Lean Hogs Trading Guide: How to Trade Lean Hogs CFDs

Lean Hogs (HE), the foundation of the pork industry, offer potential trading opportunities through Contracts For Difference (CFDs). This guide equips you with the knowledge to navigate the lean hog market and explore the possibilities of CFD trading with this commodity.

TL;DR

• Lean Hogs is a type of commodity, known as an agricultural commodity, that represents the price of pork.
• Lean Hogs Futures can be traded on the CME derivative platform, mostly to hedge and speculate on American pork prices.
• As for the production for the 2023/2024 period, the 3 largest pork producers in the world were China, the European Union, and the United States.
• Weather, disease, meat consumption preferences, input prices and seasonality are some of the most important price drivers of lean hogs.
• One of the ways to trade lean hog futures is through Contracts For Difference (CFDs).
• CFDs on lean hogs track lean hog prices and allow you to speculate on price changes without having to own the underlying assets.
• Day trading, swing trading and position trading are some trading strategies you can use when trading commodities.

What Are Lean Hogs?

Specifically bred for the purpose of producing meat, lean hogs represent a type of hog dedicated to meat production. Within just six months, they are able to achieve their slaughter weight (around 250 pounds) due to their quick development.

The delivery of pigs that are ready to be sold for usage in a variety of sectors is that which is represented by futures contracts for lean hog markets.

In Which Industries Are Lean Hogs Used?

Lean hogs are at the core of the world of pork. The hog industry raises these animals primarily for slaughter, and processing plants transform them into the familiar cuts many people enjoy around the world – ham, bacon, sausage, and ground pork.

But the pig's contribution extends beyond the realm of food. A lesser-known aspect of this industry is the use of various animal byproducts in a surprising range of applications, such as the pharmaceutical, cosmetic, and industrial sectors.

Pork Production 2023/2024

The top pork producing countries of the 2023/2024 production period are China (50% of the global pork production), the European Union (18%) and the United States (11%).

Top Producing Pork Countries (2023/2024)

What Can Affect the Price of Lean Hogs?

The cornerstone of lean hog trading lies in building a strong foundation and understanding the factors that shape commodity prices. Still, remember that while historical trends can provide valuable insights, past performance is not a guarantee of future results.

Here are some of the lean hog market's main price drivers:

• Production Cycle and Pipeline: In the pork industry, there's a natural cycle that influences supply and pricing. Familiarising yourself with this cycle,which tracks hogs from birth to market, can be helpful for traders. The pipeline method helps guess how many hogs might be available at a certain point in the future. This knowledge, along with other things, can have a big effect on the price of lean hogs.
• Weather and Disease: The lean hog supply chain can be seriously hampered by disease breakouts and weather that is hard to predict. Bad weather can interrupt supplies right away by making it harder to move goods or by damaging sites for animals. Animals may not gain weight as quickly during harsh winters, which lowers total production. In the worst situations, disease breakouts can kill a lot of animals, which further reduces supply.
• Seasonality: The lean hog market isn't immune to the changing seasons. Springtime piglets become market-ready hogs later in the year, influencing supply. Summer sizzles with barbecue demand, while holidays like Easter and winter celebrations can cause pork cravings in certain parts of the world. These predictable shifts in supply and demand create a cycle in lean hog prices, with lower points typically seen after spring births and higher prices during feeding months when market-ready hogs are scarcer. By understanding these seasonal patterns, you can gain valuable insights into potential price movements.
• Meat Consumption Preferences: The demand for lean hogs can be influenced by ever-changing consumer preferences. These shifts can be driven by various factors, including age demographics, financial means, exposure to new cuisines, and even advertising campaigns. For example, a growing interest in plant-based alternatives could potentially impact pork consumption.
• Price of Inputs: Rising input costs, particularly animal feed like Corn (ZC) and Soybeans (ZS), can influence how long producers raise their hogs. To manage the financial strain of expensive feed, producers might shorten the feeding period, ultimately impacting the overall supply of market-ready hogs.

How to Trade Lean Hogs

Here are 5 ways you can use to trade lean hogs:

1. CFDs (Contracts for Difference)
2. ETFs (Exchange-Traded Funds)
3. CFDs on lean hogs-related ETFs
4. Futures contracts
5. Options contracts

CFDs are often used by retail active traders as a way to gain exposure to the lean hog market without physically owning the underlying assets. CFDs are financial contracts allowing traders to speculate on lean hog price changes and trade both rising and falling markets.

Why Are CFDs Used to Trade Lean Hogs By Some Retail Traders?

Trading commodities with CFDs can offer several possible advantages. Let's explore some key potential benefits of using CFDs for lean hog trading:

• Long and Short Positions Possible: With CFDs, you can capitalise on both rising and falling prices with long and short positions, respectively. You can open a long position (buy lean hog contracts) if you believe the price will go up. Conversely, you can open a short position (short-sell lean hog contracts) if you believe the price will go down. This lets you potentially profit from various market conditions (bullish and bearish).
• No Storage Cost: Unlike traditional ownership of lean hogs, where you'd be responsible for physical delivery and potentially storage costs, CFD trading allows you to speculate on price movements without ever taking possession of the underlying asset. This eliminates the hassle and costs associated with the physical delivery and storage of lean hogs.
• Improved Diversification: CFD platforms usually offer access to a wide range of trading instruments, facilitating portfolio diversification for traders with asset classes such as Forex, shares, commodities, indices, ETFs and options* among others.

*Availability depends on your location and regulation.

What Are the Disadvantages of CFDs on Lean Hogs?

There are different risks involved in trading CFDs. Let's have a look at the most common ones*:

• Leverage: CFDs are leveraged products, which means that you control a larger position with the potential of amplifying profits, but this also multiplies the potential of losses.
• Margin Calls: If the market moves against you and your account equity falls below a certain threshold (maintenance margin) according to the margin requirements of your CFD provider, you'll receive a margin call. This means you'll need to deposit additional funds to keep your current positions open or face forced liquidation at an unfavourable price.

*To limit your risk, you should always consider adding risk management tools to your trading toolbox.

What Could Make Lean Hogs an Interesting Trading Opportunity?

Here are some reasons why lean hogs could be an interesting trading opportunity:

• Volatility: Like most agricultural commodities, the lean hog market can be quite volatile, with prices fluctuating based on the abovementioned factors. This market volatility can allow traders to gain exposure to short-term price movements.
• Hedging Activity: Lean hog futures and options can be used as a hedging tool for producers and consumers in the pork industry. This can create additional trading activity and liquidity in the market, potentially benefiting active traders.
• Diversification: Adding lean hog CFDs to a portfolio can diversify beyond traditional asset classes, potentially reducing overall portfolio risk.

What Are the Risks of Trading Lean Hogs?

Here are some reasons why lean hogs might be a challenging market to trade:

• ​​High Risk of Loss: The volatility that makes lean hogs interesting can also be a significant risk, especially with CFDs that rely on leverage.
• Complexity of the Market: Success in lean hog futures trading requires a good understanding of the lean hog market and the factors affecting the pork industry. This includes research and analysis of relevant data that can sometimes be difficult to find and understand, especially for beginners in trading.

How to Trade Lean Hogs with CFDs

Now that you better understand the intricacies of the lean hog market let's explore how to put your knowledge into action through CFD trading.

Choose a Way to Analyse Lean Hog Prices

Before venturing into lean hog trading, you should know about the various ways you can analyse this market and choose the analytical approach for you, as it can ultimately impact your trading process and decision-making.

Selecting the right method depends on your main goal, mostly thinking about whether you're aiming for capturing short term price fluctuations, or if you have a longer-term vision focused on the intrinsic value of the market.

Ultimately, understanding how you'll analyse the market empowers you to make more informed decisions and potentially better navigate the dynamic world of lean hog trading. It is also key information to have when thinking about your strategy before writing your trading plan.

The two most widely known methods for analysing a market are technical analysis and fundamental analysis.

Technical Analysis

Technical analysis equips traders to identify short-term opportunities in the market. This method analyses historical price patterns, volume fluctuations, and overall trends to try to predict future price direction.

Traders leverage a variety of tools to master technical analysis and identify technical triggers, including a wide range of trading charts, trading indicators like the Relative Strength Index (RSI), the Coppock Curve, and the Slow Stochastic, as well as key price levels like support and resistance zones and trading ranges.

Fundamental Analysis

Fundamental analysis takes a step back from the charts to examine the bigger picture, as it delves into factors influencing the supply and demand of lean hogs, such as feed costs, economic conditions and disease outbreaks among others.

By analysing these fundamental factors, investors aim to assess the long-term intrinsic value of a given asset within the market. Traders using fundamental analysis are looking to identify potential buying and selling opportunities based on a perceived disconnect between intrinsic value and market price.

Suppose fundamental analysis suggests the intrinsic value is lower than the current lean hog market price. In that case, it might signal a potential selling opportunity (traders then believe the price can eventually fall or even crash to reflect true value). Conversely, if the intrinsic value is believed to be higher than the market price, it could be a buying opportunity (traders potentially anticipating a price rise).

Determine Which Trading Strategy to Use to Trade Lean Hogs

The first step is to understand the lean hog market and its analysis methods. Now, it's time to choose your trading style, which usually depends on your trader profile, time horizon, risk tolerance, and trading goals.

Short-term traders can choose between day trading and swing trading.

Day trading usually focuses on short-term price movements within a single trading day, with various trading strategies such as news trading and breakout trading.

Swing trading usually involves holding positions for a few days or a few weeks to capture larger price swings. It uses trading techniques like trend trading and range trading.

Implement Risk Management Rules When Trading Lean Hogs

The lean hog market, like any financial market, carries inherent risks, so you should have a risk management strategy and implement strong risk management rules to better protect your capital, control your emotions, and trade with the right mindset.

Of course, risk management is not a one-size-fits-all approach, but there are some rules and tools you should be aware of to create your own risk management strategy when trading the lean hog market, such as stop-loss orders, position sizing strategies, and risk-reward ratio.

Stop-Loss Orders

Setting stop-loss orders can help you control your losses, as stop-loss orders allow you to exit your positions when the market moves against you automatically.

There are different aspects of your trading and of the lean hog market you should take into account to use stop-loss orders wisely and to adjust your stop-loss orders effectively. You might want to use slightly different types of stop-loss orders, depending on your particular needs.

When the market advances in your favour, a trailing stop order is a dynamic order that automatically modifies your stop-loss price. This kind of stop-loss order keeps you involved in a profitable position while assisting you in locking in more profit.

A guaranteed stop order offers an additional line of defence against unforeseen market fluctuations. In contrast to a regular stop-loss order, this type of stop-loss order ensures your exit price even in the event of high market volatility. This removes the possibility of slippage when closing your position, which occurs when your order fills at a price different from what you've set.

Position Sizing

Position sizing, the art of allocating capital for each trade, is a cornerstone of risk management. It prevents you from putting too many eggs in one basket and potentially blowing up your account.

For instance, a standard guideline suggests limiting your risk per trade to 1-2% of your total account balance.

Of course, position sizing is a dynamic process. As your account balance grows or shrinks and your experience level increases, you can adjust your position size accordingly. The key is to always prioritise protecting your capital for the long term.

Risk-Reward Ratio

Effective risk management goes beyond just stop-loss orders and position sizing. The concept of the risk-reward ratio is another crucial tool. It helps evaluate potential trades and maximise your chances of success, as it measures the amount of money you stand to gain compared to the amount you could potentially lose.

By aiming for trades with a higher potential reward than risk, you're increasing your chances of profitability over the long term but also reducing the risk. Even if you don't win every trade, as long as your average reward outweighs your average risk, you'll be on the right track.

Now that you better understand the lean hog market, its key drivers, and different trading methods, explore the possibilities of trading the lean hog market with Plus500.

Lean Hogs Trading — Frequently Asked Questions (FAQs):

What does the lean hog market represent?

The lean hog market represents the trade of live pigs destined for pork production.

Where are Lean Hogs' futures contracts listed?

The Chicago Mercantile Exchange (CME) is the go-to derivatives marketplace for lean hog futures trading, specifically on its electronic platform, the CME Globex.

What are lean hogs’ trading hours?

The market hours for lean hogs on the CME Globex platform are from Monday to Friday from 9:30 AM ET to 2:05 PM ET. On Plus500, CFD trading hours on lean hogs may differ.

What are some common ways to trade lean hogs online?

Online retail traders can capitalise on the lean hog market by using financial derivatives, such as Exchange-Traded Funds (ETFs), options, futures, and Contracts For Differences (CFDs). CFDs are frequently used to trade short-term lean hog price changes without having a hold on the underlying assets, using a variety of trading techniques and approaches, including swing and day trading.