Highlights:
-June is the best month for DCE Live Hog Futures;
– Key volume driver: Cash hog price fell 2/3 in five months, then bounced 40% in a week;
– NDRC announces decision to purchase frozen pork to support price;
– Upcoming StoneX/CACDA Webinar: A Look at China’s Largest Producers.
Dalian Commodity Exchange’s Live Hog Futures record its best month in trade volume since contract launch in January. June monthly volume of 722,327 is five times as much as May volume, and more than twice of January level. Open Interest stands at 60,375 lots today, a new month’s end record. It is more than twice as the month’s end OI in May.
In all, the five listed contract months together traded over 1.5 million contracts for the First Half of 2021. In notional value terms, which is defined as “volume x 16 tons (contract size) x transaction price”, over half a trillion yuan of pork has been traded on the futures market, equivalent to about $90 billion. (US$1≈RMB6.40 yuan).
Each DCE hog contract is 16 metric tons. Therefore, cash market equivalence of 25 million tons of pork was transacted in 1H2021 in futures. Last year, China pork production was 41 million tons. With strong recovery underway, we could expect production at around 50 million tons this year. Interestingly, hog futures market volume is just about the same size as cash hog market.
I use Futures/Cash Volume Ratio to measure the liquidity of commodity futures contracts across different industry. An active contract, such as CME Lean Hog, would have a ratio of 10:1 to 20:1. A 1:1 ratio is not bad for a newly launched contract, but there is certainly a lot of room to grow.
Key driver for Hog futures volume: Cash market price and volatility
Based on market data tracked by CACDA, China’s national average live hog price is RMB 16.1 per kilogram today (equivalent to $1.14 per pound). From the January 8th high of 36.61, cash hog price has been falling for five months. In the first half of June, price drop began accelerating, and bottomed at about 12 yuan last week, a whopping -67% decline from January.
Then, just like magic, hog price stopped falling and strongly rebounded 40% to 17 yuan within a week. It pulled back a little in the past two days to the 16-yuan range.
What just happened? Hog price fell so much that the entire industry has been bleeding. After months of panic selling, hog farmers refuse to take their hogs to market and book a steep loss. This helps slow the oversupply during low demand season and provides needed support for hog price.
NDRC announces pork reserve purchases
Earlier this week, the policy setting National Development and Reform Committee activated a “Class 1 Price Alert” for hog price. Based on pre-determined rules, when hog price falls below certain level, the government will buy frozen pork in the open market to support pork price. And when hog price rises about certain level, the government will sell pork from its cold storage to cool off the market.
The NDRC directs pork reserve management organizations from national to provincial and municipal levels to buy frozen pork. The actual amount is not yet announced, but based on previous reserve purchases, I expect the total to be in the 100,000-ton range. While this may not be sufficient considering China’s monthly pork output at 4-5 million tons, it does send a strong signal to the market. Both cash hog and futures market responded with a sharp rebound.
Where will pork price go from here?
While hog price may have hit bottom, it is unlikely to go back to the 30-yuan level. In China, longterm hog price is determined by the infamous Hog Price Cycle. It is at a late stage characterized by increased supply and downward price trend.
If hog price were to stay below 15 yuan for an extended period of time, many hog farmers would not survive. Some would exit the industry, and others would liquidate sow and hog stock. Eventually, the supply/demand dynamics will change. However, the recent rebound give farmers new hope, and they are unlikely to reduce capacity by a meaningful amount. At the same time, large producers are in a multi-year expansion, and their hog output continue to grow rapidly.
StoneX Quarterly Update: A Look at China’s Largest Producers
Hog sales data released by public firms supports the assessment of strong hog stock recovery. In the first five months of 2021, China’s Top-10 hog firms together sold 29.02 million hogs, up 89% from the same period last year. Most big hog firms saw their hog sales double or even triple.
With public hog firms accounting for 15% or more of China’s total pork production, it warrants a deep dive into this sector. On Friday, July 9 @1:30-3:00PM (CDT), I will be joined by Gavin McPherson of StoneX Group for a second webinar on China Hog Market update. I will provide an overview of all public traded Chinese hog firms and drill deep into the top-five giant hog producers.
Please email me (jimwenhuang@gmail.com) or Gavin (Gavin.McPherson@StoneX.com) if you are interested in this free, 90-minute webinar.
Have a great week.
About the author: Jim W. Huang, CFA is a veteran of financial futures markets and consultant to a number of leading Futures and Crypto Exchanges. He is instrumental in the successful launch of China’s DCE Egg Futures (2013), DCE Soybean Meal Options (2017) and DCE Live Hog Futures (2021). Jim is a leading voice on China’s livestock and poultry markets, and frequently quoted by Bloomberg, Reuters and the Wall Street Journal. From 2001 to 2011, Jim was an Associate Director of Product Strategy at CME Group, the world’s largest Financial Exchange holding company. Jim received an MBA from Chicago Booth and studied under Nobel Laureate Eugene Fama in an empirical research paper of futures market liquidity. You may contact Jim by email at jimwenhuang@gmail.com.
