Livestock traders will be
able to better hedge prices risks tied to pork when the CME Group launches
futures and options on pork cutouts on Monday.
The new contracts are “designed to give the U.S. pork industry and export markets tailored risk-management tools on the cutout,” said the CME
which defines a “cutout” as the value of a hog calculated by using prices paid for wholesale cuts of pork, which include the loin, ham and belly.
The launch is significant
in that it “provides a hedge instrument to limit pork meat risk,” said David
Maloni, executive vice president of analytics at food-service, supply-chain technology
firm ArrowStream. The hope is that the contracts will “have better correlation
to various pork cuts to hedge margins for producers and buyers.”
They’ll launch under the ticker “PRK,” be cash-settled to the CME Pork Cutout Index and serve as a complement to the lean hog futures and options contracts currently traded on the CME.
“Hog producers have been crying for a product that would be more effective as a hedging tool for those who sell their hogs using formula-based contracts, which is the majority, than do the current lean hog futures contracts,” said Arlan Suderman, chief commodities economist at StoneX. Those formula contracts are based on carcass cutout values, he said.
“It’s hoped that this contract will correlate well with the values they can achieve with their live hog formula contracts,” he said.
Meanwhile, Maloni explained that lean hog futures are used more as a hedge for hog costs, not their meat. The spread between the lean hog and pork cutout contracts “could be used by suppliers to hedge their hog expense and pork meat revenue.” On Thursday, the most-active December lean hogs futures contract
settled at 67.43 cents a pound, up 1.08 cents.
The pork cutout futures and options mark the “second swine-related offering” for the exchange, according to the CME. The exchange was once home to frozen pork bellies futures and options, which were delisted in 2011, after a 50-year run.
Belly futures were for frozen bellies, and “physical trade in the product gravitated to fresh bellies over the last couple of decades,” so the “use case for frozen belly futures declined, and so did the volume on the contracts,” said Maloni.
The new pork cutout
contracts are expected to start out slow, volume-wise, but if they’re
successful, they could “provide an instrument for retailers and restaurants to
hedge their pork cut price risk, likely through their suppliers,” he said.
“Today, that is very difficult to do unless a buyer is willing to put product
in the freezer.”