How to Trade Frozen Pork Bellies on the Commodities Exchange - dummies

How to Trade Frozen Pork Bellies on the Commodities Exchange

By Amine Bouchentouf

Essentially, the term pork bellies is the commodity traders’ way of saying bacon. Physically, pork bellies come from the underside of a hog and weigh approximately 12 Pounds. These pork bellies are generally stored frozen for extended periods of time, pending delivery to consumers.

As with most other livestock products, the CME offers a futures contract for frozen pork bellies. This contract, launched by the CME in 1961, is the first-ever contract on a commodity exchange for which the underlying deliverable commodity is a meat — albeit, dead meat. (The CME live cattle contract was the first contract based on a live animal.)

Here are the specs for the CME frozen pork bellies futures contract:

  • Contract ticker symbol (open outcry): PB

  • Electronic ticker (CME Globex): GPB

  • Contract size: 40,000 pounds

  • Underlying commodity: Pork bellies, cut and trimmed (12- to 18-pound frozen pork bellies)

  • Price fluctuation: $0.00025 per pound ($10 per contract)

  • Trading hours: 9:10 a.m. to 1:00 p.m. (CST), electronic and open outcry

  • Trading months: February, March, May, July, and August

The pork bellies market is a seasonal market subject to wild price fluctuations. Although production of pork bellies is a major determining factor of market prices, other variables have a significant impact on prices.

A buildup in pork belly inventories usually takes place at the beginning of the calendar year, resulting in lower prices. But as inventories are depleted, the market moves to a supply-side bias, placing upward pressure on market prices. On the other side of the equation, consumer demand for bacon and other meats isn’t easily predictable and fluctuates with the seasons.

Price of pork bellies futures on the CME, 2004-2010.
Price of pork bellies futures on the CME, 2004-2010.

Demand for bacon and other high-fat, high-cholesterol foods appears to be waning as a result of the health-conscious eating trends sweeping the nation. These dietary changes could have an impact on the prices of frozen pork bellies and other meats. Be aware of the impact of these dietary trends on the prices of pork bellies and other meats before investing.