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China's Dalian exchange seeks regulatory go-ahead for hog futures
May 5, 2017 / 11:11 AM / 7 months ago

China's Dalian exchange seeks regulatory go-ahead for hog futures

DALIAN, China, May 5 (Reuters) - China’s Dalian Commodity Exchange (DCE) has applied for regulatory approval for its first hog futures contract although the latest addition to the exchange’s vast agricultural arsenal may not be ready until next year, an official said.

In its first step to launching the product, the exchange submitted a formal application for approval for a live hog contract to the China Securities Regulatory Commission (CSRC), Yu Li, deputy director of the information department, told Reuters on Thursday.

DCE chief executive Wang Fenghai said in March the exchange aimed to launch the contract in the world’s top pork market by the year-end. Officials say that timeframe is ambitious.

“Live hog futures is a very complicated product,” said Yu, adding the exchange hoped to complete preparatory work this year.

The exchange, which competes with commodity markets in Shanghai and Zhengzhou, has spent more than a decade researching the feasibility of hog futures, which will complete the exchange’s hedging offering for the whole meat industry supply chain.

Futures aim to make it easier for traders and pig farmers to hedge the risks of price swings in the highly volatile market. Dalian also has soybean, soymeal and corn futures.

China consumes about 55 million tonnes of pork a year, half of the global total, but production is highly cyclical. A plunge in supplies last year pushed prices to record levels, hurting processors like global leader WH Group and spurring a surge in cheaper imports.

Developing a financial derivative based on a live animal is especially challenging, particularly in a market where small-scale farming still dominates, leading to little uniformity of breeds or farming practices.

But tougher environmental regulations have pushed many small farmers to exit the business, leaving a greater share of the industry to large-scale players.

“Ten years ago, pig farmers were small scale and the standardisation problem was really serious. Today a lot of large pig farmers have already reached scale,” said Yu.

CSRC did not respond to a request for comment. The regulator could require more preparatory work from an exchange before it approves a new product.

Once approved, DCE can draw up rules and specifications for the product. It would then need a final go-ahead from the State Council, or Chinese cabinet, before trading started.

The exchange also recently said it was developing a lean pork price index with the agriculture ministry, using data gathered from 89 large slaughterhouses from 16 provinces.

The index will update spot prices daily and could in the future be used to develop an index-based futures contract.

Editing by Edmund Blair

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