Market Spotlight: Lean Hogs

Hogs are generally bred twice a year in a continuous cycle designed to provide a steady flow of production. The gestation period for hogs is 3-1/2 months and the average litter size is 9 pigs. The pigs are weaned at 3-4 weeks of age. The pigs are then fed so as to maximize weight gain. The feed consists primarily of grains such as corn, barley, milo, oats, and wheat. Protein is added from oilseed meals. The time from birth to slaughter is typically 6 months. Hogs are ready for slaughter at about 254 pounds, producing a dressed carcass weight of around 190 pounds and an average 88.6 pounds of lean meat.

The world’s largest pork producers are China with 49% of world production in 2011, the European Union with 22%, and the U.S. with 10%. The world’s largest pork exporters are the U.S. with 34% of world exports in 2011, the European Union with 30%, Canada with 18%, and Brazil with 9%.The world’s largest pork importers are Japan, which accounted for 19% of world imports in 2011, Russia (15%), Mexico (10%), South Korea (10%), and China (9%).

When dealing with pork prices, it is important to understand both the supply and demand influences. The factors among the supply side are the production cost, such as cost of feed. The factors among the demand side are personal income, price changes in alternatives meats such as beef and chicken, and population increases. Prices can be affected by disease. In 2011, South Korea increased imports after it culled 25% of its hog herd from foot-and-mouth disease.

In 1966, the Chicago Mercantile Exchange introduced the futures contract on Lean Hogs, providing a way to engage in price discovery for the lean hog marketplace. Lean Hogs futures provide a way to effectively manage the price risk that merchandisers, producers, processors and others have related to the purchase or sale of lean hogs. In addition, traders can take advantage of the arbitrage and spread opportunities with other related meats and grains.

The pit Lean Hogs futures contract trades on the floor from 9:05 AM CT to 1:00 PM CT, Monday through Friday. The electronic futures contract, on Globex, trades side-by-side with the pit contract. In addition, trades extended hours electronically from 5:00 PM CT to 4:00 PM CT, Monday through Thursday. On Friday afternoon, the electronic futures contract closes at 1:55 PM CT.

One Lean Hogs futures contract is 40,000 pounds or approximately 18 metric tons. The previous settlement price (August 15, 2012) for October 2012 Lean Hog futures was 75.600 or $30,240 per contract.

The performance bond or initial margin requirement to initiate one futures contract is 4.69% or $1,418 (as of August 14, 2012). To control that futures contract going forward the maintenance margin becomes 3.47% or $1,050 (as of August 14, 2012).

One futures contract price increment is $.00025 per pound. A one “tick” move is $10.00. The next tick after 75.600 downward is 75.575, followed by 75.550. Therefore a one point move, from 75.600 to 74.600, would be $400.

The Daily Price limit is $.03 per pound above or below the previous day’s settlement price. For example, the Daily Price Limit to the upside for the Thursday, August 16 trading session would be 72.600.

The futures contract month listings are February (G), April (J), May, (K), June (M), July (N), August (Q), October (V), and December (Z).

The futures contract’s Last Trading Date (LTD) is the tenth business day of the contract month at 12:00 PM CT. The October 2012 Live Cattle futures contract LTD is October 12, 2012 for example. There is no First Notice Day (FND) for Lean Hogs. Lean Hogs are cash settled at expiration.

The GBE Trade Spotlight recommends selling the Lean Hogs futures contract. Consult the advisory service for the complete trading plan.

Visit our Markets section for additional contract specifications and market information regarding the Lean Hogs futures market.

*Source cmegroup.com