China’s Biggest Producer Funds 700 Million in Hog Futures


Second week trading of DCE Hog Futures saw little changes with moderate volume;

Muyuan Foods announced funding of RMB 700 million in futures hedging operations;

China’s Number 1 hog farmer produced 18.1 million pigs in 2020, up 77%;

Hog industry is a red hot sector in China’s stock market, and Muyuan is 2.4 times bigger than Tyson Foods by market capitalization;

Founder of Muyuan started with 22 pigs, and is now one of the wealthiest persons in China

[Greene County IL, Jan 24] – China’s Hog Futures ended the second week of trading with little changes. The front month September contract LH2109 closed Friday at 24,565, down 1.2% from Thursday but only 0.6% lower from the previous Friday. November contract down 0.7% daily but up 0.8% weekly. Changes on January contract were -0.9% and +0.5%, from prior day and prior week, respectively. (Note: DCE hog futures price unit is RMB yuan per metric ton, US$1≈6.5 yuan.)

This was a walk in the park comparing to the brutal Week One, where the three contracts all went down 20% or more from their listed prices on debut.

The big news of the week came from Muyuan Foods. On January 19, China’s largest hog producer announces that its Board approved funding of RMB 700 million (≈US$108M) in futures hedging operations. This marks a major inroad by commercial interest in China’s newly launched hog futures.

Let’s take a seat back to comprehend the significance of this announcement.

On Friday January 22, the three DCE hog contracts traded a total of 8,615 lots, with combined open interest standing at 21,617. Using an average price of RMB 24,000 per metric tons and considering 16 tons per contract, notional value of the day comes to RMB 3.3 billion.

As a hedger, Muyuan would be required to post 8% margins with DCE based on contract notional of Hog futures, or RMB 30,720 per contract traded. Theoretically speaking, if Muyuan were to commit 100% of its fund in DCE hog futures, it could trade and hold positions for 22,786 contracts. This amounts to 2.6 times of the Exchange total volume for Hog Futures and 1.05 times of its total open interest on Friday.

Of course, Muyuan is highly unlikely to take up all the fund in trading at once. To hedge feed ingredient cost, it would also trade corn, soybean meals and other grains and oilseeds contracts. But it will definitely be a game changer when China’s big hog firms enter the futures market one by one. According to my conversation with Muyuan’s Director of Futures, the company has not yet started trading hog futures. Its futures department was only set up last year after DCE announced the hog contract. Other big hog firms are either in similar situation or just trying out with small lots so far.

Based in Henan Province in central China, Muyuan Foods is the largest hog producer in China. Annual production was 18.1 million hogs in 2020, according to data released by the Company on January 3rd. This was a huge jump of 77% from 2019 production level, after it suffered a 7% drop the year before due to the deadly African Swine Fever pandemic which wiped out as much as two thirds of China’s hog herds.

(Lire article complet)

By Jim Huang Futures Market Executive

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