When it comes to the livestock components of the commodities space, there’s always one that springs to mind: Pork Bellies!
And that’s not just because it’s likely to be Homer Simpson’s favourite tradable commodity. Eddie Murphy’s character Billy Ray Valentine famously made big profits trading the pork belly contract in every trader’s favourite movie Trading Places.
But while pork bellies have long been one of the better known of the agricultural complex, the fact is that traders generally shy away from meat and livestock.
Why is this? And should we be exploring the opportunities available from meat and livestock trading?
A unique beast
The meat and livestock sector is the least popular part of the commodities market. This is for a number of reasons.
Firstly, agricultural commodities are generally shunned by retail traders because of their lot sizes. While exchanges and brokers have responded to the demand for metals and energy trading by producing smaller contract sizes, this has yet to occur for most of the agricultural space.
The meat and livestock sector was traditionally the domain of producers and industry insiders and this has also caused retail traders to steer clear of these markets.
Markets experts also say there is a higher level of knowledge needed to be comfortable trading livestock – even if technical analysis is your primary tool.
Hold it there, buster!
If you think you are going to rush out and start trading pork bellies, think again. We’ve got some bad news for you.
In recent years – certainly since the turn of the century – there was a marked decline in the amount of volumes we saw in the pork bellies market.
In July of this year, the Chicago Mercantile Exchange, or CME, announced it was bringing the trade in pork bellies to a close.
This is a far cry from the heyday of the contract back in the 1960s and 1970s, when it was the most traded contract on the CME. It’s for this reason why the pork bellies contract was so often part of popular culture in that bygone era.
Before the days of an integrated food industry, frozen pork bellies were used to provide bacon to hungry US consumers all-year round.
In particular, pork bellies were produced and stored during the winter months for use during summer when tomatoes ripened and Americans of all creeds and colours munched down on their bacon lettuce and tomato (BLT) sandwiches.
However, a stark reduction in demand has seen the pork bellies market disappear from trading screens.
The three that matter
With pork bellies gone the way of the dodo, there are only three major meat and livestock commodities.
Feeder cattle are those steers or heifers that are mature, usually at least a year old, and can be placed into a feedlot. A feedlot is where they are brought out of the pasture and into an area to be fattened prior to slaughter.
Of course, the majority of the information needed to trade is US-centric.
In the case of feeder cattle, most of the data is contained in individual state reports. However, the Feeder Cattle Index is published by the US Department of Agriculture (USDA) and comes out on a weekly basis.
The weather is a major determinant of price. In very hot weather, cattle are moved along the supply chain more rapidly, resulting in lower supply and therefore higher prices. Feeder cattle are traded in US $12.50 lots.
As they move further along the production line, they then become classified as Live Cattle. The monthly “Cattle on Feed” report is seen as one of the most important economic releases.
Like feeder cattle, live cattle contracts are influences by the weather, but over the longer term, the natural life cycle impacts on cattle prices in the same way as other agricultural commodities. Live cattle are traded in lots of US $10 per point.
Lean Hogs also trade at US $10 per point. Lean hogs prices are closely tied to the price of corn as this commodity is most often used in feed.
The major economic release in lean hogs is the “Hogs and Pigs” report released by the US government near the end of the quarter.
All contracts are traded for virtually 24 hours per day (with a one-hour break each day).
One of the reasons retail traders had previously not been overly interested in the sector is because of the shortened trading hours in the US pits. However, the move to electronic trading has made access to trading and information far more efficient.
“Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the pork belly contracts are saying, “Hey, we’re losing all our damn money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.”
Billy Ray Valentine, Trading Places