hog futures moved back to the 60 cents per pound level.
In 2013, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.
With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.
The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.