China's securities regulator said on Friday it had given the go-ahead to the Dalian Commodity Exchange to start trading hog futures in a long awaited move for the world's top pork producer. 

The China Securities Regulatory Commission said in a statement on its website that the new futures contract would help players in a market worth nearly 1 trillion yuan ($141 billion) manage risk, while helping the sector develop. 

The Dalian Commodity Exchange applied for regulatory approval for the contract three years ago, after spending more than a decade researching similar products. 

Details on the contract specification will be made public at a later date, a DCE spokeswoman said. 

Farmers in China, home to about half of the world's pigs, producing around 50 million tonnes of pork a year, typically experience a highly cyclical market. The arrival of African swine fever in 2018, a deadly disease that killed millions of pigs and sent pork prices to record highs in October 2019, has added to 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 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 that the standardisation of hog breeds was increasing, and with most large producers using similar piglet supply, feed and technical services, slaughtered pigs and the lean meat rate was also more uniform. 

With African swine fever still circulating in the herd however, it is not clear how DCE will manage the risk of disease. 

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

The high prices recently 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 recently. 

“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 will start. The hog contract completes its hedging offering for the whole meat industry supply chain, including soybean, soymeal and corn futures. （Reuters）