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- CRB Fundamentals - 2008 Commodity Articles

Pork Bellies

Pork bellies are the cut of meat from a hog from which bacon is produced. A hog has two belly slabs, generally weighing 8-18 pounds each, depending on the hog's commercial slaughter weight. Total hog slaughter weights average around 255 pounds, equal to a dressed carcass weight of about 190 pounds. Bellies account for about 12% of a hog's live weight, but represent a larger 14% of the total cutout value of the realized pork products. Pork bellies can be frozen and stored for up to a year before processing. The pork belly futures contract at the Chicago Mercantile Exchange calls for the physical delivery of 40,000 pounds of frozen pork bellies, which have been slaughtered at USDA federally inspected slaughtering plants. Each deliverable belly typically weighs 12-14 pounds each.

There are definite seasonal patterns in pork belly prices. Bellies are storable and the movement into cold storage builds early in the calendar year, peaking about mid-year. Net withdrawals from storage then carry stocks to a low around October. The cycle then starts again. Retail bacon demand also follows a time worn trend, peaking in the summer and tapering off to a low during the winter months. While demand patterns would suggest the highest prices in the summer and the lowest in the winter, just the opposite is not unusual. Such contra-seasonal price moves can be partially attributed to supply logistics, notably the availability of frozen storage stocks deliverable against futures at CME exchange-approved warehouses. When stocks prove either too large or small, the underlying demand variables for bacon can be relegated to the backburner as a market-moving factor. The fact that no contract months are traded between August and the following February adds to the late fall futures price distortion.

Belly prices (cash and futures) are sensitive to the inventory in cold storage and to the weekly net movement in and out of storage, which affords some insight to demand, although a better measure is the weekly quantity of bellies being sliced into bacon. Higher retail prices tend to encourage placing more supply into storage because of lower retail bacon demand. Bacon is not a necessary foodstuff so demand can be buoyed by favorable consumer disposable income. However, dietary standards have changed dramatically in recent years and do not favor the consumption of high fat and salt content food, such as bacon. In addition, alternatives to pork bacon have emerged in recent years such as turkey bacon, which has lower fat and calorie content.

Prices - Pork belly futures prices in early 2007 rallied to a 3-1/2 year high but then reversed course and sold off to a 2-1/2 year low by mid-year. Prices recovered slightly into the end of the year but closed 2007 down -6% at 85.97 cents per pound. Pork belly prices in early 2007 rallied to a 3-1/2 year high due to severe weather during winter 2007 (which caused low carcass weights) and on speculation for strong Chinese demand. Pork belly prices then faded later in the year due to increased supplies and slack demand throughout the entire pork complex.

Supply - The average monthly level of frozen pork belly storage stocks in 2007 fell by 0.3% to 40.100 million pounds, down from the 8-year high of 50.350 in 2005. As of December 2007, there were 34.519 million pounds of pork bellies in storage.

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