By Noble Drakoln

Any discussion on pork belly futures invariably involves the history and ultimate domestication of pigs in the U.S. Whether you call them pigs, hogs or razorbacks, wild boar are considered to be the first domesticated livestock, and their domestication can be traced as far back as 9,000 years. Originally, they were thought to have been initially domesticated in Eastern Turkey; however, new research shows that pig domestication may have occurred independently in several regions around the world.

America's pig farming can be traced back directly to Queen Isabella of Spain. At her prompting, Christopher Columbus brought pigs on his journey to the New World, setting a precedent for other explorers to follow suit. One of them, Hernando de Soto, became well-known for growing his livestock from a mere 13 pigs to more than 700 pigs in just three years. From this humble beginning, the pig industry began.

Cured pork belly (also known as bacon) evolved as a way to preserve the meat after slaughter. Pork belly is the result of harvesting both bellies from a pig, salting or smoking them, and refrigerating them. The pork industry's growth was fueled by the demand for pork bellies as the rail system in the U.S. improved. At the same time, the country's population and economy shifted from rural to urban, bringing a taste for pork belly to the cities. Considered a longer lasting and easier way to transport pork with little to no perishing, pork bellies became a staple in the American diet. With the increased production and distribution of pork bellies, the first pork belly commodities contract was created in 1961 by the Chicago Mercantile Exchange (CME). (Find out how to trade these hog-wild commodities, in Learn To Corral The Meat Markets.)

A sample commodity futures contract for pork belly is shown in the following table.

Pork Belly Contract Specifications
Ticker Symbol Open Outcry: PB (CME)
Electronic: GPB (Globex)
Contract Size 40,000 pounds
Deliverable Grades Green Square-Cut Clear Seedless bellies from a federally inspected packing plant. Each belly must bear a United States Department of Agriculture (USDA) Food Safety and Inspection Service Inspection legend, except if the belly has been exempted by the USDA from this requirement.
Contract Months Feb, March, May, July, Aug
Trading Hours CME Open Outcry: Monday-Friday
CME Globex electronic: Monday-Thursday 5
Last Trading Day Third to last business day of the contract month
Last Delivery Day Last business day of the contract month.
Price Quote Cents per pound
Tick Size 1 point = $.0001 per pound = $4
Daily Price Limit
(Not applicable in electronic markets)
2, 3 or 4.5 cents, expandable price limits

Understanding Pork Belly Contracts
Like every commodity, pork belly has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a pork belly futures contract, you will see a ticker tape handle that looks like this:

PB8Q @ 70.575

This is just like saying "Pork Belly (PB) 2008 (8) August (Q) at $.70575/pound (70.575)." A trader buys or sells a pork belly contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the pork belly contract equals the equivalent of 40,000 pounds multiplied by our hypothetical price of $70.575, as in:

$.70575 x 40,000 pounds= $28,230

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a pork belly contract on the CME requires a margin of $1,620, which is approximately 6% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a pork belly contract, a .00025 cent move is equal to $10 and a .0001 move is equal to $4. When determining CME's pork belly profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $4. For example, if prices move from $70.575 to $73.650, you multiply the difference, which is $3.075, by $4 to yield a contract value change of $1,230.

- Buy Sell Total Value
Price belly Contract Price (.0001 cent move = $4) $.70575 $.73650 307.5 cents or $1,230

Pork belly Exchanges
The futures contract for pork belly is traded on the Chicago Mercantile Exchange (CME) and the Dalian Commodity Exchange (DCE).

Facts About Production
Pigs are slaughtered at about six to seven months, weighing an average of 255 U.S pounds. The pork belly is derived from the pig's two bellies, which represents 12% of the pig's total weight. Each frozen pork belly weighs approximately 13 pounds.To gain those 13 pounds of belly, a pig eats about 12 bushels of corn plus 130 pounds of soybean meal.

While pigs produce more than just pork bellies, the interrelationship between pork belly prices and grains prices is undeniable. Pork production is highly dependent on feed; based on some calculations, feed represents 65% or more of total production costs. In 2004, over 1 billion bushels of corn were used to fatten pigs for slaughter. This has often led to grain prices preceding a higher price move in pork belly futures.

The pork industry has seen tremendous growth worldwide - more exports are heading to China and Japan than ever before. Pork has long been considered the leading consumed meat in the world, and the pork industry saw 105 million pigs go to slaughter in 2006, plus a doubling in export demand in 2007. With much of the pork heading overseas to fulfill growing demand, the industry's continued growth appears healthy.

Factors That Influence Pork Belly's Price
The price of pork belly is influenced by the following factors:
  • Without question, pork is the premier meat consumed in the world. Demand is projected to increase, with the U.S. at the forefront.
  • China's Dalian Commodities Exchange has developed a pork belly futures contract to account for the tremendous pork production occurring in China.
  • China's pork industry production is barely running at a net positive, which has led to an increase in demand for imports to satisfy any potential future shortfall. In 2007, pork production reached 55.8 million tons while pork consumption reached 55.3 million tons. This barely left 500,000 tons for storage carryover into 2008.
Conclusion
Pork bellies are easy to transport, can be preserved nearly indefinitely with proper refrigeration, and are a byproduct of the most popular meat in the world. Needless to say, pork bellies are commodities that will always have a supply and demand chain. China's continued urbanization presents an opportunity for explosive growth in pork product demand, much like the migration from rural to urban life in the U.S. spurred the domestic popularity of pork bellies.

Next: Commodities: Rough Rice »



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