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Mercantile Exchange Opens Trading in Hog Options

February 2, 1985

CHICAGO (AP) _ Options on live hog futures became the second option contract traded at the Chicago Mercantile Exchange as the commodity industry’s pilot program in options continued to expand.

Cattle and soybean options opened late last year and have been growing slowly but steadily.

Market analysts say market conditions haven’t been the most conducive for using the options thus far in their young life, but they say the slow start probably is a better way to get the new contracts off the ground.

For instance, Mel Davis, an analyst in Kansas City, Mo., with the Livestock Business Advisory Service, said he has not encouraged producers to hedge their anticipated sales because he believes prices are going up.

However, some of the producers have been hedging their anticipated needs of feed grains by buying call options on soybean futures.

Options come in two forms, call options and put options. A call option gives the buyer the right to take delivery of the futures contract at a specified price. Unlike futures contracts, the options have no risk of margin calls, which are requirements that additional funds be deposited to cover losses.

By buying a call option on soybeans, a livestock producer could lock in the price of his feed grains and, if the price were to increase before he needed the product, he could sell back the option at a profit to cover the increased cost of the grain.

Davis said the slow start is related to the difficulty producers have in understanding the options.

″They certainly haven’t been used very extensively yet, not that it’s been a disappointing program. People are still in the process of learning about them and deciding how they’ll fit in their individual programs,″ Davis said.

Soybean options were started at the Chicago Board of Trade at a time when few farmers had a need to hedge their crops, said Ralph Weems, president of the American Soybean Association.

″Soybean producers are just getting into them.″

However, he noted that a new contract at the MidAmerica Commodity Exchange may be more attractive because it calls for delivery of only 1,000 bushels, while the contract at the Board of Trade calls for delivery of 5,000 bushels.

The contract is to open Feb. 8.

The Board of Trade is scheduled to open trading in its second contract, corn options, Feb. 27.

A spokesman for the Mercantile Exchange said about 200 contracts traded hands in the first day of trading in the hog options.

Wayne Walter, president of the National Pork Producers Council, rang the opening bell.

″Hog options will be extremely useful in the marketing, or pricing, part of this business - and in making farmers better marketers,″ Walters said.

Here are some price trends in major commodity markets this week.

Wheat, oats and soybean prices were higher and corn was unchanged on the Chicago Board of Trade.

Wheat for delivery in March settled Friday at $3.541/2 a bushel, which compared with $3.463/4 the previous Friday; March corn was unchanged at $2.711/2 a bushel; March oats were $1.763/4 a bushel, up from $1.701/2 ; and January soybeans climbed to $6.063/4 a bushel from $5.961/2 .

Cattle and frozen pork bellies were higher and live hogs were lower on the Chicago Mercantile Exchange.

Live cattle for delivery in February settled Friday at 66.35 cents a pound, which compared with 64.97 cents the previous Friday; January feeder cattle advanced to 74.17 cents a pound from 73.60 cents; February hogs fell to 51.25 cents a pound from 51.65 cents; and February frozen pork bellies climbed to 73.35 cents a pound from 71.35 cents a pound.

Gold, silver and copper were lower on the Commodity Exchange in New York.

Gold for delivery in March settled Friday at $303.20 a troy ounce, which compared with $302.10 the previous Friday; March silver fell to $6.222 a troy ounce from $6.04; and March copper fell to 62.55 cents a pound from 60.60 cents a pound.

Crude oil and heating oil were lower on the New York Mercantile Exchange.

Crude oil for delivery in March settled Friday at $25.25 a barrel, which compared with $25.68 the previous Friday; February heating oil settled Friday at 73.51 cents a gallon, which compared with 78.73 cents a week earlier.

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