Buying Lean Hogs Call Options to Profit from a Rise in Lean Hogs Prices

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How to Make a Fat Profit From Lean Hog Futures

Commodity investors should consider pigging out on lean hogs. A record-breaking drop in global pork production will mean a massive shortfall of meat, which could spark a rally in hog prices of at least 20% by year end.

Market Data Center: Commodities & Futures

“There isn’t enough pork in the word to solve this shortage,” Shawn Hackett, president of Boca Raton, Fla.–based Hackett Financial Advisors, told Barron’s. “Certainly, it can go back and retest these highs we saw earlier the year, and it may not stop there.”

The price of lean hogs could hit $1 per pound or more by year end, up from about 80 cents recently. Prices reached a peak of around 99 cents in April before pulling back, according to Bloomberg data.

Investors looking to profit from the move could buy February-dated futures contracts for lean hogs on the CME futures exchange. Alternatively, they could buy the ETFS Lean Hogs exchange-traded fund (ticker: HOGS.UK), which tracks the price of lean-hog futures contracts.

The problem is that global pork supplies are expected to drop by the largest percentage ever, based on an analysis of data since 1960. This year, world output will be 108 million metric tons, down 4% from 113 million tons in 2020, according to data from the U.S. Department of Agriculture.

The production decline is the result of an outbreak of African swine fever in China, which is the world’s largest supplier and consumer of the meat, and elsewhere. There is no approved vaccine for the disease, which can kill infected pigs within a few days. “For hogs, it’s the equivalent of black death,” says Don Coxe, chairman of Chicago-based financial advisory firm Coxe Advisors.

While the disease is affecting herds across the world, the impact on China matters more than anywhere else. Last year, Chinese production accounted for 48% of global pork output, or 54 million metric tons. This year, China’s hog output will drop by 5.5 million tons, according to the USDA.

That drop is the direct result of the swine fever. Not only are infected beasts slaughtered and then burned, but the epidemic also has scared farmers into culling their herds.

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“China has tended to be reticent about the existence of the disease,” says Coxe. This cagey approach could have panicked farmers wanting to safeguard their investment in the livestock. It isn’t clear what portion of the herd was culled, but Hackett says it could be as high as 35%. In many cases, farmers would have chosen to send the beasts to the abattoir rather than risk them getting infected and becoming worthless.

Buying Lean Hogs Call Options to Profit from a Rise in Lean Hogs Prices

The price of Lean Hogs is 41.000 USD (per pound) today.

Will Lean Hogs price grow / rise / go up?

Yes. The LH price can go up from 41.000 USD to 41.764 USD in one year.

Is it profitable to invest in Lean Hogs commodity?

Yes. The long-term earning potential is +1.86% in one year.

Will LH price fall / drop?

What will Lean Hogs price be worth in five years (2025)?

The Lean Hogs (“LH” ) future price will be 39.878 USD.

Will LH price crash?

According to our analysis, this will not happen.

Lean Hogs Futures and Commodities

paul mansfield photography / Getty Images

Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices. Trading in these futures often attract plenty of speculative positions. The lean hog is another term for pork that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

  • Ticker Symbol: LH
  • Exchange: CME
  • Trading Hours: 10:05 a.m. to 2:00 PM EST
  • Contract Size: 40,000 pounds
  • Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
  • Price Quote: price per pound
  • Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
  • Last Trading Day: The tenth business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world’s largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.

A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).

Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to a lack of liquidity.

Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.

Corn and Hogs

The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.

One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.

Reports

The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.

Developments Over Recent Years

Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.

In 2020, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2020, the price of lean hog futures moved back to the 60 cents per pound level.

In 2020, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.

With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.

The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.

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