Alan Guebert: Let there be light | TSLN.com

Alan Guebert: Let there be light

by Alan Guebert

A Dec. 28, 2010 Wall Street Journal story laments the “near-halt” of pork belly trading at the Chicago Mercantile Exchange. Bellies were “once among the CME’s most-traded commodities,” but now “the pork belly is in danger of going belly-up.”

Indeed, only six belly contracts traded in Nov. 2010. Why? Two chief reasons, say experts cited by the newspaper.

First, belly contracts can still be “settled” – fulfilled – by delivery of 40,000 lbs. of bacon. Nearly all commodity contracts worldwide are now settled in cash and the threat of 20 tons of frozen pork landing in your office deters traders.

The other reason is the disappearance of the bacon “seasonal,” the usually profitable buy-in-the-winter, sell-in-the-summer trading strategy that belly traders banked on for decades. Today, bacon demand is heavy year-around so the death of the bacon seasonal now underwrites the death of belly trading.

Both explanations are accurate insofar as they go, but there’s a far bigger, far simpler reason why belly trading is going the way of buggy whips: you don’t need to trade bellies if you own the pig from the farrowing crate to the meat case.

Today’s nearly perfectly integrated hog sector skips over the risk of owning unpriced bellies because 90 out of every 100 hogs are produced and sold under contract either by or to packers. In short, if the pig is priced before it’s born, why hedge its bacon?

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The answer is you wouldn’t because its slaughter price, the biggest upfront risk to the packer, is locked in from its first breath.

For all its rooting around, the Journal piece does cite some important consequences of today’s nearly extinct belly trading.

For example, “Retail bacon prices in November surged 34 percent from a year earlier to $4.697 per pound, making it more expensive than pork chops, according to the Bureau of Labor Statistics.”

Golly, up really is down – eating high off the hog is cheaper than eating low on the hog – when a few giants control the production, packing and distribution of pork outside open, transparent markets.

Moreover, the Journal continues, “(S)pot [belly] prices have soared 45 percent from June to an all-time high of $1.60 a pound in September, before tumbling back to a low of 88 cents by late October. Now they fetch around 96 cents.”

Again, the clear lack of a clear market with clearly reported prices often sets the table for dramatic, mostly inexplicable, price moves.

Or, as the Journal notes in a classic understatement, “Without a viable hedging tool for belly prices, bacon producers – and consumers – can be subject to price fluctuations.”

Again, the Journal sees the trees but misses the forest.

Its “bacon producers” (we once called these folks hog farmers, now they’re contract pork producers) are the force behind both the demise of belly futures and the rise of “price fluctuations.” When nine out of 10 hogs are sold in the dark, it’s impossible to see what’s moving the market.

All this might be news to reporters high above Chicago’s Wacker Drive, but none of it is new to folks in the barn. Thin markets are easily manipulated and markets easily manipulated are markets begging for new oversight.

That’s why Congress, in the 2008 Farm Bill, mandated the U.S. Department of Agriculture, through GIPSA, the Grain Inspection, Packers and Stockyards Administration, to shine new lights on the nation’s ever darkening, packer-dominated livestock markets. The Bacon Boys, however, are fighting the proposed rules; they love the very profitable dark.

And what about you; you like sow belly selling for $4.70 a pound?

Well, grab a light – an e-mail will do – and tell you congressional reps to support the proposed GIPSA rules.

That’s right; you can save your bacon.

A Dec. 28, 2010 Wall Street Journal story laments the “near-halt” of pork belly trading at the Chicago Mercantile Exchange. Bellies were “once among the CME’s most-traded commodities,” but now “the pork belly is in danger of going belly-up.”

Indeed, only six belly contracts traded in Nov. 2010. Why? Two chief reasons, say experts cited by the newspaper.

First, belly contracts can still be “settled” – fulfilled – by delivery of 40,000 lbs. of bacon. Nearly all commodity contracts worldwide are now settled in cash and the threat of 20 tons of frozen pork landing in your office deters traders.

The other reason is the disappearance of the bacon “seasonal,” the usually profitable buy-in-the-winter, sell-in-the-summer trading strategy that belly traders banked on for decades. Today, bacon demand is heavy year-around so the death of the bacon seasonal now underwrites the death of belly trading.

Both explanations are accurate insofar as they go, but there’s a far bigger, far simpler reason why belly trading is going the way of buggy whips: you don’t need to trade bellies if you own the pig from the farrowing crate to the meat case.

Today’s nearly perfectly integrated hog sector skips over the risk of owning unpriced bellies because 90 out of every 100 hogs are produced and sold under contract either by or to packers. In short, if the pig is priced before it’s born, why hedge its bacon?

The answer is you wouldn’t because its slaughter price, the biggest upfront risk to the packer, is locked in from its first breath.

For all its rooting around, the Journal piece does cite some important consequences of today’s nearly extinct belly trading.

For example, “Retail bacon prices in November surged 34 percent from a year earlier to $4.697 per pound, making it more expensive than pork chops, according to the Bureau of Labor Statistics.”

Golly, up really is down – eating high off the hog is cheaper than eating low on the hog – when a few giants control the production, packing and distribution of pork outside open, transparent markets.

Moreover, the Journal continues, “(S)pot [belly] prices have soared 45 percent from June to an all-time high of $1.60 a pound in September, before tumbling back to a low of 88 cents by late October. Now they fetch around 96 cents.”

Again, the clear lack of a clear market with clearly reported prices often sets the table for dramatic, mostly inexplicable, price moves.

Or, as the Journal notes in a classic understatement, “Without a viable hedging tool for belly prices, bacon producers – and consumers – can be subject to price fluctuations.”

Again, the Journal sees the trees but misses the forest.

Its “bacon producers” (we once called these folks hog farmers, now they’re contract pork producers) are the force behind both the demise of belly futures and the rise of “price fluctuations.” When nine out of 10 hogs are sold in the dark, it’s impossible to see what’s moving the market.

All this might be news to reporters high above Chicago’s Wacker Drive, but none of it is new to folks in the barn. Thin markets are easily manipulated and markets easily manipulated are markets begging for new oversight.

That’s why Congress, in the 2008 Farm Bill, mandated the U.S. Department of Agriculture, through GIPSA, the Grain Inspection, Packers and Stockyards Administration, to shine new lights on the nation’s ever darkening, packer-dominated livestock markets. The Bacon Boys, however, are fighting the proposed rules; they love the very profitable dark.

And what about you; you like sow belly selling for $4.70 a pound?

Well, grab a light – an e-mail will do – and tell you congressional reps to support the proposed GIPSA rules.

That’s right; you can save your bacon.

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