New cutout futures will help pork industry with risk management

Tonsor says CME's introduction of a pork cutout contract will enable hog producers and pork buyers to possibly adjust their risk management strategies.

October 5, 2020

2 Min Read
New cutout futures will help pork industry with risk management
National Pork Board

The CME Group's plan to launch pork cutout futures and options on Nov. 9 is good news for pork buyers as well as producers, a Kansas State University agricultural economist says. 

"There indeed is significant interest from U.S. and Canadian hog producers in having additional risk management alternatives available," says Glynn Tonsor, livestock market specialist with K-State Research and Extension. 

A "cutout" is the approximate value of a hog calculated using the prices paid for wholesale cuts of pork. The values, or cuts, used to calculate the pork cutout include the loin, butt, picnic, rib, ham and belly. The new contracts will reflect the price of the wholesale product after processing. CME Group is a global marketplace for agricultural and other derivatives.

"As the market has evolved, our customers continue to look for new tools to manage the price risk associated with hog and pork production," says Tim Andriesen, CME Group managing director of Agricultural Products.

"Over time, more and more marketing contracts include a pork cutout component," Tonsor says. "Combined, CME's introduction of a pork cutout contract will enable interested hog producers, as well as pork buyers and sellers, to possibly adjust their risk management strategies. While much attention has come from the possible benefits from a hog producer's perspective, the observed wholesale pork volatility during the pandemic likely corresponds with strong interest from pork buyers seeking ways to mitigate pork purchase price risks they face."

Information about how futures and options are used to manage risk in livestock markets is available on the CME Group's website

Even with the welcome introduction of the new resource, context is important, Tonsor says. 

"The role of specific futures and options contracts varies over time. For instance, the pork belly futures contract was a pioneering financial instrument in the 1960s that ultimately changed along with broader industry developments in the belly — where we get bacon — market. More broadly, it will be important to monitor the final up-take on this (cutout) product and what implication that has directly for not only its viability, but the indirect impacts on viability of other products including CME's Lean Hog futures and options products," he says.

The new contracts will be quoted in U.S. cents per pound, will have a contract size of 40,000 pounds and will be available for trading on CME Globex or through block trades via CME ClearPort. 

Tonsor says the new contract brought to mind the role of pork belly futures in the 1980s Eddie Murphy movie, "Trading Places."  

More information about livestock markets is available at K-State's Ag Manager website.

Source: Kansas State University Research and Extension, which is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.

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