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Pork Bellies
Enthusiasm towards the Chicago pork belly futures market quickened in the final quarter of 2002 following a protracted period during which prices traded basically within a 20 cent range pivoting around the mid-60 cent/lb. range. By yearend 2002, futures were nearing 90 cents, basis nearest futures, about 10 cents higher than a year earlier, a 50% gain in 2002's fourth quarter; the strength reflecting anticipated tighter supplies in 2003. Historically, wide price swings are not unusual in pork belly futures, which in recent years have been accentuated by curtailed speculative interest towards the market. In either case, futures are more likely to respond to supply considerations, real or perceived, than to demand factors, which are more often difficult to ascertain.
Pork bellies, more commonly known as bacon, are obtained from the underside of a hog. A hog has two bellies, generally weighing about 8-18 pounds, depending on the hog's commercial slaughter weight. Slaughter weights now average about 255 pounds per head, equal to a dressed weight of about 190 pounds. Bellies account for about 12% of a hog's live weight, but represent a somewhat larger percentage of the total cutout value of the realized pork products. Frozen bellies deliverable against futures generally weigh between 12-14 pounds.
There are definitive seasonalities for pork bellies. Bellies are storable and the movement into cold storage builds early in the calendar year, peaking about mid-year. Net withdrawals from storage then carry stocks to a low around October. The cycle then starts again. Retail bacon demand also follows an time worn trend; peaking in the summer when consumer preference shifts to lighter foods and tapering off to a low during the winter months. While demand patterns would suggest the highest prices in the summer and the lowest in the winter, just the opposite is not unusual. Such contra-seasonal price moves can be partially attributed to supply logistics, notably the availability of frozen storage stocks deliverable against futures at exchange (CME) approved warehouses. When stocks prove either too large or small the underlying demand variables for bacon can be relegated to the backburner as a market making variable. The fact that no contract months are traded between August and the following February adds to the late fall futures price distortion, as seen in 2002.
Belly prices (cash and futures) are sensitive to the inventory in cold storage and to the weekly net movement in and out of storage, which affords some insight to demand although a better measures, are the weekly quantity of bellies being sliced into bacon. Higher prices tend to encourage placing more supply into storage by discouraging retail bacon demand. Bacon is not a necessary foodstuff, but demand can be buoyed by favorable consumer disposable income. However, dietary standards have changed dramatically in recent years that do not favor the consumption of high fat and salt content food--like bacon. The U.S. economy stalled in 2002 at least relative to expectations, which would have been expected to contain consumer bacon demand, but retail prices held firm, especially in the first half of the year. The anticipated 2002 average of $3.25/lb was unchanged from 2001, which was well above the annual average of the 1990's.
Foreign trade in bacon as a processed product is small. Imports are largely from Denmark and exports go to Eastern Europe.
Futures markets
Frozen pork belly futures and options are traded on the Chicago Mercantile Exchange (CME). Futures are also listed on the CME for fresh pork bellies.
Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here
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