A London-based market research company named Ipsos MORI surveyed people’s diet preferences worldwide. The published research paper brought to light an amusing fact – 90% of the people across the globe are non-vegetarians. ‘Non-vegetarian’, an English word very commonly used in India, refers to food items containing meat or animals’ flesh.
Meat lovers worldwide know that the most sought-after item is Pork – out of the meat category. Pork is a delicacy savoured extensively in Asia, Central Europe, and the Western world. It is served in different variants to suit regional taste buds.
What are the different pork products?
Pork can either be cooked fresh or cured and processed over a long period.
The Total Addressable Market of processed pig meat is enormous – ham, bacon, and sausages are widely consumed. The reason behind this mass popularity is quite simple – processing extends the shelf life of meat, adding to consumers’ convenience.
In the days of the 20th century, consumers tended to consume frozen meat during specific periods and seasons, owing to which the price of Pork would vary drastically. During peak seasons, when the demand for Pork would increase, the price of Pork sky-rocketed as well. This price variance became a problem for the pig-eaters. Something had to be done to hedge against the price hike and continue enjoying the meat’s royal flavour. And that’s how Pork Bellies were invented.
What are Pork Bellies?
As the name suggests, Pork Belly is the meat or the flesh that comes from a pig’s belly. Pork Bellies are crucial ingredients for the making of pig products. What is Pork Belly called in layman’s terms, you ask? Sometimes referred to as ‘Side Pork’ or ‘Fresh Pork Belly’, in the 1980s, Pork Belly had become a buzzword.
Buthow are Pork Bellies related to the world of finance, you would wonder?
Pork Bellies definition translates to a commodity traded in the futures market in financial terms. Remember we had spoken about the volatile fluctuations in the pig market? Pork Bellies meaning is the hedge against a potential price hike using futures as a commodity.
The origin of Pork Bellies trading
Pork Bellies were one of the earliest forms of financial futures contracts and preceded many financial contracts we see today. Pork Bellies trading dates back to 1961 when the popularity of financial instruments had begun to take shape. The first-ever Pork Bellies trading took place on the Chicago Mercantile Exchange, popularly by the acronym CME. Pork Bellies reached their maximum popularity in the early 1980s when the American population adapted to them with open hands.
Let’s understand what a futures contract is
A futures contract is simply a contract or an agreement between two people. The contract is where one party buys, and the other sells – commodities, securities or any other assets at a predetermined price at a predetermined future date.This concept was also used in the pig market called Pork Bellies trading.
But why did Pork Bellies begin to trade?
The idea of a pig being traded on an exchange seems pretty absurd. Pig trading might seem like a joke to some, but it did happen, and it happened in volumes. So let’s understand what led to this craze.
See, Pork Belly is used for cooking bacon. People were producing Pork Bellies throughout the year; however, the demand for bacon was pretty low in winter. So, traders began to purchase Pork Bellies in bulk when their demand and price was low. The Pork was then frozen and stored till the time was right. Interestingly, Pork Bellies could be stored and preserved for over a year with the facilities available. Then the same conserved food product would be sold in summer when the demand for meat would be high. This tactic was a perfect arbitrage opportunity – buying at the right time when the prices are low and exiting at the right time when the prices are high, giving insane riskless profit to traders by simply taking advantage of the market sentiments. The only ones to suffer as a consequence were the poor consumers, but what option did they have?
Enter commodity trading
Producers of Pork Belly began purchasing futures contracts to reduce their production costs. Traders began purchasing these contracts to sell Pork Bellies at a predefined price in the future. Consumers wanting to hedge against a price rise in the future got to pre-fix their Pork Belly purchase price. All this with the hope of stabilising the crazy volatility of Pork Belly prices.
Like any other futures contract, the execution of the Pork Belly contracts happened in standardised lots. A contract unit was made up of forty thousand pound frozen slabs – which in turn comprised cuts of meat weighing eight to eighteen pounds.
Pork Bellies make up a staple diet for countries around the world. China dominated the world in Pork Belly consumption. China also has a history of favouring Pork over other meat products. But then, in 2011, Pork Belly trading stopped.
What happened to Pork Belly trading?
When countries preferred Pig meat over other animal products, why did the Chicago Mercantile Exchange delist Pork Belly futures in 2011?
There were a few primary reasons behind this drastic change. The most significant reason was the change in consumer behaviour – a change in their taste and preference. Consumers began eating pig meat all year-round, which reduced the requirement of a future hedge. Consumers’ interest in Pork commodity trading reduced, due to which the traded volume on the exchange declined. Also, there were reports that the commodity’s price became highly volatile. It became difficult for traders to gauge the market movements, making the investment risky beyond doubt.
The importance of bacon in a person’s diet led to the introduction of the CME Fresh Bacon Index in 2019. Lean Hog Futures are now traded on the CME, replacing the Pork Belly futures. These futures are cash-settled. Even though the erstwhile Pork Bellies are no longer traded, with market evolution, we have improved contracts replacing it for good.