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

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FUTURES/OPTIONS; Pork Belly Prices Rise; Oil Contracts Off Again

By The Associated Press

    Aug. 7, 1987

Current-month pork belly contracts advanced strongly Thursday for the seventh consecutive session, while most other meat and livestock prices also rose in futures trading. Oil prices fell modestly. The contract for August delivery of pork bellies continued to lead trading in pork-related futures, rising 1.88 cents a pound.

Tom O’Hare, an analyst in New York with Smith Barney, Harris Upham & Company, said the supply of deliverable bellies was very low, while the number of open contracts outstanding for August delivery remained unusually large.

Pork prices also were buoyed by light sales of hogs at market, when a pickup had been expected because of the cooler weather in the Middle West. Cattle Prices Increase

Analysts said cattle futures rose in response to the light slaughter of animals, while demand for beef was fairly good.

October and April live cattle futures set contract highs on the Chicago Mercantile Exchange, as did all feeder cattle deliveries.

Traders said feeder prices were increased by the belief that replacement supplies for animals moving off the feedlots were tight. Also, feeder prices on the spot market have been moving higher.

Oil futures prices declined for the third straight day on the New York Mercantile Exchange as the situation in the tense Persian Gulf remained stable.

Peter Cardillo, commodity futures trading adviser for Josephthal & Company, said traders were maintaining a wait-and-see attitude. September Oil at $21.14

West Texas Intermediate crude oil was 15 cents lower to 6 cents higher, with the September contract at $21.14 a barrel.

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Most grain and soybean futures prices were lower on the Chicago Board of Trade.

Market activity was subdued, with many traders on the sidelines awaiting Tuesday’s crop production estimates from the Agriculture Department.

The estimates will include the first Government report on the size of the corn and soybean crops and will be watched closely, said Mickey Luth, an analyst with Shearson Lehman Brothers Inc.

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.

CHAPTER 24 RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING

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