The first anniversary of the listing, the functions of price discovery and risk management have begun to appear——
Can Hog Futures Flatten the Pig Cycle?
Our reporter Zhu Huichun
On January 8, 2021, my country's first livestock futures variety and live delivery variety, live pig futures, was listed on the Dalian Commodity Exchange, and it is now one year old.
In 2021, the price of live pigs is still in a downward cycle, and live pig futures are parallel to the spot market. However, the two functions of “price discovery” and “risk avoidance” of live pig futures are gradually benefiting all players in the industry chain, and are promoting the stable supply of my country’s live pig industry. It has played an active role in improving the price of live pigs and improving the long-term mechanism for the stable development of the pig industry.
The role of stabilizing market expectations appears
In 2021, the price of live pigs will decline, the spot price will drop by about 55% for the whole year, and the futures will drop by about 47%.
The main reason for the downside of both spot futures is the fundamental supply and demand imbalance.
The live pig market has gradually entered a stage of excess supply from the shortage of supply in 2020, while the demand has been affected by the epidemic and continues to be weak.
Live pigs are the most valuable agricultural and sideline products in my country.
When hog futures were first listed, some hog breeding companies even pinned their hopes on hog futures to support the fall in hog prices.
In fact, this understanding is a misreading of the function of futures.
The futures market forms a sequence of future prices, which reflects the expectations of market players on future supply and demand and price trends.
Therefore, within the scope determined by the fundamentals of supply and demand, the futures market can sharply improve market pricing and the operation efficiency of real enterprises due to its fast information digestion and sensitive price response.
Overall, the supply and demand fundamentals of the hog industry in 2021 have not fundamentally reversed.
However, in the trend of downward trend in the price of hog futures throughout the year, the performance of hog futures is remarkable.
"When the spot price was high in January, the futures price showed a discount, and when the spot price fell to the bottom in June and July, the futures price showed a premium, which provided a good price guide for production and consumption companies in the hog industry. For example, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that hog futures have initially played a role in futures price signals, and played a role in clarifying and stabilizing market expectations.
"After the listing of live pig futures, a round of live pig prices just ushered in." Zhu Bin, deputy general manager of Nanhua Futures, said that he was worried that some people in the market would think that the listing of live pig futures caused the price of pigs to fall.
Fortunately, this worry is redundant. "This means that the market is more rational, and the futures market is more of a price indicator, and this concept has gradually become a consensus."
Zhu Bin said.
Industry actively embraces active participation
Since its listing for one year, the rules, system and process design of hog futures have been fully tested by the market, and market transactions and positions have increased steadily.
By the end of 2021, the cumulative trading volume of hog futures was 6.058 million lots, with a turnover of 1.7 trillion yuan and an average daily position of 60,000 lots.
The market has basically formed a pattern of "gradual participation of industries, and gradual play of price discovery and hedging functions".
At present, more than 2,500 corporate clients have participated in futures trading and delivery, and more than 90 breeding enterprises have applied for hedging qualifications.
More than 10 listed companies including Muyuan Co., Ltd. and Superstar Agriculture and Animal Husbandry announced that they plan to use the futures market to assist their operations. Among the top 20 leading companies in pig farming, 19 have submitted application materials for delivery warehouses to the Dalian Commodity Exchange, and 11 have become Hog futures delivery warehouse.
The reporter learned from the investigation that the situation of large-scale pig breeding enterprises actively participating in the futures market has basically taken shape, while small and medium-sized farmers mainly participate in the "insurance + futures" project.
Qin Jun, secretary of the board of directors of Muyuan, said that as a leading pig breeding enterprise, Muyuan reasonably designs hedging plans based on its own slaughter plan and breeding costs, and conducts hedging transactions on various contracts of pig futures based on market conditions.
The person in charge of the relevant departments of Muyuan Co., Ltd. told reporters that the company has completed the formation of the futures team, and will continue to improve the research and trading system in the future, open up the linkage between the futures and spot departments, and explore the most suitable futures and cash model for the stable operation of the company. Better use of live pigs Futures assist business development.
Jiang Guojin, chairman of COFCO Jiajiakang Food Co., Ltd., introduced that COFCO Jiajiakang actively participates in hog futures and avoids business risks by selling hedging, which is a direct beneficiary.
Sichuan Dekang Agriculture and Animal Husbandry Food Group Co., Ltd. owns 2 national key leading enterprises in agricultural industrialization.
Hu Wei, vice president of the company, told reporters that there are two major risks in pig breeding, one is production risk, also known as breeding risk; the other is price risk, that is, the risk of fluctuations in pig prices.
"For the futures market, we take the initiative to embrace and participate in all aspects." He said that all-round participation means that every contract of hog futures participates, and OTC options and "insurance + futures" derived from hog futures also actively participate. Modes and projects of the combination of futures and currents are also being actively explored.
"Futures are of great significance for companies to avoid price risks." Hu Wei said.
Some breeding enterprises have achieved a good "price stabilization" effect by using the risk hedging function of hog futures.
At the same time, many hog companies have not taken hedging measures, which has put pressure on their performance this year.
"Hog futures have the ability to hedge risks, and the key depends on how companies use them." Zhu Bin said.
Smart use of live pig futures for stable operation
The launch of financial services such as pig futures and their derived OTC options, and "insurance + futures" has brought new opportunities for small and medium-sized enterprises in the industry chain to develop.
Doruimi (Chengdu) Agricultural Technology Group Co., Ltd. is one of the small and micro enterprises mainly engaged in live pig trade.
Many of the company's customers are small farmers.
Since the listing of live pig futures, under the guidance of Huaxi Futures, Dourimi has implemented the first live pig delivery in Sichuan Province.
When purchasing live pigs or selling feed, the company adds value-added services such as pig breeding technical guidance, price risk management, and basis acquisition to the contract, purchases live pigs from farmers, and hedges them in the futures market.
Sichuan Jiajiale Feed Co., Ltd. is a small and micro enterprise that produces feed.
When the company sells feed, it signs contracts with downstream farmers and agrees to provide them with price-reduction services when live pigs are released in the next 5 to 6 months.
At the same time, the company withdraws a part of the profit from the sale of feed as an option fee, and transfers the risk by purchasing the corresponding OTC option from the futures risk management subsidiary.
This innovative customized service, on the premise of taking on the risk of a smaller current price difference, effectively solves the business problem of farmers who "don't dare to raise", and also brings business growth to itself.
Hog futures are the first varieties of DCE that were included in the agricultural insurance plan in the year of listing.
In 2021, a total of 131 live pig futures price projects will be established under the "Daily Commodity Exchange Farmers' Income Guarantee Plan", covering 31 provinces across the country.
As of the end of September 2021, a total of 175 live pig "insurance + futures" projects have been launched in the futures industry, providing protection for 39,000 tons of live pigs, corresponding to a value of 1.02 billion yuan.
For a large number of small and medium farmers, the "insurance + futures" model of live pigs is becoming more and more popular.
In Butuo County, Liangshan Prefecture, Sichuan, the pig "insurance + futures" project provided insurance for 36 local pig farmers and 2,880 pigs, and paid about 1.155 million yuan in compensation.
Local farmers told reporters that the "insurance + futures" model of live pigs provides them with solid protection.
With the maturity of hog futures and the introduction of more futures options related to the industry chain in the future, enterprises in the hog industry chain will fully realize the risk management value brought by hog futures to enterprises, and make better use of financial tools such as futures options. Stable business operations.