Listed on Dalian Commodity Exchange on January 8, 2021——
Can hog futures smooth the "pig cycle"
Our reporter Zhu Huichun
□ For a long time, my country's live pig industry has been plagued by the "pig cycle", and the price of live pigs fluctuates frequently.
Due to the lack of effective forward price guidance and hedging tools, pig breeding companies often blindly expand or reduce production.
□ For my country's pig breeding industry, pig futures help to form a broadly representative pricing mechanism, which is of great significance to hedging, reducing operating risks, stabilizing production returns, regulating market order, and stabilizing production and supply.
On December 11, the China Securities Regulatory Commission announced that live pig futures will be listed for trading on the Dalian Commodity Exchange from January 8, 2021.
This is my country's first futures product with a living body as the trading target.
my country's live pig slaughter, pork production, and pork consumption rank first in the world. Consumers are very sensitive to changes in pork prices. It is no exaggeration to say that the price of live pigs is related to the national economy and people's livelihood.
Because of this, the pig futures have been brewing for 20 years.
In terms of industrial scale, pork is the largest consumer of meat in my country.
The status of live pigs in the domestic market can be compared to American live cattle.
Experts said that the nominal trading volume of live cattle futures and options contracts on the Chicago Mercantile Exchange in 2019 was 15.5 times that of beef consumption that year.
Based on this multiplier, the nominal trading volume of my country's live pig futures is expected to reach 690 million tons.
If calculated at the price of 30 yuan/kg, the nominal trading volume of live pig futures can reach 20 trillion yuan.
In comparison, the accumulated transaction value of Shanghai crude oil futures in the two years of listing is nearly 30 trillion yuan.
Experts said that the listing of live pig futures will provide price discovery and risk management tools for my country's live pig breeding industry, and promote the stable and healthy development of the industry.
For a long time, my country's live pig industry has been plagued by the "pig cycle", and the price of live pigs fluctuates frequently.
Due to the lack of effective forward price guidance and hedging tools, pig breeding companies often blindly expand or reduce production.
Especially in recent years, major pig breeding companies have generally formulated plans to accelerate the expansion of production capacity, but they suffer from no hedging tools. Once prices enter a downward cycle, they will face huge risks.
At the same time, fluctuations in the price of live pigs will also affect consumers' normal consumption demand for pork, and the increase in pork prices has a significant boost to CPI.
From a foreign perspective, the Chicago Mercantile Exchange in the United States once launched live pig futures.
The quality of 70% of standardized pigs produced in the United States can meet the delivery standards of the Chicago Mercantile Exchange.
As the subjects participating in hedging can obtain higher credit ratings, it helps companies obtain credit and attracts more pig industry operators to enter the futures market to participate in hedging.
After entering the 1990s, large-scale enterprises have become the market leader with a high degree of product standardization.
However, with the changes in consumption habits of American consumers, live pig futures no longer meet market demand. The Chicago Mercantile Exchange changed live pig futures to lean hog futures based on lean hog carcasses, and changed physical delivery to Cash settlement.
Drawing on the experience of foreign markets, in order to become bigger and stronger in China's pig industry, in addition to industrial policy support, financial market support is also indispensable.
Live pig futures play an important role in stabilizing risks for breeding companies. Therefore, leading companies in the pig industry such as Muyuan Co., Ltd. have a higher willingness and enthusiasm to participate in pig futures.
So, how will hog futures work?
First, the hog futures participating groups are diverse and open, including hog breeding companies, slaughter companies and traders.
More adequate information exchange can provide the industry with fair and transparent forward prices, and the price discovery function of hog futures can also provide market expectations for hog spot prices to a certain extent.
Breeding companies can use this as a reference to adjust the scale of breeding to avoid cyclical sharp fluctuations in prices, which will help solve the "pig cycle" problem.
Second, hog futures will provide an effective hedging risk management tool for the hog industry.
Pig breeding companies can sell in the futures market in advance to lock in sales profits according to the slaughter plan, stabilize breeding business activities, solve the worries of rapid expansion of large-scale enterprises, promote the further improvement of the scale of the industry, and promote the long-term healthy development of the industry.
In addition, live pig futures will form a feed breeding industry chain with upstream soybean meal, corn and other varieties.
Investors can lock in breeding profits through corn, soybean meal and live pig futures transactions.
At the same time, through arbitrage trading among the three varieties, the rationality and effectiveness of futures market prices will be further improved.
It can be said that for the pig breeding industry in my country, pig futures help to form a broadly representative pricing mechanism, which has the important significance of hedging, reducing operating risks, stabilizing production returns, regulating market order, and stabilizing production and supply.
However, the challenges faced by DCE's pig futures are also very great.
The obvious problem is that the profit distribution of the pig industry chain is unreasonable.
In the pig industry chain, pig farmers and consumers bear the pressure of operating risks and price fluctuations, while the risks of sellers, feed suppliers, and processing companies are relatively low, but they occupy a considerable part of the profits.
How to ensure that the profit distribution of the pig industry chain is more reasonable is one of the challenges that need to be addressed in the design of related futures products and their trading mechanism.
In addition, live pigs are living, and their delivery system needs to be innovated.
At the same time, the market also needs a process of digestion, recognition, and reuse in the initial stage of the launch of new varieties.