At a Glance
- Amid robust restaurant, retailer demand, bacon “far and away the most volatile” of all hog cuts
- New CME Fresh Bacon Index establishes transparent price reference for fresh pork bellies
Ask Chicago butcher Bill Begale to name his top-growing products in recent years, and you get a quick answer.
“Bacon, bacon, bacon,” said Begale, who runs Paulina Market, a popular meat retailer on the city’s North Side. “It’s a big thing for us. You can do anything with bacon.”
Demand has been so strong over the past five years that Paulina Market expanded its bacon offerings beyond its standard, pork-based varieties, Begale said. The store also sells English bacon , lamb bacon, veal bacon and beef bacon. Paulina Market even experimented with “bacon soup,” he said.
What’s behind Americans’ seemingly insatiable appetite for all things bacon? “It’s the flavor,” Begale said. “It enhances everything you do with it.”
Begale is one example in a vast ecosystem of retailers, wholesalers, restaurants and others serving markets for one of the fastest-growing foods over the past two decades.
The pork industry has ramped up pork belly production to all-time highs amid robust demand from food service locations.
In 2018, ready-to-cook belly production totaled a record 3.43 billion pounds, up 2.6 percent from 2017 and up almost 13 percent from 2008, according to Steiner Consulting Group, which cited USDA data. Production is forecast to rise another 2.9 percent in 2019, according to Steiner Consulting.
Difficulty Hedging over The Long-term
As bacon demand accelerated, the pork industry continued to grapple with a long-running challenge: pork bellies, the part of the hog carcass that’s sliced into bacon, are a tricky market to navigate. Wholesale pork belly prices often swing sharply and unexpectedly, making it difficult for processors, retailers and others to hedge longer-term market exposure.
“Of all the hog cuts, bellies are far and away the most volatile in price,”, said Jim Sullivan, Manager, Research and Product Development, at CME Group. “Pork bellies are highly seasonal, and supply and demand doesn’t coincide with overall demand for pork in general, or correlate with the other cuts,” such as chops, ribs or hams.
CME Group’s benchmark Lean Hog futures contract is widely used to manage price risk for slaughter-ready hogs, but there’s no such vehicle for pork bellies. Following years of dwindling trading volume, CME’s frozen pork belly futures contract was de-listed in 2011.
“It would be difficult to hedge right now for a purchase or promotion in November, for example,” Sullivan said. “Prices for fresh bellies are so volatile that people in the industry often are reluctant to quote or price beyond two or three months into the future. There’s no reliable way for users to effectively manage that risk.”
“If a restaurant or grocery chain wanted to hedge bacon purchases for a promotion several months in advance, they most likely wouldn’t use our Lean Hog contract,” Sullivan said. “They would look to book the physical deal and price the bacon very close to the actual event,” Sullivan said.
Fresh Bacon Index Sheds Light on Supply/Demand
CME aims to fill that gap with its new Fresh Bacon Index, which the exchange launched May 13. The index establishes a weighted average wholesale bacon price published every Monday, based on U.S. Department of Agriculture data and reflecting one load (40,000 pounds) of fresh, skinless pork bellies (for the week ended May 10, the index was $1.5539 a pound).
With the new index, hog producers, meatpackers, wholesalers, retailers and others across the “bacon supply chain” gain a transparent weekly gauge to track supply and demand dynamics.
“As consumer tastes have evolved, bacon is now in demand year-round,” Fred Seamon, CME Group Executive Director of Agricultural Research and Product Development, said in a statement. “We believe our Fresh Bacon Index can become the market-preferred bacon price reference… (and) will provide greater price discovery for market participants who need transparent bacon prices.”
Paulina Market’s Begale is one of many pork buyers and retailers struggling to make sense of price movement in the fresh belly market.
“Belly prices may go up 30 cents one week, then two weeks later drop” by a similar amount. “I’m not sure why. It’s more volatile than any other cut.” If wholesale belly prices rise further, “we may have to raise our prices,” he added.
Fading Memories of Belly Futures Glory Days
Launched in 1961 by the Chicago Mercantile Exchange, pork belly futures arrived before other livestock contracts, such as live cattle futures, as well as the equity- and interest rate-based contracts, like Eurodollars, Treasury bond notes and S&P 500 index futures, that dominate CME trading today.
For a time, pork belly futures were used as a hedge against food inflation, according to market historians. Pork bellies eventually became entrenched in popular culture as a symbol of freewheeling, bare-knuckled capitalism (ask a veteran trader for a “Trading Places” quote or two), and the belly pit on the old Merc floor grew legendary, a colorful place full of colorful characters where prices would careen from “limit-up” to “limit-down” and back again, often for no apparent reason, and often on the same day.
Why? Don’t ask. For inquiring market reporters on the trading floor in those days, “more buyers than sellers” (or, “more sellers than buyers”) was a typical response from traders in the pit.
But pork belly futures trading peaked in the 1980s, and as people started eating more bacon and other pork products year-round, there was less need to sock frozen bellies away in cold storage, and therefore less need for a frozen pork belly contract. By the beginning of this decade, the pork belly contract was effectively obsolete.
Volatility Hurting Pork Belly Buyers and Sellers
Steve Meyer, an economist with Kerns & Associates and a consultant for the National Pork Board, said the pork industry needs an “updated mechanism” to manage price risk in pork bellies and bacon.
“We’ve had huge volatility past five years, and that has at times hurt both buyers and sellers,” Meyer said. “There’s been some misjudgments by some market participants over how much was needed in storage.”
If the new CME Fresh Bacon Index gains acceptance and leads to a viable futures contract, “that could help the industry manage price risk,” Meyer added.
Bacon’s popularity upswing in part reflects the meat’s growth beyond the traditional “bacon, lettuce and tomato season” in the spring, Meyer said.
“We’ve seen a resurgence of meat demand in general, and bacon has been at the forefront of that trend,” Meyer said. “Bacon is a lot better product than it was 10 to 15 years ago. Pork producers’ efforts to raise leaner hogs has paid off in leaner bacon.”
Bacon: It’s on the Menu
Restaurants big and small, fast and slow, have been a major driver of bacon demand in recent years.
McDonald’s Corp., the world’s biggest restaurant chain, reported a 4.5-percent jump in comparable store sales in the first quarter, in part due to bacon-related promotions such as “Big Mac Bacon” and “Quarter Pounder Bacon” (“Because There’s No Such Thing as Too Much Bacon,” the company said in a January statement).
Bacon ranked No. 3 (behind shellfish and barbeque) in the National Restaurant Association’s 2018 “What’s Hot Culinary Forecast,” which was based on feedback from 700 professional chefs.
Bacon is “not just for breakfast anymore,” the association said in a report. “Restaurants are offering everything from bacon cheeseburgers to maple-bacon ice cream to bacon jam. It’s also in ethnic cuisines. Pork belly never tasted so good.”
Meyer, the Kerns & Associates economist, said he expects the bacon boom to continue buoying U.S. pork producers.
“Increasing bacon demand has helped the whole pork business,” Meyer said. “We’ve seen very high belly prices for past few years. Bacon demand is strong, and I don’t see any reason it won’t continue to grow.”