Pork Cutout futures help to manage risk

Pork Cutout futures help to manage risk
Nov 17, 2020

CME Group recently introduced Pork Cutout futures and options to complement Lean Hog futures and options 

By Jackie Clark
Staff Writer

CME Group has introduced a new tool that allows producers to manage risk using the Pork Cutout Index, which reflects prices paid for pork. The index is calculated by taking a five-day weighted average of pork prices reported by the United States Department of Agriculture.

The new CME Pork Cutout futures and options based “off that (index) allow you to manage your value risk, and that is helpful,” said Abhinesh Gopal, head of commodity research at Farms.com Risk Management.

“It’s new, it just started trading,” he explained. The cutout futures and options are “a move in the right direction.… If you’re a pork producer or if you’re a player in the hog or pork industry, it allows you to manage your risk better because you have another tool to hedge with.”

The new index and associated futures and options contracts account for price “further down the supply chain,” he added. Using “the Lean Hog futures, you can hedge at the hog price stage … and with the futures off of the cutout, you can hedge further down the value chain as well.”

The new tool “helps to tighten up pricing and hedging for producers. Some of the producers have various formulas for the pricing of their animals based off of various indexes that are available,” he said. The cutout index “allows you to be more in sync with the market.”

During the initial weeks of the COVID-19 crisis, prices along the value chain were not in sync. Demand for live hogs was down because packing plants had to shut down due to COVID-19 outbreaks. Meanwhile, consumer demand for pork was steady or even elevated.

If the situation were to arise again where there is disparity in demand at the hog versus pork level, cutout futures and options contracts would allow producers “to better align their risk management strategy with their market exposure because these new risk management tools complement the lean hog futures and options,”,” Gopal explained. “Since you have futures off of (the pork cutout) you can hedge against that … you’re participating in those price moves.”

Hog pricing formulas for producers increasingly capture demand for live hogs as well as pork cutout values.

“A futures market facilitates better risk management,” Gopal said. “You can use the pork cutout futures to have exposure to that aspect of the value chain.”

Overall, this is a positive step for pork producers.

“It’s an addition to the risk management armory,” Gopal added.

Magone\iStock\Getty Images Plus photo

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