characteristics of lean hog futures market?

Answer 1

Watch for regulatory actions that clearly define a direction. I.E.-what will make it more expensive to produce hogs.

Answer 2

Basic answer: "Hog production in the United States has undergone a dramatic change in the last decade and a half. In 1988, Hog farms with less than 1,000 head accounted for 32% of the market share of all Hog producers, while large 50,000 plus head operations accounted for roughly 7% of total hog production. According to a 1998 pork industry Structure Study done by the University of Missouri, large 50,000 plus animal operations now account for 37% of the total Pork Industry, while small 1,000 head or less operations only account for 5% of total US market share. This transformation from small operators to large-scale operations has changed the nature of the pork industry as well as pork futures trading.

Prior to 1997, Hog futures were traded based on "live weight". This was the total weight of the Hog prior to slaughter and dressing. Due to the changing nature of the pork industry, the Chicago Mercantile Exchange changed the Hog contract to "lean weight", or post slaughter based on the fact that most finished hogs are sold to slaughter houses who priced the animals based on slaughter weight, not "on the hoof" weight. In order to maximize the utility of Hog futures for producers, processors, and speculators the Hog contract was changed from 40,000 pounds live weight, to 40,000 pounds lean weight, or post slaughter. (Note: All prices used prior to the February 1997 contract reflect Live Hog futures as opposed to Lean Hog futures)."

From an article on this week's prices:
"HOGS

Karen’s Thoughts: A couple of weeks ago I brought up some issues I had been hearing from clients about the potential to see lower market-ready hog supplies. Looking at where prices have since sprung up to, it appears the trade is pricing in this unexpected drop in supplies. I suspect this is primarily due to a disease outbreak and a slowing of Canadian feeder pigs, all hitting at the same time. It’s hard to foresee this happening when we have had a flood of meat supplies hitting the market for several months. But timing is everything in a market like this. When demand soars during the summer months – shortened supplies can lead to amazing price spikes. I don’t take this move for granted either, nor do I think it’s a long-term situation. Supplies can be replenished very quickly. This is why a price level this high deserves a serious look at hedging strategies.
Scott’s Thoughts: In spite of the drop in the hog slaughter pace recently, hog weights also declined over the past week. The market took that as proof positive that hog runs have dried up and we face an immediate shortage of animals. What I haven’t heard, however, is a reasonable long-term explanation of where the hog supplies went. So I continue to treat this speculative-driven rally in futures very cautiously. Past experience warns me that “missing” hogs have a habit of showing up suddenly and derailing these supply driven rallies.

Our Hog Verdict: This spike higher in hog futures has been surprisingly aggressive, but it may not be “sustainable.” Get plans in place now for fall/winter hedge coverage. These prices appear very attractive for producer margins."