Lean hogs are the most commonly traded commodity product for gaining investment exposure to whole hog prices.
The importance of lean hogs is directly linked to the massive global pork industry. More people in the world consume pork than any other animal protein. Worldwide consumption of pork products exceeds 100 million metric tons annually and spans across diverse geographies, economies and cultures.
Companies and individuals involved in the production, distribution and sale of pork products use lean hog futures and options as tools for hedging risk. As a result, these financial products occupy a critical role in global food commodity markets.
How Do Farmers Produce Hogs?
Hog production involves three stages:
- Producing and raising young animals
- Feeding the pigs to slaughter weight
- Slaughtering and fabricating products from the animal
Successful production relies on proper animal husbandry techniques and good economic decision-making.
The hog industry has evolved dramatically in recent years as large private and corporate operations have replaced small family farms.
Farms with larger head counts (number of pigs) have at least two economic advantages:
- Lower production costs: Economies of scale allow farmers to feed pigs more efficiently and better utilize their labor.
- Negotiating leverage: Larger farms can enter into better contracts with packing operations – the companies that slaughter, process, pack and distribute hogs – since they can offer packers a more consistent supply of hogs.
Hog production takes place in five stages:
- Gestation and birth
Gilts (young females that have not yet given birth) and sows (mature female breeders) breed twice annually to ensure a steady flow of pigs for the operation.
Operators seek out gilts that show excellent growth, leanness and breeding potential. Farmers purchase boars (sexually mature males) from breeding farms.
Hog breeding takes place in one of three ways:
- Pen mating: One or more boars are placed with a group of sows.
- Hand mating: One boar is placed with one sow or gilt.
- Artificial insemination: A more labor intensive method that allows farmers to control genetics.
Gestation and birth
Female pigs have gestation periods of 4 months and give birth to average litters of 9 -10 pigs. This number has steadily increased in recent years due to improvements in health, genetics and production methods. Traders pay close attention to these yield figures as they determine the future supply of hogs coming to market.
Females wean baby pigs for three to four weeks. After this time, sows are either re-bred or sent to market. During the weaning stage, about 5% of pigs die from suffocation, disease, weather and other factors. Changes to this attrition number can affect supply and hog prices.
Grains including corn, barley, milo, oats, distiller’s grains and wheat comprise the main diet of young pigs. Farmers often supplement the diet with oilseed meals and vitamins.
It takes about six months to raise a pig from birth to slaughter. A barrow (castrated male) or gilt typically gains on average about 1 pound a day during the finishing stages and will weigh about 270 pounds when they are ready for market. Producers usually sell pigs directly to packers.
Packers slaughter the pigs and butcher the carcasses into cuts that they sell to retailers. A typical 270 pound pig will yield a 200 pound carcass with an average of 25% ham, 25% loin, 16% belly, 11% picnic, 5% spareribs and 10% butt. Jowl, lean trim, lard and miscellaneous cuts and trimmings comprise the rest of the production.
Hog operations fall into four categories:
|Type of Hog Operation||Description|
|Farrow-to-Finish||Handle all phases of production from birth to sale of a market-ready hog|
|Farrow-to-Wean||Handle raising pig from birth to weight of about 10 -15 pounds and then sell to a feeder operation|
|Farrow-to-Feeder||Raise hogs from birth to feeder stage (weight of 40 – 60 pounds) and then sell to a finishing operation|
|Finish Only||Handle preparation of pigs prior to slaughter|
Top 10 Pork Producers
|Rank||Flag||Country||Pork Produced per Year (1,000 Metric Tons)|
|#3||United States of America||12,188|
Top 3 Uses of Lean Hogs
|Use of Lean Hog||Description|
|Pork||Ham, pork loins and pork chops and are among the many food products produced from lean hogs.|
|Pharmaceutical Co-Products||Pharmaceuticals rank second to meat in products obtained from lean hogs. The following are a small handful of the pharmaceutical products we obtain from hogs:|
|Industrial Co-Products||Lean hogs make contributions to the production of many industrial products including the following:|
What Drives the Price of Lean Hogs?
Some of the specific factors that move lean hog prices include:
- Feed Prices
The cost of grains and feeds represents more than two-thirds of the production costs of producing pigs.
Historically the price of livestock feed, especially corn, is inversely related to the price of lean hogs. As the price of corn rises, farmers take their hogs to market at lower weights to save on the higher costs. This creates an excess supply of hogs in the marketplace.
Corn is such an integral part of the process of raising pigs that many farmers dependent on lean hog prices will hedge their exposure to corn prices. Traders looking to invest in lean hogs should keep a careful eye on grain markets and the factors that influence grain prices.
Extremely warm weather in the late summer and early fall can make hogs inactive and lessen their desire to mate. This could result in a smaller number of births in the winter months. The reduced supply can translate into higher prices at market in the following summer months when the pigs are taken to market.
On the other hand, cold winter weather can increase the number of births that take place in the spring months. Lean hog traders should pay close attention to weather patterns in key hog production regions.
China is a behemoth when it comes to pork production and consumption. The country produces and consumes about half of the world’s supply of pork products. In addition, China accounts for about 20% of the global supply of pork imports.
As China continues its transformation into a world superpower, it will require more food to feed it growing population. The country will likely increase its volume of pork consumption as its population gets wealthier. Other emerging economies such as Mexico and South Korea may also have greater demand for pork as their economies get stronger.
Pork competes with other animal protein products such as chicken, beef, lamb and fish.
Many factors can impact which of these products consumers choose, but price often plays the biggest role. If pork prices rise, consumers may substitute other animal proteins in their diets.
Other factors that could lead to substitution are the health benefits of the various choices. Hog farmers in the United States have made efforts to reduce the antibiotics used to produce pigs. In addition, the industry has changed the diet fed to pigs in an effort to produce leaner and healthier meat. How the public perceives these benefits can determine demand and price for lean hogs.
3 Reasons You Might Invest in Lean Hogs
Buying lean hogs can be a great addition to an investment portfolio for the following reasons:
- Bet on Demand from China
- Inflation Hedge
- Portfolio Diversification
Bet on Demand from China
Growth in Chinese demand for pork might be the best reason to invest in lean hogs.
The global supply of pork has tightened in recent years as Chinese imports have risen sharply. If these patterns continue, there could be supply shortages and higher lean hog prices.
Of course, the biggest determinant of demand in China will be the economy. However, pork has long been the favored animal protein in the country, and demand elasticity might be less than for other types of meat.
Investing in lean hogs is a way to hedge against the loss of purchasing power from inflation. Livestock is almost certain to become more expensive if the world economy starts to overheat.
Low interest rates from the Federal Reserve and other central banks have produced speculative bubbles in assets ranging from equities to high-yield debt to cryptocurrencies.
Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Lean hog prices could benefit from these conditions.
Investing in lean hogs might be a way to diversify a portion of a portfolio out of stocks and bonds and into commodities.
Should I Invest in Lean Hogs?
Lean hog prices are extremely volatile. Unlike crude oil or gold, the primary traders of the commodity are not speculators, but industry players hedging their risk exposures.
Changes in weather, corn prices and demand from China, among other things, often create huge price swings. For this reason, traders may want to avoid taking large speculative positions in the commodity.
However, traders might want to consider buying a diversified basket of commodities that includes lean hogs.
Investing in a basket of commodities that includes lean hogs, other livestock and poultry, other agricultural commodities, metals and energy can provide a portfolio with protection against inflation. It could also insulate against large movements in individual commodities.
Traders should also consider specifically investing in lean hogs because of the enormous importance of the Chinese market. Investing in lean hogs provides a way to participate in future economic growth in this huge economy.
However, traders should also consider these three risks of investing in lean hogs:
- An economic slowdown in China could seriously limit demand for pork.
- Better hog breeding techniques and animal husbandry practices could create oversupplies of lean hogs.
- Health and environmental concerns could lead to decreases in pork consumption. In particular, hog producers have come under attack from environmental groups for waste and animal cruelty. Changes in perceptions about the industry could dampen demand.
What Do the Experts Think About Lean Hogs?
Pork industry experts are generally very optimistic about the prospects for lean hog prices in the future. Experts cite demand, especially from international sources, as the main catalyst for higher prices.
We’re currently seeing so far this year in 2017, 15 percent more exports of pork, and it’s all going to foreign consumers. Strong demand is how we would explain the situation of more supply but even higher prices.
– Chris Hurt, agricultural economist at Purdue University
Another expert shares this optimism and believes higher beef prices in the United States might fuel more pork demand.
We’re pushing 4 percent more pork this year and 4 percent more pork next year. We’re going to be pushing those per capita offerings over 52 pounds per person [domestically], which is about as high as we’ve ever seen
– Steve Meyer, vice president for EMI Analytics-Pork
How Can I Invest in Lean Hogs?
Investors have several ways to get investment exposure to lean hogs:
Lean Hog Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?|
|Lean Hog Futures||5||N||N||Y||N||Y||Y|
|Lean Hog Options||5||N||N||Y||N||Y||Y|
|Lean Hog ETFs (ETNs)||2||N||N||N||Y||N||Y|
|Lean Hog CFDs||3||N||N||N||N||Y||Y|
Lean Hogs Futures
The Chicago Mercantile Exchange (CME) offers a futures contract that settles into 40,000 pounds (18 metric tons) of lean hogs.
The contract trades globally on the CME Globex electronic trading platform and has a variety of expiration months and cycles.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, lean hog contracts are financially settled.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Lean Hogs Options on Futures
The CME offers an options contract on lean hog futures.
Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium for each contract. An options bet succeeds only if the price of lean hogs futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in lean hog futures to profit from their trades.
Lean Hogs ETFs
These financial instruments trade as shares on exchanges in the same way that stocks do.
There is one ETF that trades in London and invests in lean hogs:
- ETFS Lean Hogs –
There are three US ETFs that invest generally in livestock:
Top 3 Livestock ETFs
|iPath Bloomberg Livestock Total Return||E-TRACS UBS Bloomberg Livestock Commodity Total Return||iPath Pure Beta Livestock ETN|
Shares of Lean Hogs Companies
There is no adequate way to get pure-play exposure to lean hog prices through the equity market. Most ranches that raise lean hogs are privately owned or part of big public companies that engage in other activities. Investors seeking exposure are better off looking to ETFs that invest in futures than to equities.
A popular way to invest in lean hogs is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of lean hogs. The value of a CFD is the difference between the price of lean hogs at the time of purchase and its current price.
Many regulated brokers worldwide offer CFDs on lean hogs. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to lean hog prices without having to purchase shares, ETFs, futures or options.
One of the leading brokers for trading agricultural commodity CFDs is Plus 500. Here’s why:
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade hundreds of CFDs
- Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.