Pork bellies are the boneless, underside of a pig – the “belly” –, which is used in making bacon. Due to the huge interest in bacon, the Chicago Mercantile Exchange, or CME, developed frozen pork belly futures as a risk management tool to meet the demand of meat packers who have to compete with volatile hog prices. For the most time, factors that affect hog prices also affect pork belly prices, since the latter is gotten from the former. In any case, here are the top factors that affect pork belly prices – and how they do so.
Pork belly inventory levels in CME-monitored warehouses are one of the biggest movers of pork belly prices. Bloomberg reported on August 9, 2010 that pork belly futures for August 2010 delivery jumped by the CME’s 4.5-cent limit, or 3.7 percent. The story went on to note that that was the sixth straight session that the commodity rose the maximum permitted by the CME.
Analysts attributed the consistent surge at that period to low inventories. At the end of July 2010, pork belly inventories in CME monitored warehouses were about 73 percent smaller than it was a year earlier. The longer inventories were down, the longer the rally would continue.
When inventories are low, there is a fear that pork bellies would soon become scarce, which ends up sending prices higher. The reserve is also true. At periods when inventories are at high levels, prices tend to be low.
Unquestionably, pork is a premier meat that is consumed around the world. Year in year out the demand for the meat has grown. Between 2010 and 2013, the consumption of the meat rose 6.2 percent to over 109 million tons.
With the growing plot to stop cattle rearing for environmental reasons, the demand for pork is projected to keep rising. And you know what, the U.S. at the forefront of the projected surge in demand. Currently, US annual pork consumption stands at about 8.668 million ton, according to USDA. The more that figure grows, the higher pork belly prices would go up. For what it is, this is part of the reasons why inventories matter a lot.
Despite being a major producer of hog, China is considered a net consumer of pork. In 2013, China accounted for over 77 percent of the world’s total pork consumption. Such as been the trend for a long time. In reality, pork is the meat that gets consumed the most in the country. All of these are just to show you just how important Chinese demand trend is to pork belly prices.
Therefore, if, for any reason, China consumes less pork than it currently does, you can expect a decline in pork belly prices. The difference between its pork production and its consumption is another metric to watch. The lower the spread, the higher the chance that demands would outgrow supplies, which is an indicator that china might import more pork, which might end up sending prices high. With the constant growth in consumption, there are huge chances that the Chinese pork industry production would be running at a net negative in future, which suggest that higher pork belly prices could be on the horizon.
This is one of the major forces that has been – up to time of writing –moving pork belly prices in 2014. Bloomberg repotted on August 5, 2014 that a spreading virus caused hog prices to rise as much as 56 percent to a 30-year high. That is just to show you the extent to which disease outbreaks could change the pork market. Usually, when there is a disease outbreak, supply gets tighter, and hence prices. The fact that it does not usually come with significant decrease in consumers’ appetite for bacon makes its effect even worse.
Weather is an important supply-side variable that can cause significant price swings in the pork market. Apparently, cold winters do not favor pig rearing. Farmers have found that hears tend to experience slowed growth during winters. This means that the time frame before the pigs get to the market is increased, thereby, putting pressure on supplies. Therefore, pork belly prices tend to be higher during cold winters. Mild winters are known to help the production process. For instance, a story published on New York Times mentioned how hogs gained weight faster than normal because of a mild winter, which caused them reach the market earlier than normal. If such is witnessed, it might bring down prices, to some extent.
Cost of feed
Apparently, when cost of feeds is high, pork prices would be high. Feeds are quite the biggest production input in raising hogs. Here, you want to focus on the two most important pig feed ingredients; soybean and corn. Major increase in the prices of these two commodities could bring about an increase in pork prices. One thing that should be mentioned here is that the price increase here could be a result market activities borne out of the fear that increase in the prices of these commodities might mean more expensive pork.
This is another important factor that moves pork prices. The first Bloomberg story that was referenced here explicitly the price chance was a result of speculation. You are probably asking why speculation get to influence prices so much. The simple reason is that it takes some time for pork to get to the market. This makes it easy for changes in consumption behaviors to change the demand and supply dynamic of the pork significantly.
On a final note, it might be worth it for traders to also keep tabs on the state of the livestock market at large. Changes in consumption pattern of livestock have high chances of influencing the fundamentals of pork bellies.