CME Group Set to Introduce Pork Cutout Futures and Options

CME Group Inc. CME will unveil cash-settled Pork Cutout futures and options, following the fulfillment of regulatory approval on Nov 9, 2020.

New CME Pork Cutout futures and options are designed to give the U.S. pork industry and export markets tailored risk-management tools on the cutout. These contracts will be cash-settled to the CME Pork Cutout Index and will complement CME Lean Hog futures and options. It will aid in boosting CME Group’s array of leading agricultural benchmarks.

Lean hog futures and options are traded at CME and allow sellers and buyers, such as hog producers and packers, to manage the risk of adverse price movements in their operations, aid in managing price risk and engagement in price discovery for individual markets, and enables access to electronic markets.

The new contracts will be quoted in U.S. cents per pound and will have a contract size of 40,000 pounds.

While the Lean Hog Index reflects the prices paid for hogs in the United States, the Pork Cutout Index reflects the prices paid for pork. A “cutout” is the approximate value of a hog computed using the prices paid for the various wholesale cuts of pork, including loin, butt, picnic, rib, ham, and belly. Pork cutout values have seen tremendous volatility since the onset of the pandemic. During the first wave of panic buying in the second quarter, the USDA pork carcass cutout value based on FOB Omaha skyrocketed by nearly 116%.

The CME Pork Cutout Index price gives an indication of the overall supply and demand situation of the wholesale pork market.

Pork Cutout futures and options will provide risk management tools for producers, packers, processors, wholesalers, importers, and exporters to tailor their risk management strategy according to exposure to pork cutout values. It will provide an opportunity to trade the spread between Pork Cutout and Lean Hogs.

Moreover, it will improve market visibility, which helps in maintaining a highly competitive and innovative pork production system in the United States.

The new contracts will be listed on CME and has the backing of CME Clearing, mitigating counterparty risk. Margin offsets will also be available between Pork Cutout and Lean Hog contracts.

CME Group exchange consists of designated contract markets for the trading of futures and options contracts. It focuses on maximizing futures and options growth globally, diversifying business and revenues, and delivering unparalleled customer efficiencies and operational excellence.

The company offers the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange (FX), agricultural, energy and metal commodities.

Agricultural futures and options provide the tools the industry needs to manage risk and help put food on the table for a growing global population.  The livestock industry is a global market, which is exposed to risks that could affect profitability.

CME Group Livestock futures and options provide the ability to manage these market scenarios. These allow participants such as producers, feed lot operators, meat packers, importers and exporters to deal with the price risks associated with the sale or purchase of livestock and meat products. In the case of speculators, these provide them with tools to capitalize on potential profit opportunities in the livestock markets.

CME Group began livestock futures trading in 1964, with the listing of Live Cattle futures. The livestock complex now includes futures and options on Live Cattle, Feeder Cattle and Lean Hogs.

Shares of this Zacks Rank #3 (Hold) largest futures exchange in the world in terms of trading volume as well as notional value traded have lost 21.2% in the past year, compared with the industry’s decline of 1.1%. Nonetheless, the company’s policy to ramp up its growth profile and capital position should continue to drive shares higher.

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