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Evaluating the Hedging Potential of the Lean Hog Futures Contract


  • Mark W. Ditsch

    (Consolidated Grain & Barge Company)

  • Raymond M. Leuthold

    (University of Illinois at Urbana-Champaign)


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.

Suggested Citation

  • Mark W. Ditsch & Raymond M. Leuthold, 1996. "Evaluating the Hedging Potential of the Lean Hog Futures Contract," Finance 9609003, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9609003
    Note: Type of Document - Word Perfect 6.1; prepared on PC; to print on HP Laser Jet 4; pages: 23. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 96-03. For a complete list of OFOR working papers see

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    References listed on IDEAS

    1. Hayenga, Marvin L. & Jiang, B. & Kweon, J. H. & Lence, Sergio H., 1994. "Cross Hedging Wholesale Beef and Pork Products," Staff General Research Papers Archive 11399, Iowa State University, Department of Economics.
    2. Hayenga, Marvin L. & DiPietre, Dennis D., 1982. "Cross-Hedging Wholesale Pork Products Using Live Hog Futures," Staff General Research Papers Archive 11305, Iowa State University, Department of Economics.
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    Cited by:

    1. Sanders, Dwight R. & Greer, Tracy D., 2002. "Hedging Spot Corn: An Examination Of The Minneapolis Grain Exchange'S Cash Settled Corn Contract," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19064, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    2. Guo, Zhibo & White, Ben & Mugera, Amin, 2013. "Hedge Effectiveness for Western Australia Crops," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152154, Australian Agricultural and Resource Economics Society.
    3. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    4. Wang, Qizhi & Chidmi, Benaissa, 2009. "Cotton Price Risk Management across Different Countries," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46762, Southern Agricultural Economics Association.
    5. Christian Dunis & Pierre Lequeux, 2000. "Intraday data and hedging efficiency in interest spread trading," The European Journal of Finance, Taylor & Francis Journals, vol. 6(4), pages 332-352.

    More about this item


    lean hog futures contract; hedging;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance


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