January 11, 2021


Hog futures on the Dalian Commodity Exchange drop 12% on debut


China's live hog futures on the Dalian Commodity Exchange closed 12.6% on January 8, 2021, as analysts say the sell-off was because of the contract's high listing price and potentially increasing supplies, Reuters reported.


The live hog futures front-month September contract ended at CNY 28,290 (~US$4,376.95; CNY 1 = US$0.15) per tonne on Friday versus its CNY 30,680 (~US 4,736.32) listing price.


Trading volume reached 91,056 lots against 1.4 million for Dalian's most active contract for soymeal.


China is the second market in the world to trade mainstream live hog futures after the United States. This is China's first live-animal physical delivery contract as well.


Wang Dan, Hang Seng Bank China's chief economist, said the pork cycle is projected to go down with increased supply.


She said weaker consumer demand recovery was because of higher unemployment rates, which affected prices.


The live hog futures debut on the Dalian exchange, planned for 10 years, comes during an important time for the pork industry in China, as the country steadily recovers its herd following an African swine fever outbreak that decimated swine herds in 2018. Domestic pork supplies dwindled and prices surged to record highs.


New Hope Liuhe, one of China's major pork producers, said it will participate in live hog futures trading to avoid risk and stabilise business. They said the futures contract will standardise products in the domestic swine industry.


New Hope Liuhe, Muyuan Foods, and Wens Foodstuff Group have been giving regulatory approval to be a delivery warehouse.


Li Qing, head manager of New Hope Liuhe's hog futures project, said the delivery warehouse makes their hedging possible.


But the contract's initial use for hedging will be limited by high margin requirements.


Jim Huang, chief executive at China-America Commodity Data Analytics, said none of the swine producers will be able to devote tens of billions of yuan to fully hedge, adding that speculative trade will dominate this contract.


Swine prices in China are more volatile as the industry has small farmers that are affected by low prices. These farmers contribute a key portion of China's swine output and will exit the market when prices are low, compared to major swine producers that operate long term.


About 700 million swine are slaughtered per year in China. The country produces more than 50 million tonnes of pork domestically, representing half the world's total pork output.


- Reuters