LIVESTOCK OVERVIEW

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).

Supply / Production Considerations
The change from small to large Hog producers dominating the pork industry has changed the nature of the Hog supply.  Today, systems producers, who typically use large controlled-environment buildings known as "hog factories" dominate Hog production.  These facilities make handling Hogs easier by providing for more direct observation of animals, allowing greater control over the production process and protecting both the animals and the workers from heat, cold, rain, and snow.  Because of the close supervision of the production process and the complete control of the environment, swine production system facilities generally are able to produce a market weight Hog faster and cheaper since feed efficiency is better than small-scale outdoor facilities.  Feed and labor are the two largest variable costs faced by Hog producers.

Demand / Consumption Considerations
The demand for pork is traditionally very seasonal in nature. Seasonal aspecs of supply and demand are already factored into the futures prices and these prices do not move in tandem with the respective cash market. Additionally, the option premiums do not move in tandem with the underlying futures contracts. Pork demand tends to be the strongest during the summer in the United States when barbecuing is more prevalent, and Americans consume more processed meats, which typically contain a high amount of pork products.  However, the United States is not the largest pork-consuming nation.  Pork in the United States is gaining as producers are making leaner, less fatty hogs for slaughter.  The industry has slimmed down their pigs, with today's pork containing 50% less fat than the pig of the 1950's.  Around World War II, pigs averaged 2.86 inches of back fat, compared to today's leaner, slimmed down hog which contains an average of less than an inch of back fat.  This trend toward leaner pork, coupled with the Pork Councils marketing, "Pork the Other White Meat" television and print commercials, has increased the American public awareness of pork.  However, pork still has a stigma attached to it in North America, though this is not true for Asia and Europe.

China is not only the largest pork-producing nation it is also the largest pork-consuming nation.  Part of this is simply due to the sheer population in China, but pork has been a popular part of the Chinese diet for centuries.  The ancient Chinese were so loath to be separated from pork, that the departed was sometimes accompanied to the grave with their herd of hogs.  In 1997 China ranked as the largest pork-producing nation, producing more than the total of the next nine largest producers (including the United States), in &aggregate.  Despite China's large prowess in pork production, in most years China is a net importer of pork, though only a marginal importer of U.S pork products.

The United States is the largest pork exporter in the world, followed by Denmark.  The United States exports more pork to Japan than any other nation, as Japan also has a strong appetite for pork.  Canada, Mexico, Russia, Hong Kong, Korea, Italy, China, the Philippines, and Britain are important markets for U.S. pork exports.

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