Evaluating the Hedging Potential of the Lean Hog Futures Contract

OFOR Working Paper 96-03

21 Pages Posted: 17 Oct 1996

See all articles by Mark W. Ditsch

Mark W. Ditsch

Consolidated Grain & Barge Company

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign

Date Written: August 1996

Abstract

The lean hog futures contract is replacing the live hog futures contract at the Chicago Mercantile Exchange beginning with the February 1997 contract. The lean hog futures will be cash settled based on a broad-based lean hog price index, eliminating terminal markets from the price discovery process. Using this index over a twenty-month period as a proxy for the lean hog futures price, this paper compares the hedging effectiveness of the live hog futures contract to the hedging potential of the lean hog futures contract for cash live hogs as well as four cash meat cuts. Frozen pork bellies futures are also examined for the cash meats. Both long-term and short-term hedges are simulated, using the minimum-variance approach, which utilizes only unconditional information, and the Myers-Thompson approach that incorporates conditional information. The results show that the lean hog futures should perform better than either the live hog or the frozen pork bellies futures as a hedging instrument for Omaha cash hogs and cash loins. The strongest evidence of this is for the short-term hedging of cash hogs. For the other three meats, no futures contract demonstrated a clear hedging advantage.

JEL Classification: Q13, Q14

Suggested Citation

Ditsch, Mark W. and Leuthold, Raymond M., Evaluating the Hedging Potential of the Lean Hog Futures Contract (August 1996). OFOR Working Paper 96-03. Available at SSRN: https://ssrn.com/abstract=717 or http://dx.doi.org/10.2139/ssrn.717

Mark W. Ditsch

Consolidated Grain & Barge Company ( email )

Mandeville, LA 70448
United States

Raymond M. Leuthold (Contact Author)

University of Illinois @ Urbana-Champaign ( email )

1301 W. Gregory Drive
326 Mumford Hall
Urbana, IL 61801
United States
217-333-1810 (Phone)
217-333-5538 (Fax)

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