Lean Hogs Futures and Commodities

Lean hog futures are critical hedging instruments for the pork industry because of the volatility of hog prices. Trading in these futures often attracts plenty of speculative positions. "Lean hog" is another term for "pork" that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

• Ticker Symbol: LH
• Exchange: CME
• Trading Hours: 9:30 a.m. to 2:05 p.m. ET
• Contract Size: 40,000 pounds
• Contract Months: February, April, May, June, July, August, October, and December
• Price Quote: U.S. cents per pound
• Tick Size: $0.00025 per pound = $10.00
• Last Trading Day: The 10th business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog-producing states are Iowa, Minnesota, and North Carolina. 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 280 pounds.

A market hog with a live weight of 280 pounds will typically yield around 140 pounds of bone-in retail cuts. This meat consists of an average of 35 pounds of ham, 35 pounds of loin, 29 pounds of spareribs and bacon, and 14 pounds of Boston butt roast.

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 before processing. The contract was discontinued due to a lack of liquidity.

Corn and Hogs

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.

Reports

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.

On March 18, 2014, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea virus or PEDv 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 the summer of 2016, the price of lean hog futures moved back to the 60 cents per pound level.

In 2013, a Chinese company 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.

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.