Lean hog futures
The CME Group lean hog futures contract, symbol HE, calls for 40,000 lbs. of hogs on a lean (carcass) basis. Today, a 270 lb. live hog produces a 203 lb. carcass. Pricing is quoted on a dollar-per-hundred-weight (cwt.) basis. Therefore, a quote on the screen of 85000 is called $85 per cwt. The minimum tick size is 2.5 cents per cwt. A minimum tick move from 85000 to 85025 would represent a change in value of $10 per contract. (Take note that some quote systems do not quote the last digit.) The contract is cash-settled against a two-day weighted average of the cash market called the Lean Hog Index, symbol IHX. Contract expiration is generally around the 12th of each contract month.
Supply projections are pretty straightforward for lean hogs. It takes just six months from birth (farrowing) to slaughter. When you add in a 114-day pregnancy period, you have a relatively modest 10-month delay from a decision to expand or contract to when those numbers hit the packing plant and affect prices.
The main long-term supply picture comes from the USDA’s quarterly survey of producers called the Hogs & Pigs Report (which can be downloaded at http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1086). The general trader can get a quick idea of supply for the next six months out by looking at the weight breakdowns in the “kept for marketing” numbers. With slightly more effort, the farrowing intention numbers can help provide a map of supply for the next full year out. For 2013, with sharply lower grain prices, the question in the industry is not if producers will expand, but when and by how much.
The CME Group live cattle futures contract, symbol LE, also is traded in a 40,000 lb. allotment. Though packers buy on a carcass- and live-animal basis, this contract is based off the live animal pricing. It also is different from hogs in that it can be physically delivered. Keep that in mind as first notice day approaches. Pricing is quoted as dollars per cwt. A price of 127000 on your screen is therefore $127 per cwt.
Supply projections are a little different for cattle because there is a two-stage production process. The base producer in the industry carries a herd of mothers (cows) and sells the offspring in the form of 400-500 lb. calves or later as 600-900 lb. feeder cattle. Those offspring are fed out in feedlots from three to eight months, depending on various factors, until they are 1,100 to 1,400 lbs. Profitability in the feedlot phase is dependent on the purchase price of feeder cattle, feed costs and selling price of live cattle.
Important for us for the long term is that the base producer has a separate concern as well: Quality pastures. With drought a lingering concern in the Plains, the breeding herd has been in liquidation for eight years. As there is a three-year lag between a decision to expand and when that expansion hits the packing plant, the long-term supply picture is clear here.
The report that the industry gauges to determine monthly supply is the USDA’s Cattle on Feed Report. It can be accessed at http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1020. A supply picture for the coming months can be made by following the number of new calves and feeders starting their feeding period, called “placements.” We can gauge whether feedlots are actively selling market-ready animals on time by monitoring the marketing numbers.