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.)
Cheap Talk 
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April 30, 2009 at 9:28 pm
Brian
Leo Melamed:
“The price of pork bellies, which are uncured bacon, were very volatile and produced five or six bull and bear markets each year. It was a great market.”
http://www.derivativesstrategy.com/magazine/archive/1995-1996/0496qa.asp
Also explains why we don’t have onion futures.
April 30, 2009 at 9:52 pm
Bill
Actually, pork belly futures are rip-your-face-off volatile. There is a metric used by meat packers called “cut out” and hams and bellies are the most profitable components of this metric. Some other components are picnics, loin, and ribs. If they cannot be sold as fresh pork or further processed into processed products, they are deep frozen and sold later.
In the late 1990’s, the resurgence of high protein, high fat diets led to a huge surge in demand in the US and impacted the price of bellies in a tremendous way, enticing bellies out of cold storage at an unprecedented rate.
The “cut out” indicates the profitability of meat packing and moves much the same way the crack spread moves in crude oil – pigs go in and pork products come out. In the crack spread, crude oil comes in and unleaded gasoline and distillates come out. When demand for products is high, the cut out margin for packers is good. When demand for products is low, the cut out margin suffers.
The largest and most successful meat countries in the country (see Tyson and Smithfield) are at least a little vertically integrated – supplying some of the animal inputs to their kill plants just like BP or ExxonMobil delivers crude oil to some of their own refineries. This can help shave some of the volatility from earnings.
There is a dude in the Merc pit whom the local have named Captain Hook. He helps the market maintain its status as a roach motel – traders can get in, but they can’t get out. Stay away unless you have a bonafide hedging need or want to lose money.