We’ve watched all summer as the drought has sent grain prices skyward, and even setting some new records for those markets. Inevitably, those higher grain prices are now sending shockwaves throughout related markets – leading to quite a bit of hand-wringing recently over the bacon supply. The pork belly futures of Trading Places fame are no longer traded, but lean hogs are – and the latest news suggests that this trade is in for a big swing in the coming year. Via Futures Magazine:

U.S. hog farmers are slaughtering animals at the fastest pace since 2009 as a surge in feed costs spurs the biggest losses in 14 years, signaling smaller herds next year and a rebound in pork prices.

Bad news for prosciutto-lovers everywhere. Just how much of a price spike should we expect? Well, fortunately, that’s exactly what futures contracts are meant to do – allow for price discovery ahead of time by showing what buyers and sellers expect the price to be later on. The forward contracts for lean hogs are already pricing in the expected shortfall:

Lean hogs for June 2013 delivery are trading 28% higher than hogs for October 2012 delivery, although that jump is as much caused by below-average prices now as above-average prices later. Farmers are cutting back on the size of their herds now, creating a glut in the market in the near-term. This pig shortage isn’t just going to hit the United States, however – we’re looking at a global decline in ham supply. The UK National Pig Association (NPA) has a plan to save England’s bacon:

In its Save Our Bacon campaign, NPA is asking shoppers to make a point of selecting pork and bacon with the British independent Red Tractor logo, as an increase in demand for British product now may help persuade supermarkets to act before it is too late.

Sainsbury’s has increased the price it pays to a few of its pig farmer suppliers and NPA has welcomed this gesture. But it says the major supermarkets need to do much more, if they want to protect their customers from shortages and high prices next year.

The US is embarking on a similar project – buying up extra pork now to prop up the price in an attempt to keep hog farmers solvent until next year, when their herds will be more valuable. Until then, enjoy your bacon mania while you can.