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Time to Put a Stake Through the Heart of Pork Bellies

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Frozen Pork Belly futures at the CME have 16 contracts open as of the close yesterday, according to the CME volume and open interest reports. Recent price action, influenced by very little actual trading activity, has seen prices move sharply higher. This is a contract that needs to go away. It is time for the CME Group to step in and take action to encourage the handful (or less) of remaining players to liquidate their positions so the contract can be delisted. Failure to act could leave the CME with a black eye that could make launching a re-worked bacon contract much more difficult. The current action in pork bellies does not have the makings of a happy ending.

Back when I entered the futures business, a friend gave me this advice: There are three things you never want to do. First is never trade pork bellies. Second, never have an affair with your boss's wife. Third, never trade pork bellies. That was the bad reputation the bellies had back in the early 1980s.

Pork Bellies used to be a huge contract for the CME, back in the days before financial futures. Some traders used to use it as a way to hedge their inflation risk, as it was a liquid market where prices were very sensitive to the raging inflation of the early 1970s. The glory days for pork bellies are long gone, though the gory days still seem present.

The pork belly pit survived the merger of the CME with the CBOT and the move off the trading floors to the CBOT Building. However, since then when open interest was just under 2600 contracts, open interest has never exceeded that level. In late June of this year, open interest dipped below 100 contracts for the first time. With just 16 contracts open, up from a low of 14, it is time for the CME to engineer an ending to this storied contract.

The world has changed. The food processing business has changed. The price discovery process for this contract is broken. Its time for the CME Group to act.


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