Trading in China’s hog futures must be properly regulated
- The idea sounds fine on paper as pork is essential to the diet of the Chinese people and to food security, but speculators must be kept at bay
Pork is to Chinese what beef is to Americans. High pork prices have been a headache for many Chinese people, from homemakers to the most senior policymakers. The African swine fever outbreak, one of the world’s worst instances of animal disease, is to blame for the wild price swings over the past two years. Given pork’s importance in Chinese society, Beijing has pulled out all the stops to stabilise supplies and prices. The latest, 20 years in the making, is the launch of hotly anticipated hog futures on the Dalian Commodity Exchange.
The futures product, the first in China that will allow the delivery of live animals, comes just in time, but its impact on the industry remains to be seen. It will hopefully lend some stability and predictability to the price and supply of the meat.
The country accounts for almost half of global pork consumption and also produces 2 trillion yuan’s (US$309 billion) worth a year. The pork price is a significant component of the consumer price index and can cause wild swings in inflation expectations. Prices rose to a record last year, only to plummet 13 per cent in November year on year and send inflation down for the first time in more than a decade.
It’s not an exaggeration to say that pork prices are directly related to national food security and social stability, and are therefore a key focus of Chinese policymakers.
Following the outbreak of African swine fever in 2018, half of the nation’s pig population was lost to disease or culling. The crisis wiped out most backyard pig farms and small operators but has also consolidated the industry around the surviving bigger players. These are the ones with both the financial resources and know-how to make use of the new futures market.
Since 2019, the central government has had to tap into its pork reserves and subsidise consumers to suppress inflation. If there is a silver lining, it is that the outbreak has compelled the central government to aggressively modernise pig farming, upgrade production and quality, and reduce costs.
Lower and more stable prices will also benefit Hong Kong, as the mainland supplies about 85 per cent of the city’s live hogs and about a quarter of its frozen pork.
One worry is that the new futures product may unleash – no pun intended – the animal spirit of speculators as mainland markets are perennially afflicted by a dearth of investible options for institutional and retail investors. Speculative fervour recently drove iron ore futures contracts on the Dalian exchange to premiums, until the exchange changed its rules to drive out the speculators. Regulators must make sure the new futures serve the purpose they are intended for, and not the speculators.
