August 5, 2020

 

China's hog futures contract set to launch soon

 

China's much anticipated live hog futures contract will soon launch, providing a vital hedging tool for biggest pork industry in the world already affected by an African swine fever (ASF) outbreak, Reuters reported.

 

Plans to launch China's live hog futures contract has been around for more than 10 years and is expected to be well-received by Dalian Commodity Exchange (DCE) domestic traders.

 

However, it will face multiple issues such as complex delivery logistics, strict standards for quality control, low experience with futures contracts domestically, and a retail trading community that has affected other markets.

 

About 700 million swine is slaughtered in China every year, producing 50 million tonnes of pork or half the world's total pork production. Swine and pork producers usually relied on contracts that outline volume and delivery requirements but do not have management or insight into the costs, particularly in future months.

 

The issue of non-control in costs showed when ASF decimated close to half of China's swine herd and caused dwindling supplies of pork in the country.

 

While swine producers are rebuilding, with 339.96 million head as of end-June, average pork prices have soared to record levels. The launch of a transparent pricing and hedging tool will may see prices more controlled in the future.

 

Jim Huang, China-America Commodity Data Analyticschief executive said China's swine industry needs this contract as it was not conducive for the swine industry to be affected when prices go up or down.

 

China's live hog futures were approved by regulators in April, with two analysts estimate its market value to beRMB 20 – 30 trillion (~US$4.29 trillion; RMB 1 = US$0.14), one of the country's biggest commodities futures products.

 

According to DCE's draft specifications, at 16 tonnes per lot the live hog contract size will eb 110 to 140 live swine. This means delivery will be restricted to major swine producers such as New Hope Liuhe and Muyuan Foods.

 

A representative from DCE said the contact will be in accordance to China's domestic spot market normal trade size and will be able to meet hedging demands of the majority of live hog breeders, traders, as well as upstream and downstream companies.

 

It is projected that many hedgers will be major swine producers using standarised swine breeds and swine slaughterhouses, resulting in both players affected to price hikes. Small-scale swine farmers aren't likely to hedge.

 

The large size of China's live hog futures contract will also restrict retail speculators, who have controlled positions in other futures contracts.

 

Three sources familiar with the launch, who did not want to be named as they are not authorised to speak to the media, said delivery warehouses will be located in key swine producing provinces such as Henan, Shandong, Anhui, Hubei and Jiangsu.

 

According to analysts, producers located far from delivery locations may incur higher costs.

 

But the DCE said China's live hog trade has moved to provincial deliveries over nationwide transport.

 

A number of swine producers have submitted delivery warehouse approval applications to the DCE, said two producers and a consultant. In addition, trading teams are being established to conduct market research and discuss with external experts.

 

-      Reuters