What value – or desired price – have you set for your pigs?

Lean hogs futures are a common whipping boy when hog markets are low or just disappointing relative to expectations. The latter is a good descriptor of this summer so allegations of nefarious behavior or just complaints about structural issues that make the lean hogs contract less useful are common at present. Add in fund positions that appear to have more and more influence on price movements and some question just what this futures contract does for the pork industry as a whole and pork producers in particular. 

Such questioning is healthy provided it is based on facts.  So let’s consider a few issues and the facts that should inform our response to them.

Issue No. 1:  Lean hogs futures contact much more volatile than it once was

I hear this all the time and must admit that I believed it to be true. One reason for the apparent volatility is larger price change limits that simply allow market conditions to move prices further in one day’s trading that once was allowed. But as with many “beliefs” this one fails the fact check.

Figure 1 shows the standard deviation of closing daily prices for each contract from February 2018 through July 2024. For instance, the last observation is the standard deviation of all of the daily closing prices for the July 2024 contract. It is clear that LH futures have indeed been more volatile than they once were but it appears that the volatility has declined since 2022. I’m not surprised that volatility exploded in 2020 due to COVID issues or, for that matter, that the 2020 volatility poured over into 2021. I am a bit surprised that it has dropped back into the 2018-2019 range but it has.

And considering the higher absolute value of LH futures prices, volatility has declined even farther.  Figure 2 shows the coefficient of variation (COV = standard deviation / average) for each contract since February 2018.  This measure puts volatility below the 2018-2019 level since the beginning of 2023.  A key driver of the lower COV is higher LH futures prices since February 2022

Issue No. 2:  Lean hogs futures prices do not predict hog prices as well as they once did 

There is some truth to this one but we need to consider just what is being predicted and, even more important, whether traders are really thinking about a predicted price at all.

Theoretically, the value of any LH contract on a given day would, I guess, be a predictor of the lean hog Index value on the day of contract expiration. If that is the case, this thing has performed pretty miserably. 

Figure 4 shows the percentage of daily closes that are within $1/cwt of the final expiration price of each contract. It would answer the question “What percentage of daily closes actually predicted well the price that is theoretically being predicted?” And the answer is “Not very many!”