Securities regulators in China have green-lit the inclusion of a new futures contract at the Dalian Commodity Exchange (DCE) aimed at stabilizing the country's hog prices. The China Securities Regulatory Commission (CSRC) announced on Friday last week that the new hog futures should help China's major pork producers better manage their risks, while at the same time provide a new mechanism to aid in the further development of the sector.
China's pork industry, worth an estimated 1 trillion yuan or around $140 billion, could benefit from the new futures contract as it would provide the market with a more stable and transparent price reference. Analysts pointed out that participating in the futures trading would be conducive to pork producers as it would allow them to better optimize resource allocation and scale.
Establishing a financial derivative based on live animal products is a complex undertaking and is much more difficult when compared to derivatives based on commodities such as oil and agricultural produce. The development of the futures contract is also particularly difficult given how China is home to thousands of small-scale farms that had very little uniformity.
The DCE mentioned in a statement that it will work to further standardize hog breeding throughout the country and provide more support to producers in order to ensure uniformity. The exchange added that it will announce the specifications of the contract at a later date.
However, the recent devastation to the industry caused by the African swine fever outbreak has forced government agencies to accelerate their efforts to develop mechanisms to better stabilize the sector. The futures contract is the result of years of work and pressure from major pork producers who want a sophisticated hedging tool to aid them in managing their risk.
In 2001, China had started work on developing a hog-based futures contract for its rapidly growing industry. In 2006, the State Council mentioned that it acknowledged the importance of adopting futures trading and other measures to develop the country's various industries. It added that it is considering the launch of live pig futures trading. Three years ago, the DCE applied for regulatory approval after more than a decade of developing its proposed hog futures contract.
Since 2003, pork prices in China have continually fluctuated, with the recent one occurring two years ago after the African swine fever outbreak. Prices fell to as low 10 yuan per kilo in March of last year and then climbed to a record 40 yuan per kilo in the following months. The huge fluctuations had brought great uncertainty to industrial players, who have clamored for the government to step in to aid in the healthy development of the industry.
