Why is China hog futures slumping during a “peak demand” season?

Eleven months after the debut of hog futures trading in China’s Dalian Commodity Exchange (DCE), the main contract had lost more than half of its value this year, trading at 14,560 yuan/ton ($2,293/ton) on Wednesday.

Despite a sharp rebound of 30% off the record low of 13,365 yuan/ton ($2,105/ton) during October 2021, the contract broke the upward trend and slid for five consecutive trading sessions in the first two weeks of December – a month that is traditionally a peak-season for pork demand as China enters the Lunar New Year holiday.

DCE January 2022 Hog Futures (Daily Chart) Source: Wenhua

This year, the holiday is taking place two weeks earlier than 2021 according to the Lunar calendar. Hence, demand in China’s pork market was expected to spike in late November (as opposed to December) as people start to prepare cured pork about two months before the holiday.

Consumers took advantage of these low prices and stronger demand lifted prices from their oversold levels. At the same time, the government came into the market and bought up pork to replenish state reserves which also supported prices.

These factors drove prices higher but were only temporary, and the hog market continued to deal with overcapacity on the supply side.

“There are still too many hogs. Particularly, as pork price rebounded earlier, many companies were holding onto their herd to wait for the pre-holiday demand. But they realized demand was not as good as expected, and started dumping [their herds],” said one China-based animal feed trader.

Sources: Sitonia Consulting, China Ministry of Agriculture and Rural Affairs

Too many hogs, losses deepen

Yet, demand growth failed to keep up with supply, leading to an oversupplied market for most of 2021.

According to sources, margins for raising a hog weighing 120 kg slumped to -500 yuan (USD 78) at one point this year. Meanwhile, margins for pork imports into China were also largely negative this year and importers are facing huge financial pressures.

Cash prices hold up while futures prices fall

Since November 26, the January futures contract has slumped 12.5% while national average cash prices have only slid 3.5%.

The physical market remains strong going into the holiday, however much of the market has a bearish outlook after the holiday demand fades and this is being reflected in sharply falling futures prices.

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