Selling (Going Short) Lean Hogs Futures to Profit from a Fall in Lean Hogs Prices

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What are Lean Hogs? – Trading Great Swings with Lean Hog Futures

Many new to trading tend to only look at markets they are familiar with. Most often, that happens to be the index markets and not, for example, lean hogs futures. That’s a pity since there are other markets that offer great opportunities to diversify!

In general, you want to diversify as much as you possibly can so that one market or one strategy isn’t responsible for all your profits. The more markets and strategies you trade, the better prepared you are for market turmoil and black swan events. To be frank, there simply is no reason to stay with one market, when there are so many to choose from!

One great market that is often overlooked, is the lean hogs market. It holds many edges that are worth investigating for your trading. However, the subject of this post is another. The lean hogs futures market has experienced great swings lately, and I thought that it might be interesting to understand why!

In many cases, it’s hard to ascribe price action to certain events, but this time there is one reason that seems to have triggered it all.

What Has Happened?

Take a look at this daily chart of the lean hogs futures market:

Lean hogs futures chart

As you can see, the price has rocketed since the beginning of March, going from slightly below 70$ all the way up to 98$. That’s an increase of over 40%, in just one month! So what’s driving this market?

Well, China, that stands for nearly 50% of the world production of pork meat, has had to make its biggest purchase of US pork meat in nearly two years. The reason is that a massive outbreak of African swine fever has reduced Chinese pork production by as much as 30%, creating a shortfall that needs to be compensated through more imports. China already is a massive buyer of American meat products and consumed nearly half of worldwide pork production in 2020.

The approaching trade deals between China and the U.S could determine the extent of the Chinese increase in meat imports, thus impacting the price of lean hogs. In other words, this is something worth keeping an eye on!

Profiting From Lean Hogs Rally

All major price movements of any market offer great opportunities to make substantial profits or losses. If you have a robust strategy, you might end up on the winning side and make some gains. Here is one strategy of mine that has been very successful in the recent lean hogs rally:

Lean Hogs strategy

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As you see, lean hogs futures managed to catch a significant extent of the last month’s swings. First, it followed the market all the way up to the top, exited the market, and managed to reenter right when it was about to turn up again. In the picture below you can see how the last two trades made a significant mark on the equity curve.

Of course, this strategy was lucky and managed to be on the right side of the market. That’s not always the case. Nonetheless, having a good strategy increases your odds of making money from volatility explosions like this one!

Final Words

There are many markets that hold nice opportunities for traders to make money, and the lean hogs futures market is one of them. Many new traders focus too much on their favorite markets and subsequently miss many chances to diversify and achieve higher returns with lower risk. Don’t be one of them! Trade as many markets you can, and you will most likely achieve better results! Diversification is the closest we can ever come to “the holy grail” in trading!

Lean Hog Futures

Each year, 100 million hogs are brought to slaughter, a number only possible because of the movement to intensive, rather than traditional, pig farming. Because pork is one of the most widely consumed meats, the demand for pork is always strong and growing. Lean hog is the most common source for pork meat in the U.S., but the country that continuously ranks at the top for total consumption of pork is, without a doubt, China.

Lean Hog Futures Contract Specifications
Contract Size 40,000 pounds (˜18 metric tons)
Price Quotation Cents per pound
Trading Hours Monday 9:05 a.m. Central Time/CT-Opening. At 4:00 p.m. CT on Monday- Thursday, the markets halt and restart at 8:00 a.m. CT on the next morning. Friday 1:55 p.m. CT-Close
Minimum Price Fluctuation $.00025 per pound ($10 per contract)
Product Code CME Globex: HE
CME ClearPort: LN
Clearing: LN
TAS: HET
Listed Contracts February (G), April (J), May (K), June (M), July (N), August (Q), October (V) & December (Z)
Settlement Method Financially Settled
Last Trade Date 10th business day of the contract month, 12:00 p.m.
Trade At Marker Or Trade At Settlement Rules Trading at settlement is available for first 2 listed futures contract months, a calendar spread between the first and second contract month, and are subject to the existing TAS rules. The Last Trade Date for CME Livestock TAS products will be the second to last business day in the month prior to the named contract month.

Trading in all CME Livestock TAS products will be 9:05-13:00 Chicago time on Mondays or on the Tuesdays that follow a Monday holiday, and Tuesday through Friday 8:00-13:00, Chicago time.

TAS products will trade a total of four ticks above and below the settlement price in ticks of the corresponding futures contract (0.00025), off of a “Base Price” of 0 to create a differential (plus or minus 4 ticks) versus settlement in the underlying product on a 1 to 1 basis. A trade done at the Base Price of 0 will correspond to a “traditional” TAS trade which will clear exactly at the final settlement price of the day.

Note: No May contract or calendar spread with the May expiration as a leg will have TAS in Lean Hog futures.

Settlement Procedures Lean Hog Futures Settlement Procedures
Exchange Rules These contracts are listed with, and subject to, the rules and regulations of CME.
Source: CME Group

Lean Hog Facts

Hogs have a relatively short gestation period of about 3.5 months with the typical litter bearing 9 piglets. Therefore, hogs are bred twice a year continuously in order to ensure a constant wave of production. After about a month, the piglets are weaned from their mothers and fed a special diet to produce a quick weight gain. Hogs can gain up to 3 pounds every time they feed. When hogs are around 6 months old and reach a weight of over 250 pounds they are ready to be butchered. Each matured hog can yield around 190 lbs. of meat suitable for consumption.

China is responsible for nearly half of all pork production worldwide, however, the United States is the leader for pork exports. Japan was the world’s largest importer of pork in 2020.

Lean hog futures can allow traders to address price risk among those involved in the trade of lean hogs and to assess supply and demand of lean hogs for both the current and future outlook.

Last updated October 2020

Additional Info

Recent Posts on Lean Hogs

  • Turner’s Take Podcast: 97 Million Acres of Corn! (3/31/2020) – New Crop looks bad. We estimate we lose another 150mm in demand from low energy prices in the 2020-21 marketing year. With 97 million acres and a trend line yield we see ending stocks blowing out to 3.4 billion. This puts cash prices and harvest lows under $3.
  • Turner’s Take Podcast: Transitioning to Wide Ranging Consolidation (3/25/2020) – I am working from home while IL has a Stay at Home order in effect. My office cell is 312-651-4621. My office phone 312-706-7610 will roll over to my cell phone if you call my trade desk. This week we talk about the steps that took place so a potential bottom could be made. I think the market is now heading into a period of wide ranging consolidation. We talk about what to look for and why in the coming weeks for stocks, energy, livestock and grains. Make sure you take a listen to the latest Turner’s Take Podcast!
  • The Swine Times 3/24 – Exit (3/24/2020) – Exit April-Oct as it surges

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The FED, USD, and the Coronavirus Outbreak

The 2020 outbreak of the novel coronavirus (COVID-19) created a financial environment driven by angst and trepidation. COVID-19 panic swept the globe, placing the world’s capital structure under extreme pressure. The result was consistently high volatilities in the commodity, equity, currency, and debt markets.

Is the Coronavirus Causing a Global Recession?

Traditional financial theory suggests that a recession is two consecutive quarters of negative growth in a nation’s gross domestic product (GDP). The underpinnings of these types of economic downturns vary. Typically, a recession is attributed to commodity pricing instability, market crashes, inflation, or extraordinary events.

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