Why Are Pork Bellies Valuable?
Pork bellies are cuts of meat taken from the pig’s stomach. The high fat content of this cut makes it ideal for producing bacon.
Pork bellies have a long and storied tradition in financial markets. In 1961, their commoditization ushered in the first livestock trading markets on the Chicago Mercantile Exchange (CME). Over the years, they attracted a wide following from market analysts and traders eager to try to profit from the ups and downs of this niche market.
In 2011, the CME announced the end of pork bellies trading on its exchange. Extreme volatility coupled with dwindling trader interest made the product no longer relevant to financial markets.
However, pork bellies and bacon remain dietary staples for many people around the world, and demand for these products remains robust. For this reason, prices for pork bellies still influence global commodity markets.
Why Did Pork Bellies Become a Commodity?
The market for pork bellies started as a result of Americans’ love affair with bacon.
Before the advent of a transparent futures market for pork bellies, pork manufacturers experienced wild swings in their cost of producing bacon. The reason for this volatility was the seasonal nature of bacon demand in the United States in the 1950s and 1960s.
Although hog farms produced a steady supply of pork year-round, demand for particular cuts of pork varied by the calendar. In the hot summer months, Americans grilled more foods and used bacon as a topping on items ranging from summer salads to hamburgers. In the cold winter months, demand for bacon declined.
Pork producers aware of these seasonal fluctuations began buying, freezing and warehousing pork bellies. The idea was to smooth out their production costs and make their profits more predictable.
Since pork bellies can be frozen for up to a year, the idea made economic sense. Not only could pork manufacturers insulate themselves from seasonal fluctuations in bacon demand, they also could protect against other supply shocks such as declines in hog production.
Ultimately, the growing interest in buying and selling pork bellies ushered in the pork belly futures contract on the CME.
Traders looking to capitalize on arbitrage opportunities began trading contracts to buy and sell standardized lots of pork bellies in the future. A standard lot consisted of a 40,000-pound frozen slab made up of eight- to 18-pound individual cuts. These standardized contracts provided traders, slaughterhouses and manufacturers with a transparent market for pricing pork bellies and conducting business.
Over the years, the seasonal patterns of bacon consumption became less pronounced. Americans began consuming more bacon year-round for a variety of reasons:
- Migration and demographic shifts resulted in more Americans moving south to states with less extreme seasonal weather differences.
- The fast-growing Latino population in the United States has fueled year-round demand for pork products including bacon.
- Americans are dining out more and the food service industry is supplying more recipes with pork bellies.
- The Pork Board, a leading industry group, is promoting consumption of a variety of cuts of pork including pork bellies.
- The growing popularity of Asian foods such as banh mi has created demand for pork bellies.
The unpredictability of seasonal bacon demand may have contributed to excessive volatility and dwindling interest in the CME pork bellies futures contract. However, overall pork belly demand is greater than ever, and pork producers still need to purchase the commodity to satisfy consumer demand.
How Are Pork Bellies Produced?
The production of pork bellies begins on hog farms that raise the animals for food. Modern hog farms have evolved dramatically in recent year as large private and corporate operations have replaced small family farms. The advantages of these mega-farms are two-fold:
- Lower production costs: Economies of scale allow farmers to feed pigs more efficiently and better utilize their labor. This results in more affordable cuts of pork for food manufacturers.
- Negotiating leverage: Larger farms can enter into better contracts with packing operations – the companies that slaughter, process, pack and distribute cuts of meat such as pork bellies. Packers are usually willing to pay more for hogs if a farmer can offer a consistent supply of the animals.
It takes about six months to raise a pig from birth to slaughter. At the time of slaughter, a typical hog weighs about 270 pounds.
Packing facilities purchase whole hogs from hog farms, slaughter them and process them into a variety of cuts of meat, which they sell to retailers. A typical 270-pound hog will yield a 200-pound carcass with an average of 25% ham, 25% loin, 16% belly, 11% picnic, 5% spareribs and 10% butt.
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 Pork Bellies
|Uses of Pork Bellies||Description|
|Bacon||This product from the pork belly is usually cured with nitrites and nitrates and smoked over various types of wood. Bacon is used in a variety of recipes:|
|Roasted Pork Belly||Pork belly can be seasoned with spices and oven-roasted. It can be sliced and used in a variety of dishes:|
|Braised Pork Belly||This long and slow cooking process melts the fat and creates a tender final product. Braised pork belly can be shredded and used in tacos, sandwiches or skillet dishes among other things.|
What Drives the Price of Pork Bellies?
The following are the major drivers of pork belly prices:
- Belly Stocks
- Chinese Demand for Pork Products
- US Demand for Bacon
- Supply of Hogs
- Opaque Marketplace
Pork bellies typically go into cold storage at the end of each calendar year.
Historically, winter has been the season with the lowest demand for pork belly products. However, recent consumption patterns show less seasonal differences in demand.
Strong demand for pork bellies during the winter can cause a dwindling of stocks. This, in turn, can create tightness in the supply and higher prices.
The United States Department of Agriculture (USDA) publishes data tracking monthly cold storage stocks for pork bellies. Traders carefully monitor this data for clues about the future price of pork bellies. Unexpected reductions or increases in belly stocks can have dramatic effects on prices.
Chinese Demand for Pork Products
China is a giant in both 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.
Consumption of pork products around the globe had been rising at a very robust rate until a few years ago. Since then consumption has risen modestly. Some of the slowdown in growth is attributable to a moderation in Chinese demand as consumers substitute more vegetables for pork in their diets.
China will undoubtedly continue to dominate the world in pork consumption. The country has a long history of favoring pork over other animal proteins. As its population grows and gets wealthier, it will likely ramp up consumption again.Pork belly prices are very likely to be correlated with overall pork demand. Since China drives the pork market, traders should pay attention to its consumption patterns.
US Demand for Bacon
US consumption of bacon has been on the rise in recent years. The bacon industry generates more than $4 billion in annual sales in the country. Moreover, bacon is no longer just a breakfast item in the United States. The product appears in everything from desserts to alcoholic beverages.
There are many explanations for the rise in bacon consumption. The popularity of high-protein diets and the emergence of bacon as a trendy food are two possible reasons.
Increased US bacon demand has produced tremendous volatility in pork belly prices. Supply shortages have caused prices to skyrocket and then eventually retrace. This price action suggests US consumers are sensitive to higher bacon prices. Traders should pay close attention to US per capital consumption patterns for clues about pork belly prices.
Supply of Hogs
The pork belly market requires a steady supply of hogs to meet demand, so surpluses or shortfalls can impact prices. These factors play the biggest role in determining hog supplies:
- Weather: Extreme hot weather in the late summer and early fall can make hogs inactive and impede breeding. On the other hand, cold weather in the winter can promote breeding and increase the supply of hogs in the spring.
- Feed Prices: The cost of feeds and grains represents more than two-thirds of the production costs of raising hogs. Interestingly, as feed costs rise, the supply of hogs rises and prices fall. This is because farmers take their hogs to market at lower weights to avoid paying these high feeding costs.
- Diseases: Diseases and viruses can decimate hog inventories and cause prices to spike.
The lack of a transparent public marketplace for pork belly futures can cause huge price swings in the commodity. Up until 2011, traders could rely on the benchmark CME contract for price discovery. The USDA National Daily Hog and Pork Summary is the only reliable data on negotiated sales of pork bellies.
Should I Invest in Pork Bellies?
There are many good reasons to invest in pork bellies including the following:
- Chinese Pork Demand
- Inflation Hedge
- Portfolio Diversification
Chinese Pork Demand
The world could be facing critical food shortages in the years ahead as the population in China and other emerging economies continues to grow.
Despite a slowing growth rate for pork demand in recent years, China continues to be the largest global importer of pork. The USDA estimates that consumption of pork in China will begin to rise again in the coming year.
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 pork bellies 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.
Food remains a basic and fundamental necessity so prices for pork bellies and other food commodities could see the largest increases if the economy experiences higher inflation.
Investing in pork bellies might be a way to diversify a portion of a portfolio out of stocks and bonds and into commodities.
What Do the Experts Think About Pork Belly?
Analysts see the pork bellies market as very sensitive to supply and price changes. When supplies are tight and prices are low, demand tends to surge and prices move higher. However, high prices have proven that demand for the commodity is highly elastic:
What goes up must come down. The retail bacon price spike dampened consumer and food service sales. That, in turn, has sent wholesale pork belly prices falling about 50 percent in the past few weeks.
– Steve Meyer, a pork analyst at Indiana-based EMI Analytics
How Can I Invest in Pork Bellies?
Since the end of pork bellies trading on the CME, traders have no pure-play investment vehicles for getting exposure to pork bellies prices. However, there are trading products that may offer indirect exposure to pork belly prices:
Lean Hog Futures and Options
The Chicago Mercantile Exchange (CME) has both a futures and options contract tied to the price of lean hogs. The futures contract settles into 40,000 pounds of lean hogs and is financially settled. The options contracts give the buyer the right, but not the obligation, to purchase (calls) or sell (puts) lean hog futures for a specified price at a specified future date.
However, traders should understand that lean hog and pork belly prices could de-couple, so this is not a perfect way to gain exposure.
There is an ETF that trades in London and invests in lean hogs ETFS Lean Hogs:
However, as with futures and options, this is not a perfect substitute for a pork belly futures contract.
There are also three US ETFs that invest generally in livestock:
Top 3 Livestock ETFs
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