CME Group announced Monday that it has begun publishing a new CME Fresh Bacon Index to establish a transparent price reference for fresh pork bellies used to make bacon.
Bacon price volatility is at a high – driven by rapidly growing consumer demand, global trade disputes and disease outbreaks, said CME Group in a release. Prices for pork bellies have been the most volatile of all the pork primal cuts, with volatility peaking at over 40% last year.
"As consumer tastes have evolved, bacon is now in demand year-round," says Fred Seamon, CME Group Executive Director of Agricultural Research and Product Development. "We believe our Fresh Bacon Index can become the market-preferred bacon price reference. This new index will provide greater price discovery for market participants who need transparent bacon prices."
Part of this development is due to the rebirth of bacon, says Steve Meyer, ag economist with Kerns and Associates.
“It wasn’t that many years ago that we didn’t know what we would do with bellies because nobody wanted them and now everyone wants them,” Meyer says.
The new index will provide producers, packers, processors, wholesalers, foodservice, retailers and others across the bacon supply chain with a transparent weekly price to track supply and demand dynamics of bacon transacted on the cash market, CME Group said.
The index establishes a weekly bacon price each Monday based on a combination of negotiated and formula transactions, readily available from the USDA. The CME Fresh Bacon Index price reflects the value of one load (40,000 lbs.) of fresh, skinless pork bellies in cents per pound.
“I think it’s a great development,” Meyer says. “The market is completely different for bellies and bacon now.”
The price risk on bellies has been monumental in the last several years, Meyer adds. He says if CME designed a properly specified contract, there would be a lot of interest in it. Meyer believes it would allow users and sellers of bacon to manage their price risk in such a way that they would be more likely to use bacon.
CME Group says for now they are focused on publishing the Fresh Bacon Index to build awareness and acceptance of the index as the bacon price reference.
“The CME Fresh Bacon Index is a reference price for fresh pork bellies used to make bacon, not a futures contract,” Seamon says. “There is currently no market-preferred bacon price reference available. As we continue to educate customers about ways they can use our index to track the supply and demand dynamics of bacon transacted on the cash market, we hope our CME Fresh Bacon Index can become the de-facto bacon price reference for the industry.”
The CME Fresh Bacon Index will complement CME Group's existing risk management tools and reference index prices for pork and hog industry participants, including Lean hog futures and options, the CME Lean Hog Index and the CME Pork Cutout Index.
CME previously offered a frozen pork belly futures contract, which was physically delivered. Over time, the type of pork belly demanded by consumers and traded on the cash market shifted, and that contract was delisted in 2011.
For more information on the CME Fresh Bacon Index, please visit www.cmegroup.com/baconindex.
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