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CME launches new pork carcass contractCME launches new pork carcass contract

While the five-day weighted average will smooth out the gyrations in the index, the day-to-day index is bound to be a bit wild.

Dennis Smith

November 9, 2020

5 Min Read
CME launches new pork carcass contract
frotog/ThinkstockPhotos

Today the CME Group launches their new hog carcass contract. This will be traded the same hours as lean hog futures and will be the same size, 40,000 pounds. The contract will converge with a five-day weighted index based upon the USDA pork cutout calculation that occurs each day. Trading months will also be the same as in lean hog futures.

While the five-day weighted average will smooth out the gyrations in the index, the day-to-day index is bound to be a bit wild. Certainly the noon quotes will contribute to volatility. Much of the volatility stems, I believe, from the labor issues the industry faces as a direct result of COVID-19. More specifically, pork requires much more "added processing" than does beef. This applies to finished products such as sausages, bratwurst, pizza toppings, bacon and bologna.

However, this also applies to many wholesale products. Hams, in particular, are quite volatile on the noon quotes. Hams are sold as bone-in product and as boneless product. The boneless product is further processed/packaged which all requires labor at the packing plant. The fact is, packers don't have enough labor to do such processing. So, we're experiencing a glut of bone-in product and a very tight supply of some boneless product.

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Contributing to the volatility, especially in the ham sector, has been excellent demand for hams and reduced output due to far fewer butcher hogs coming available than expected. Pork export demand has been record high this year. In September, recent data confirmed that pork exports were up 17% compared to September of last year.

On Nov. 5, the ham primal used in the cutout calculation, was priced at $98.36. This level is not only a 52-week high but the highest level I show for this primal (in November) going back 10 years. Looking at individual ham cuts, the 23/27-pound bone-in ham was quoted at 76 cents per pound on this date. The 23/27 boxed ham was priced at $1.02.

However, some of the boneless product, such as the rollout boneless boxed hams were quoted on this date at $1.89 per pound. What is called the boneless insides were quoted at $2.06 per pound and the outsides were quoted at $2.08 per pound. You see, some of the boneless product is priced nearly triple that of the bone-in hams. Frozen ham stocks as of Oct. 1 are down 28% from last year at 146 million pounds. Given a normal draw down season, by January ham stocks may only be around 30 million pounds … extremely tight.

Adding fuel to the fire is the fact that production is running short of expectations. The most recent Hogs and Pigs Report projected hog slaughter during October to run 110% of last year. Instead, the actual kill was about even with the year prior. The report went further to project the kill during November should run at about 106% of last year. Again, the kills have instead been running up only about 1%.

The hogs and pigs surveys obviously did not accurately measure and quantify butcher hog and baby pig euthanasia that occurred in the industry and they were unable to measure widespread sow abortions that were thought to have occurred. This three-way combination including the magnification from the aborted sows (nearly 11 pigs per sow), caused the survey to grossly overstate the kept-for-market hog category. As stated many times, there's simply no playbook for what's occurred in the livestock industry this year.

As expected, the October hog contract went off the board strong, expiring at $78.42. Following this expiration December hogs, trading at a substantial discount, shot upward to just above $72 but has since pulled back. The recent range of consolidation has been between $67.50 on the top side and $64.50 on the lower side. Eventually, say by the end of the week ending Nov. 14, I'm expecting December futures to resume their uptrend and likely expire strong on Dec. 14. This could take the December to where October expired, $78.50 or possibly higher.

Looking further ahead, my sources are indicating that additional contraction may be occurring in the U.S. hog herd. This is needed. A solid several months and hopefully more than a year of highly profitable prices is necessary to restore lost equity to the industry. We appear to be on the verge of a food price inflation binge that should be very supportive to pork values and hog prices.

Germany may be only days away from discovering African swine fever in their commercial hog herd. If/when this happens, large scale culling will likely have to occur. Despite what the Chinese are telling the world, the fact is the Asian hog herd has been devastated by ASF and it will take time, more time to recover and rebuild the herd. In the short term, say over the next two months, China is expected to import vast quantities of pork ahead of their lunar New Year holiday that cranks up in February.

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I was honored to be part of the National Hog Farmer Global Hog Industry Virtual Conference last month. As I mentioned during the conference, I publish an evening livestock wire for my clients. Producers can take a look at this report on a free 30-day trial. The trial also includes a morning livestock report and midday pork and beef update. If interested in the free trial, simply send me an email requesting such.

Source: Dennis Smith, who 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. The opinions of this writer are not necessarily those of Farm Progress/Informa.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 25 years. Dennis has a wide range of customers many of whom are grain and livestock producers. Dennis and his partner, Patrick Garrity, develop and execute hedging and speculative trading strategies in their evening Daily Livestock Wire which is prepared each afternoon exclusively for their customers. 

Dennis grew up in Central Illinois and earned a Masters Degree in Agricultural Economics from the University of Illinois before launching his brokerage career.

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