CHINA’S live hog futures tumbled in their debut on the Dalian Commodity Exchange, with analysts attributing the sell-off to the contract’s high listing price and expectations of increasing supplies.

The front-month September contract closed 12.6 percent lower at 28,290 yuan (US$4,376.95) per ton Friday versus its 30,680 yuan listing price.

Trading volume stood at 91,056 lots, versus 1.4 million for Dalian’s most active contract for soymeal, a key pig feed ingredient.

Comparatively, spot hog prices in major producing province Shandong were at 35.8 yuan per kilogram Thursday.

China, the world’s largest pork producer and consumer, is the second market globally to trade mainstream live hog futures after the United States. It is also China’s first live-animal physical-delivery contract.

“The pork cycle is expected to go down with increased supply,” said Wang Dan, Hang Seng Bank China’s chief economist, referring to pork’s cyclical price movement based on output.

Weaker recovery in consumer demand also weighed on prices, she said.

The live hog futures launch, a decade in the making, comes at a crucial time for the pork industry in China, which has a huge appetite for the meat that is a staple in local cuisine. The country’s hog herds were wiped out after an African swine fever outbreak in 2018 killed millions of pigs, disrupting pork supplies and sending prices to record highs.

Cashing in on high prices, hog producers are now rebuilding herds by setting up huge, modern breeding facilities.

New Hope Liuhe said it will “actively participate in hog futures trading to avoid risks and help stabilize business,” adding the contract will help China’s hog industry standardize products.

Along with industry peers including Muyuan Foods and Wens Foodstuff Group, it has received regulatory approval to be a delivery warehouse.

“Successfully setting up the delivery warehouse will make our hedging possible,” said Li Qing, head manager of New Hope Liuhe’s hog futures project.

High margin requirements, however, will limit the contract’s initial use for hedging.

“If you have 20-30 million hogs, you need tens of billions of yuan to fully hedge. None of the producers are ready to devote that much cash,” said Jim Huang, chief executive at China-America Commodity Data Analytics.

“At the beginning, speculative trade will dominate this contract,” Huang said.

China’s hog prices are more volatile as its fragmented industry includes small farmers who are vulnerable to low prices. Contributing to a key portion of output, they are more likely to exit the market when prices fall, versus large producers who have more stable and longer-term operations.

China slaughters around 700 million pigs annually and produces more than 50 million tons of pork, about half of global output.

Live hog contracts were first introduced in 1966 on the floor of the Chicago Mercantile Exchange (CME) as a physically delivered contract. In 1997, it was converted to its current form of cash settlement. Frozen pork belly futures traded for 50 years before being delisted in 2011. Eight years later, CME Group began publishing the CME Fresh Bacon Index to provide price transparency for pork packers, processors, wholesalers and retailers.

The contract size in Dalian is 16 tons, which the bourse says is equivalent to the total weight of animals in a full truck, the usual way to transport pigs in China. (SD-Agencies)