In our most recent article about the Risk Management Puzzle, we outlined what you need to develop a solid risk management strategy. We noted that whether you are a producer or consumer, exposure in hogs and other meats can be challenging. That’s where Cargill Risk Management can help by offering an over-the-counter (OTC) marketplace for meats.
In addition to the OTC opportunity, which you could take advantage of right now, the CME is expected to launch a new pork belly contract in 2020 that is based on the price risk that buyers and sellers face.
Quick history lesson about the pork belly contract
1961: Pork bellies started trading on the Chicago Mercantile Exchange in 1961. The unit of the commodity was 20 tons of frozen, trimmed bellies. They were flash frozen and could be held for an extended time in storage.
2011: Even with a little star power – the contract was depicted in the 1983 film Trading Spaces, starring Eddie Murphy – the contract was delisted in 2011. Food companies had started purchasing chilled pork bellies versus frozen, which reduced open interest to almost nothing.
2019: A revised version of the pork belly contract is back. A weekly bacon price will be set each Monday, and the index will “reflect the value of one load, or 40,000 pounds (18 metric tons), of fresh skinless pork bellies in cents per pound.”*
What is a pork belly and why should you care?
What is a pork belly, you may ask? A pork belly is the cut used to make bacon. Your second question may be – why should I care about the pork belly contract? It’s a fair question. Here’s why: there has been an increase in wholesale prices due to volatility caused by consumer demand, African Swine Fever (ASF) decimating hog herds in China and the U.S.-China trade war. See the chart below for a look at prices and read our first article in this series to learn more about ASF.
Here are few other reasons that bacon may be a good addition to the menu:
- 40 million pounds = the amount of excess, uneaten bacon the U.S. is sitting on – a 48-year high – according to data released by the U.S. Department of Agriculture*
- 99% = the amount pork belly growth is expected to outperform other food and beverage ingredients in the next four years
- 84% = the amount bacon growth is expected to outperform other food and beverage ingredients in the next four years
- 70% = the percentage of menus where bacon is found
- 42% = the percentage of consumer who claim to eat bacon multiple times per month*
All of this means is that there’s a potential new market for you to explore in this space, as niche contracts like this can offer interesting opportunities for producers and consumers. The majority of the volatility has been in this area versus other pork contracts, which may help increase margins. Here’s another interesting fact: according to June United States Department of Agriculture (USDA) data, the U.S. exported twice as many pork products this year as in the previous year. If you are a producer or consumer of pork, that’s a stat you should keep an eye on, since you don’t want to be caught six to 12 months down the road without a plan.
The pork belly contract will not be in place for a few months, but Cargill Risk Management is here to help now and in the future. We provide a variety of over-the-counter (OTC) hedging solutions that can be tailored to your specific needs – whether it’s in pork bellies, live cattle or corn.
CME Group, file:///C:/Users/k799156/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/DX89S3NP/2019%20Bacon%20Stakeholder%20Meeting%20(002).pdf