A futures market is an organized exchange at which commodities are bought and sold. The sale is finalized by means of a futures contract, which is a binding legal agreement to buy or sell a commodity of a certain quality at a definite price that is to be delivered at a particular place at a future date.
The futures contracts are exchange-traded derivatives contracts. This means the contracts are guaranteed, standardized financial contracts that are traded on an exchange and settled through a clearinghouse.
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Pork Belly Trading and the Futures Market
Pork bellies are a commodity that was once traded on exchanges where they were sold by producers and purchased by resellers, speculators and businesses in the food industry that used them in products. The pork belly futures market allowed meatpackers to "hedge their bets" by speculating as to how high the price of the commodity would rise, then contracting for a lower price.
The futures contract is a "buying hedge" that allows a buyer who's involved in pork belly trading to purchase a quantity of a commodity at a fixed price that will be delivered in the future. By "hedging their bets" in a dynamic market, those who purchased the futures contracts secured their financial returns on the underlying asset, namely the pork bellies.
Origin and End of Pork Bellies Futures
Pork bellies, which are a cut of pork from a pig's belly, became an icon of futures trading when pork bellies futures were introduced in 1961. In the 1980s, pork belly trading futures contracts were used to hedge against consumer food inflation. But in 2011, trading of these pork belly futures ceased due in part to a decline in the demand for bacon and, thus, a decline in the pork producers' share in the consumer meats and fish market.
Pork Belly Market and the CME Group
The CME Group is the world's leading derivatives marketplace, which deals in financial derivatives exchange and trades in agricultural products, currencies, energy, stock indexes, interest rates, metals and cryptocurrencies futures.
The Exchange trades Lean Hog (HE) futures for contracts for the sale and purchase of 40,000 pounds of hog meat per contract. Also, in 2019, the CME introduced the Fresh Bacon Index, which sets the price for 20,000 pounds of fresh port bellies. There are not, however, futures contracts.
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Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.