First of all, in case there is any misconception, trading in pork bellies really means trading in the bellies, and only the bellies, of pigs. Bacon (Sandeep’s vegetarian-exception) is cut from pork bellies. Pork bellies futures, like all futures contracts, are agreements on delivery, at some pre-specified date in the future, of freshly-butchered pork bellies. They have been traded for decades on the Chicago Mercantile Exchange. Futures contracts are generally used to manage risk from volatile prices by securing in advance a price for future delivery at some premium.
Now, the question. Why pork bellies futures? Are pork bellies prices so volatile? Surely they cannot be more volatile that than the rest of the pig’s parts since supply must move together. More volatile than other meat products? Since we can always just count the number of pigs alive today we can get a good forecast of the supply of butchered pigs in the future so any volatility must be explained by demand fluctuations. But what is so volatile about the demand for bacon? I can’t imagine it is any more volatile than the demand, say for sushi-grade tuna. But there are no tuna futures as far as I can tell. This is a genuine mystery. Please share your pork belly knowledge in the comments section.
(dinner conversation with Dilip, Tomek, Stephen and Sylvain acknowledged.)