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Financials

UPDATE 3-China gets go-ahead to start trading hog futures

* Hog futures have been studied for more than a decade

* Contract expected to be physically delivered - source

* Comes after swine fever caused high volatility, market upheaval

* Go-ahead given amid growing pressure to boost economy (Adds detail)

BEIJING, April 24 (Reuters) - China is set to become the second market in the world after the United States to trade live pig futures after the securities regulator said on Friday the Dalian Commodity Exchange could launch a contract in the world’s top pork producer.

The new contract, which has been under discussion for more than a decade and awaiting a green light for three years, comes as Beijing tries to jump start its economy amid growing worries about a long and deep contraction.

China Securities Regulatory Commission said in a statement on its website that it would help players in its most valuable agricultural market - worth nearly 1 trillion yuan ($141 billion) - manage risk, while helping the sector to develop.

Farmers in China, home to about half of the world’s pigs, producing around 50 million tonnes of pork a year, typically face a highly cyclical market. The arrival of African swine fever in 2018, which killed millions of pigs and sent pork prices to record highs in October 2019, added to the volatility.

“It will provide a very good tool to hedge,” said a manager at a major pig producer about the new futures contract. “Pig prices are quite high now, but it will not remain like this.”

The exchange has previously noted the complexity of developing a financial derivative based on a live animal, particularly in a market where small-scale farming is still widespread and where there is little uniformity of breeds or farming practices.

But African swine fever has caused a huge upheaval, significantly reducing the market share of smaller players that were unlikely to use sophisticated hedging tools.

“Now the bigger players are investing so much in building new farms. They’re in a position to say, we want to manage the risk, we should probably push forward with this,” said Darin Friedrichs, senior Asia commodity analyst at broker INTL FC Stone.

The DCE said in a statement the standardisation of hog breeds was increasing, and with most large producers using similar piglet supply, feed and technical services, slaughtered pigs and lean meat rates were also more uniform.

Details on the contract specification will be made public at a later date, a DCE spokeswoman said, but it is understood that the contract will by physically delivered.

A person who participated in an information session organised by the exchange last year said sellers would be limited to a small number of pre-approved large-scale hog producers to reduce the risks of any impact from African swine fever, which is still circulating.

China’s herd is believed to have shrunk by as much as 60% and pork output last year plunged by more than a fifth.

Recent high prices will likely also drive strong investor interest in the product, given how much money has poured into other futures contracts such as eggs, seen as proxies for protein amid the huge meat shortage in China.

“A lot of people have opinions on the price of pork. I think they would want to make sure it isn’t flooded with a huge wave of speculative money or small time traders,” added Friedrichs.

The DCE did not say when trading would start but new futures contracts are typically launched around a month after final government approval.

The hog contract will complete its hedging offering for the whole meat supply chain, including soybean, soymeal and corn futures.

$1 = 7.0728 Chinese yuan renminbi Reporting by Dominique Patton and Hallie Gu; Editing by Kevin Liffey, Philippa Fletcher and David Evans

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