It seemed like a neat idea.
But speculating on hog call options to minimize a prospective American duty on imports of Canadian hogs probably wouldn’t pay off, says the manager of risk management for Manitoba Pork Marketing Co-operative.
“It’s kind of reaching,” said Tyler Fulton. “To take a long position that the market will jump because of fewer pigs heading south – I don’t think you can count on it.”
The co-op had investigated using call options on Chicago Mercantile Exchange lean hog futures contracts to counteract damage from possible U.S. duties on Canadian hogs.
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A call option allows the holder to take possession of a futures contract for a pre-set price before an agreed-upon expiry date. What the Manitoba agency and other industry players were considering was buying call options on American lean hog futures for shortly after the time when the American government might impose duties on Canadian hogs.
That strategy could pay off if the duties caused Canadian hogs going to the U.S. to sharply fall. Fewer Canadian weaners would cause the American herd to shrink, which should cause the price to strengthen. A call option set on a price that did not factor in this sudden shrinkage in the pig herd would pay off when prices rose.
But Fulton said there is little reason to believe that duties would severely reduce the number of weaner and slaughter pigs shipped to the U.S.
There are too few feeder barns in Canada to accommodate all the country’s weaners, so they would probably go to the U.S. anyway. And Canadian slaughter capacity cannot absorb all the slaughter hogs, so those would also go south, regardless of duties.
Fulton said the market might also have already factored in a possible supply reduction because of the threatened duties, so even a post-duty herd shrinkage might not cause a price spike.
“We looked into it, but we decided that there were too many other factors that could move the market either for or against the position, so that the correlation was not strong enough to make that viable,” said Fulton.
Options strategies are often difficult with lean hogs futures, Fulton said, because of poor liquidity.
Because few are trading the far-out options, the premiums are high, making them less attractive.
“The further you get out into the future the more illiquid, and consequently the option premium goes up substantially,” said Fulton.
Hog market speculation has become tricky recently because “all the rules seem to have changed.”
Fulton said the wildly bucking dollar, the Japanese BSE situation, large U.S. pork exports and especially the surging demand for all meat because of popular low-carbohydrate diets have complicated the task of predicting hog prices.
