China’s hog futures set to make debut, but face big challenges

SHANGHAI — China’s long-awaited live hog futures contract is almost ready, offering a vital hedging tool for the world’s largest pork industry, which has been roiled by an African swine fever outbreak that devastated herds and sent pork prices soaring.

The country’s first live-animal physical-delivery contract has been planned for a decade, and is expected to be popular with domestic traders on the Dalian Commodity Exchange (DCE).

But complex delivery logistics, tight quality-control standards, a local lack of experience with futures contracts, and a retail trading community that has wildly distorted other markets will be key challenges.

Producers are now rebuilding the herd, which stands at 339.96 million head as of end-June, but average pork prices remain near record highs, making the launch of a transparent pricing and hedging tool a welcome development.

“The hogs industry is huge, but not strong. When prices go up everybody does well, but when it goes down everybody suffers. This isn’t healthy. You can’t keep up with this forever,” said Jim Huang, chief executive at China-America Commodity Data Analytics, adding the industry “badly needed” this contract.

Regulators approved live hog futures in April, and that market is expected to be worth around 20 trillion-30 trillion yuan ($4.29 trillion), two analysts estimate, making it one of China’s largest commodities futures products.

A launch date hasn’t been announced.

HURDLES

At 16 tons per lot, according to DCE’s draft specifications, the live hog contract size will be 110 to 140 live pigs. That will limit delivery to large-scale producers like Muyuan Foods and New Hope Liuhe.

The contract is in line with the normal trade size of China’s domestic spot market, a DCE representative said in written replies to Reuters, adding that it can meet the hedging demands of most live hog breeders, traders, and upstream and downstream enterprises.

Hedgers are expected to mainly be large-scale producers with standardized hog breeds, and slaughterhouses that buy live hogs and sell meat, making them more exposed to price risks. Small farmers raising mixed breeds are not likely to have the scale needed to hedge.

The contract’s large size will also limit the participation of China’s army of retail speculators, who have dominated positions in other futures contracts.

Delivery warehouses will most likely be in key producing provinces like Henan, Shandong, Hubei, Anhui and Jiangsu, said three sources familiar with the plans, who declined to be named as they were not authorized to speak with the media.

Several hog producers have submitted applications to DCE for delivery warehouse approval, two producers and one consultant told Reuters. They are also assembling trading teams, conducting market research and consulting external experts.

The feedstock industry, already trading pig feed ingredients corn and soymeal futures, is also likely to trade.

The DCE representative also said they had received “positive responses” regarding the contract from industry players including producers, feedstock and slaughtering enterprises.

Traders say contract volatility poses a risk as pork prices are a measure of inflation in China.

Limited understanding of futures trading in the industry is another obstacle, although the DCE representative said the exchange had conducted training courses on live hog futures. —