China’s securities regulator has approved plans for a long-awaited live hog futures contract, taking the Dalian Commodity Exchange a step closer to launching a product that will allow farmers in the world’s top pork market to hedge livestock costs.
The exchange said in a statement late on Monday that the China Securities Regulatory Commission had given the go-ahead to an application first logged last year.
Details about the specification of contract and timing for the launch have yet to be decided, an official at the exchange told Reuters.
The exchange has spent more than a decade researching the feasibility of hog futures, which will complete Dalian’s hedging offering for the whole meat industry supply chain, including soybean, soymeal and corn futures. It submitted a formal application to operate a live hog contract early last year.
The hog futures approval also comes ahead of a much-anticipated crude oil futures contract, for which approval is expected soon.
The exchange will still need a final go-ahead from the State Council, or Chinese cabinet, before commencing trading.
China consumes about 55 million tonnes of pork a year, half of the global total, but production is highly cyclical. Futures will help pig farmers hedge the risks of price swings in the highly volatile market, the exchange said in its statement.
In previous cycles, prices have changed as much as 183 percent from the trough to peak, it said, adding that every 1 yuan change in pricing per kilogram causes a 800 million yuan ($127 million) in fluctuation in pig farming profits.
Still, skeptics say the contract may have limited appeal to farmers at first. China’s other major commodity derivatives are very popular with speculative and financial investors, whose trading strategies have whipsawed prices of everything from steel and eggs to rubber over the past two years.
A contract based on a live animal will also be challenging in a market where small-scale farming still dominates, leading to little uniformity of breeds or farming practices.
“The hog variety for delivery is still the biggest problem,” said Yao Guilin, analyst with China-America Commodity Data Analytics.
“Right now, the majority of the hog varieties raised in China is similar to the international standard. But China has its local hog varieties as well and there are a considerable number of them.”
Rapid industrialization in pig farming in China is giving way to larger, more standardized producers, making it easier to develop a contract based on the live animal, however.
Around 200 companies were producing more than 50,000 hogs a year in 2016, said the exchange, about 8 percent of the national output.