Buying Pork Bellies Call Options to Profit from a Rise in Pork Bellies Prices

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FUTURES/OPTIONS ; Soybean Prices Fall; Pork Bellies, Cattle Up

Soybean futures prices dropped sharply on the Chicago Board of Trade today on heavy selling by speculators. Grains futures also fell.

One trader said the market was no longer focusing on tight stocks of the old crop of soybeans but on rain over soybean areas in the Middle West, which has improved the outlook for the new crop.

Traders paid little attention to the strong export demand for soybeans or to Thursday’s report that crushing by United States soybean processors is still active.

Wheat Crop Estimate

Thursday’s larger-than-expected estimate of the American winter wheat crop by a private forecaster, Conrad Leslie, weighed on wheat futures.

Mr. Leslie predicted this year’s crop would come in at 2.07 billion bushels, up from the Agriculture Department’s latest estimate of 1.98 billion bushels and the 1.99 billion bushels grown last year.

Corn futures also fell slightly, even though Mr. Leslie’s report indicated some problems with the new crop.

Pork belly futures rose by up to 0.95 cent a pound on the Chicago Mercantile Exchange, but live hog futures were mixed.

Bob Kuhn, a livestock analyst at Dean Witter Reynolds, said labor troubles at three Canadian pork packing plants were causing concern among hog traders, who fear more hogs will be sent to the United States to be slaughtered.

Live cattle futures rose because traders believe wholesale beef prices may rise early next week, Mr. Kuhn said.

In New York, cotton futures closed sharply lower in nearby contracts on speculative selling. and orange juice futures rose by more than 2 cents a pound before falling back on profit- taking. Reports that a major Brazilian exporting company had raised the price of its new-crop orange juice concentrate lifted prices early on.

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Coffee futures fell sharply as fears of cold weather in the Brazilian coffee belt over the weekend subsided.

CHAPTER 24 RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING

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What Are Pork Bellies in the Stock Market?

Pork bellies are used to make bacon.

Hemera Technologies/PhotoObjects.net/Getty Images

For most people, the market for pork bellies was little more than a punch line to a joke about the absurdities of the financial industry. As bizarre as it sounded, these cuts of pork were traded as commodities on the futures market, with a handful of traders buying and selling futures contracts based upon nothing more than slices of meat you could find at many butchers’ shops.

In the history of the U.S. stock market, pork bellies were cuts of meat that were traded as futures through 2020.

Pork Bellies 101

As a traded commodity, pork bellies were exactly what their name implied: cuts of meat taken from pigs’ stomachs. Because these fatty cuts could be used to make bacon and were being produced year-round, traders began purchasing, freezing and warehousing pork bellies during the winter, when demand for bacon was traditionally lower, and selling them in the summer when consumers had a taste for bacon and its price was higher. This commodity, sold on the futures market, was the basis for pork belly trading.

Pork Bellies Traded as Commodities

Because pork bellies were an unprocessed good that meatpacking plants were able to use to make bacon and other products, they began selling as commodities. As with all commodities, they were traded in standardized units: In this case, a unit consisted of 40,000-pound frozen slabs made up of eight- to 18-pound individual cuts of meat. This standardized contract allowed slaughterhouses, traders and food manufacturers an easy reference point to buy and sell mass quantities of pork bellies efficiently.

Use of Futures Contracts

Pork bellies could be frozen for up to a year, so meatpackers began turning to the commodity to help smooth out production costs, which could fluctuate wildly with agricultural production. Traders began purchasing agreements to sell standardized lots of pork bellies in the future, attempting to maximize profits by purchasing pork bellies when costs were low due to decreased demand or increased production and selling them when prices rose again. Trading in pork belly futures began on the Chicago Mercantile Exchange in 1961.

The End of an Era

Consumers’ eating habits and taste for bacon didn’t remain constant, however. Where demand for pork bellies traditionally rose during the grilling season, bacon became a much more prevalent part of the American diet, appearing on hamburgers and in salads. Because of this, volatility – essentially an expression of how unpredictable prices were – made trading in pork belly futures too risky for most traders, and volume of the futures slowly declined. In 2020, the Chicago Mercantile Exchange de-listed pork belly futures due to low trading volumes.

Beloved Pork Belly Prices Soared 80%

3 minute, 4 second read

I have a problem … I can’t say no to bacon.

Every time one of my coworkers throws a BBQ, I demand everything — even the veggies — gets wrapped in bacon. Sometimes I even ask for the bacon to be wrapped in bacon.

See? It’s a little bit of an addiction. But I’m not alone in this obsession. America — and countries around the globe — are making this commodity sizzling hot.

That demand is thanks, in part, to budding foreign markets. But Americans are a massive part of it. Market research firm Nielsen recently discovered that we consumed 14% more last year than in 2020.

And now the price of pork belly — where delicious bacon comes from — is at record highs. It’s up a jaw-dropping 80% this year.

The U.S. is in the midst of a bacon feeding frenzy, and who can blame us?

That’s why our frozen reserves are at a six-decade low, which has sparked worries of a bacon shortage … an aporkalypse if you will (a devastating notion to grease-loving Americans like me everywhere). Pig farmers just can’t keep up with the demand, although they are trying. The U.S. overall hog herd reached a seasonal peak of 71.7 million head in early June — a 3% rise from the prior year.

Yet our frozen pork-belly supply plunged to 31.6 million pounds in May — down a massive 59% from a year earlier. To put this into perspective, that’s the lowest amount for May since the USDA started recording it in the 1950s.

Yikes. It’s no wonder prices have soared.

I’m sure there are a lot of commodity investors out there kicking themselves for missing out on this — because this is precisely the type of supply-squeeze story they should have had on their radar.

In fact, if you had a system in place for analyzing commodity trends, you might have been able to profit from this price surge before the rest of Wall Street started sniffing out the bacon shortage.

Take our commodity expert Matt Badiali’s system for example. He has the ability to predict price turns months in advance. That’s because he knows every natural resource follows a repeatable pattern … called the commodity life cycle, which has three main phases.

  • Phase 1 is the formation phase. This is when a resource is starting to come into demand, but supply can meet that demand.
  • Phase 2 is the surge, when demand spikes but supply cannot catch up. This causes the price of the commodity to jump. Bacon is currently in this stage.
  • Phase 3 is the taper … when supply exceeds demand, causing prices to fall.

As you likely guessed, the important part of this cycle is the timing: You want to invest at the start of the surge phase and get out at the taper phase — which can be incredibly difficult to do on your own, particularly if you don’t have much experience investing in commodities. That’s why so many investors stay out of this area — letting massive profits pass them by.

So I want to use this time to urge you to follow a proven system or a trader whom you trust if you’re interested in benefiting from these type of trends.

You can start doing your research by learning about Matt’s system. Click here to get an idea of how he picks hot commodity plays.

Because in the end, if we’re seeing an aporkalypse, we should at least be able to profit from it.

Also, feel free to write me with your bacon stories and worries at [email protected] I can never hear enough about bacon.

Catch you next week.

Jessica Cohn-Kleinberg
Managing Editor, Banyan Hill Publishing

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Editor’s Note: I, along with a few esteemed colleagues, publish our insight in our e-letters Winning Investor Daily, Smart Profits Daily, Bold Profits Daily, Great Stuff & Bauman Daily. Every day, we send you our very best ideas to help protect and grow your wealth. Sign up below for free.

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