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China’s hog futures sink 12 percent on debut

China’s live hog futures tumbled in their debut on the Dalian Commodity Exchange, with analysts attributing the sell-off to the contract’s high listing price and expectations of increasing supplies.

8 January 2021, at 8:57am

Reuters reports that the front-month September contract closed 12.6 percent lower at 28,290 yuan ($4,376.95) per tonne on 8 January versus its 30,680 yuan listing price.

Trading volume stood at 91,056 lots, versus 1.4 million for Dalian's most active contract for soymeal, a key pig feed ingredient.

Comparatively, spot hog prices in major producing province Shandong were at 35.8 yuan per kilogramme on Thursday 7 January.

China, the world's largest pork producer and consumer, is the second market globally to trade mainstream live hog futures after the United States. It is also China's first live-animal physical-delivery contract.

"The pork cycle is expected to go down with increased supply," said Wang Dan, Hang Seng Bank China's chief economist, referring to pork's cyclical price movement based on output.

Weaker recovery in consumer demand due to higher unemployment also weighed on prices, she added.

The live hog futures launch, a decade in the making, comes at a crucial time for the pork industry in China, which has a huge appetite for the meat that is a staple in local cuisine. The country's hog herds were wiped out after an African swine fever outbreak in 2018 killed millions of pigs, disrupting pork supplies and sending prices to record highs.

Cashing in on high prices, hog producers are now rebuilding herds by setting up huge, modern breeding facilities.

New Hope Liuhe said it will "actively participate in hog futures trading to avoid risks and help stabilise business," adding the contract will help China's hog industry standardise products.

Along with industry peers including Muyuan Foods and Wens Foodstuff Group, it has received regulatory approval to be a delivery warehouse.

"Successfully setting up the delivery warehouse will make our hedging possible," said Li Qing, head manager of New Hope Liuhe's hog futures project.

High margin requirements, however, will limit the contract's initial use for hedging.

"If you have 20-30 million hogs, you need tens of billions of yuan to fully hedge. None of the producers are ready to devote that much cash," said Jim Huang, chief executive at China-America Commodity Data Analytics.

"At the beginning, speculative trade will dominate this contract."

China's hog prices are more volatile as its fragmented industry includes small farmers who are vulnerable to low prices. Contributing to a key portion of output, they are more likely to exit the market when prices fall, versus large producers who have more stable and longer-term operations.

China slaughters around 700 million pigs annually and produces more than 50 million tonnes of pork – about half of global output.

($1 = 6.4634 Chinese yuan)

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