Editor's note:

Is there such a thing as a "reduction crackdown" in the world? Liu Cixin said yes, I also think about the same. Not because "the Three-Body Problem" watch too much, but found that more and more traditional industries by "new players" disruption, as far as apple, as close as ants. They create 10 times or even 100 times the value of traditional leading enterprises, and even after adjusting for inflation, they still create unimaginable value of traditional enterprises. But as hard as it is to imagine, we can at least be certain that Both Master Joe and Master Ma are human beings. They deftly used the latest ideas and technologies across industries and traditions to crush the entrenched defenders. They may be savage, but they are not backward. "Because I believe, I see" is the motto of the investment community, which is the mantra of how many entrepreneurs inspire their teams. But how you treat your industry when it comes to new technologies and new ideas really determines your understanding and courage of "innovation" and "disruption".

On April 24, 2020, China Securities Regulatory Commission announced the approval of Dalian Commodity Exchange to carry out hog futures trading, and the first futures product with main protein as the subject was put on the agenda. The whole country was seething and the crowd was seething. The editors joined in the revelry and danced vigorously. All of a sudden, "futures" became the original "two ears do not hear out of the window" aquaculture and meat industry trend. It seems that the standardization of our basic industries is easy to come by overnight. It seems that the development of our industry has outstripped the United States and walked in the forefront of the world. But then the dream of the United States always wake up that day, but to a little fast, also a little hazy. The pig futures, which are expected by the whole country, jumped all the way from June to the end of August, and then there was no news. According to the editors' latest information from regulators, the ipo will be launched in the first quarter of 2012 at the earliest. Market education and product training, a "routine front stop" for new products to be listed on exchanges, have also slowed down and tightened quotas. Many unknown netizens are still in the background to the editor message, "Is the hog futures already online? Why is nothing moving? Am I missing something?"

In fact, you have not missed anything, because nothing has not begun. But when we take a longer view, a longer time horizon, we may have missed more than half a century. Back across the Pacific in 1961, the US officially launched its first frozen pork belly futures contract. The United States has been 60 years ahead of China in futures on the concept of pigs. Getting ahead is not scary at all. We're good at catching up. The really scary thing is that even though we know there are more advanced and sophisticated technologies and methods, we still do nothing. And those "new players" outside the industry are already gearing up to transform our old world!

On November 9, 2020, CME launched Pork Cutout Futures, a landmark futures product. For a very simple reason, the previous futures products are either pigs or carcasses, and we actually trade the "meat" or not the same, the price is also different, we call it value bias. Now, the futures products directly correspond to the "six cuts" and "most of the meat" of our trade. The futures products that really affect the global pork trade will make their debut next Monday. China, the world's largest meat importer and consumer of pork, is struggling to stay afloat. The Times make you obsolete, it's none of your business. Even when Brazilian farmers are using futures bases extensively to sign trade contracts, are you going to take the initiative, or are you waiting to be educated by the market?

Today, we are not afraid of hard, not only to know, but also to know why. We tried to tease out the history of American pig futures. If you are familiar with or not interested in this topic, you can jump to "How Chinese pigs concept futures and importers for reference?" to directly discover the content relevant to the business. Thank "a bite of Wall Street" for its support to the theoretical research in this paper.

CME has announced that it will split pork futures and options contracts on November 9, marking a new stage of standardization in the US pork industry.

In retrospect, the concept of pig futures was closely related to the development of pig breeding and agriculture in the United States. In terms of evolutionary history, the 1960s marked the watershed for American pork farming. Before 1960s, it was in the form of "family free-range farming", with low yield. After the 1960s, retail investors gradually withdrew, and "large-scale farming" began to emerge. After a 10-year incubation period, it started to develop in the 1970s, and its production capacity has been constantly improved. Its process consists roughly of the following three phases (see Table 1).

In the three stages of evolution, pig inventory output continues to grow. In 1961 there were 5.17 million; Increased to 6.17 million in 1971; In 1980 there were 7.54 million; 8.76 million in 1999; Increased to 10.46 million in 2008; By September 2020, the total number of new stocks reached 79.1 million. Although the scale development causes the farm to reduce, but the output increases obviously however. With the increase of stock, the futures business related to pigs also developed rapidly.

In the 60 years since the introduction of frozen pork belly futures in 1961, the subject matter of the pig concept has changed gradually. As shown in Table 2, it has undergone an evolutionary process of "frozen pork belly - live pig - pig carcass - pork cutout". This process is closely related to the large-scale pig breeding. Concept futures of pigs brought hedging and risk hedging tools for breeding enterprises.

The launch of the first frozen pork belly futures contract was no accident. At that time, the production, logistics, freezing, storage and other technologies of frozen pork belly in the United States were relatively advanced, and could provide technical guarantee for physical delivery of frozen pork belly. So the physical delivery form of futures business was developed. Five years later, a live pig futures contract for delivery of live pigs was born. The futures business related to pigs has begun to mature.

In 1991, when pig production was accelerating, CME introduced lean pig futures contracts with pig carcasses as the subject matter. The settlement mode has changed from physical delivery to cash settlement in the past, which saves the complicated operation of physical delivery for investors to participate in futures hedging, and provides great convenience for trading. It marks that the concept of pig futures has entered a new stage of fundamental change.

The development and progress of finance are inseparable with the development of industry, and the road of industry standardization needs more accurate hedging tools. With the continuous improvement of pork segmentation technology, the price of pork parts is more refined. In the futures market, in the past, frozen pork bellies, live pigs, and pig carcasses as the subject of futures products, has been difficult to meet the needs of development. Futures products with pork as the subject matter are closer to the market trade, so its production is also the inevitable choice of the market. CME announced that it will launch pork futures and options contracts on November 9, 2020, which will provide financial derivatives for market participants to hedge the risk management of pork market price and provide more accurate hedging tools for industry clients. This is also more in line with the current pork market trading rules of futures products.

Pork cutout is just as its name implies is refers to the Pork Carcass after segmentation processing products. As a subject matter, pork cutout can be understood as six cuts, which mainly include:：Butt、Loin、Picnic、Sparerib、Ham and Belly.

Split pork futures and options contracts are an effective complement to lean pork contracts and a new risk management tool for prices associated with pigs and pork production, according to CME information and data. It will enable customers to manage risk and enable price discovery from pigs to pork. As shown in Table 3, the segmentation of pork futures and options can make the role of each link in the pork production supply chain to hedge the risk of pork price more precise and precise, and help them adjust the strategy of hedging the risk of pork price in real time. At the same time, it can help them centralize the clearing form, effectively protect them from default risk, and ensure the safety and stability of trading.

What is most important to note, and what is most important to downstream pork producers, processors, and traders, is that in the past, frozen pork bellies, live pigs, and frozen pork carcasses were all targeted to help upstream producers hedge risks and effectively protect against them. As an important tool for downstream pork producers, processors and traders to control risk exposure, pork futures and options contracts are an effective supplement to lean pork futures contracts. At the same time, it is possible to trade spreads on meat contracts and lean pig contracts. If we use lean pork futures to lock the cost of raw materials and meat futures to lock the price of products, we can form a relatively complete risk management strategy and guarantee the profits of enterprises. It provides margin write-off and other convenience for investors to carry out cross breed arbitrage and cross term arbitrage of meat and lean pig contracts. Therefore, the listing of pork futures and options allows the downstream pork institutions to see the opportunity of hedging.

Leading by 60 years, US hog concept futures are quite mature. China's hog futures have yet to be officially launched. Of course, this has to do with the late birth and development of The Futures market in China (it was born on October 12, 1990 when the wholesale grain market opened in Zhengzhou, China) and the low concentration and standardization of the pig industry in China. However, China's futures market has the world's mature experience for reference and learning ability, will be able to quickly shorten the development time. Therefore, under the premise that the futures of soybean, corn and other agricultural products have achieved fruitful results, the hog futures will inevitably achieve the listing and benign long-term development.

There are at least two learning directions for the development of Pig futures in China: 1. Absorbing the essence from the mature CME pig concept futures business can make the Chinese futures market less take a lot of detours. It includes accelerating the evolution of hog futures at various stages and advancing the evolution of delivery methods such as cash settlement. 2. Provide investment opportunities for domestic investors related to frozen products to connect with the mature futures market in Chicago, and let those who are prepared to move first.

First of all, the first reference is related to the development process of the whole domestic meat futures market, which is closely related to the futures policy, development environment and promotion process, and has a positive impact on the upcoming market of pig futures. In the pig breeding industry, due to the living environment suffering from the pig cycle, there is a lack of porcine-related futures tools for risk management and hedging, so domestic pig farmers cannot participate in futures hedging and profit, which is not only the loss of the futures market, but also the helplessness of the breeding enterprises. By learning the history of American pork futures, domestic regulators, financial institutions and hog related enterprises can find relevant ways as soon as possible to solve the practical problems affecting the development of domestic pig futures due to delivery difficulties and counterparty orders.

In fact, after the impact of African swine fever, China's pig industry is rapidly expanding. Enterprise production technology and product standardization is also rapidly improving. In this process, China's pig industry urgently needs the support of industrial policies and financial markets, so as to minimize the harm of risks to enterprises under the influence of every pig cycle and price fluctuation without hedging tools. More realistically, relevant departments can remove the crude and extract the fine from the history of CME in the evolution of pork futures, actively promote the establishment and improvement of relevant mechanisms of delivery standardization and industrial standardization, and help hog futures, a product related to national economy and people's livelihood, play its due role and value.

Second, keep your eyes on the horizon. It is of great value to discuss the practical significance of pork futures for all investors. Especially for Chinese importers such as downstream producers, processors and traders, once the investment methods and routes can be opened up, it will have great value and impact on the actual business.

From the perspective of sino-us pork breeding and import and export trade relations, CME's pork-related futures are not only closely related to the US production and consumption market, but also directly reflected by China's pork import trade and market consumption. Against the backdrop of huge pork production in the United States, pork consumption is only the third largest type of meat after chicken and beef. The USDA puts us consumption in 2019 at 10.06 million tonnes, far behind China's 44.866 million tonnes. Therefore, exporting to China will be an important means for the United States to seek "destocking" of pork.

China, by contrast, has seen a surge in imports of pork from abroad due to a short supply shortage in the domestic market due to the impact of African swine fever in 2019. China's pork imports rose 120 per cent year on year in the first quarter, with imports from the US up 640 per cent. In the second quarter, pork imports continued to grow rapidly. According to USDA data, China's imports of US frozen pork from July 2019 to June 2020 increased fourfold from July 2018 to June 2019. USDA forecasts that China's pork imports will continue to surge in 2020, with a quarter coming from the United States.

Given the stability of domistic consumption in the United States, then, changes in the volume of exports will have a direct price impact on the futures market. As the world's largest pork importer, any significant increase or decrease in pork imports from China would have repercussions in U.S. futures markets. That gives Chinese pig producers, slaughter processors and traders an opportunity to hedge their exposure. They can use CME pork cutout futures as a reference leading indicator. When its prices rise sharply, it may mean that a large amount of imported meat will enter the domestic market in a few months 'time, allowing for hedging and hedging in advance.

The closer we can trade with futures products, the better we can play to the advantages of industrial investors and maximize the function of risk prevention. To realize the docking with CME's pork futures and options business, importers such as China's pork production, processing and trade have a suitable "grasp" tool for hedging risks and asset preservation. From the perspective of operation, since the main imported products are pig hexing and meat cutting, etc., the use of meat cutting futures will be more accurate and effective if the import cost is to be covered. An importer may enter into a contract with a domestic customer and fix the selling price, or fix the price in the form of a CME pork cutout futures contract with a fixed base; Buy the corresponding amount of CME pork cutout futures contract; After the execution of the contract, sell the futures contract held by the liquidation of positions; The price risk will be passed on to achieve the locking of import profits.

The advantage of an industry consultant is that he can stand in the industry and jump out of it. We look at our industry. We look at the ups and downs of businesses in our industry. We try to sum up the unique strengths of the companies that have achieved these results. It may be summed up simply as capital, efficiency, products, or government relations. But one thing that can't be ignored is that they all have layouts. Rome was not built in a day. Every day we deal with "important and urgent" work. Does that mean we don't pay attention to important work when it's not urgent? In management, these "important but not urgent" jobs are collectively referred to as "strategic". Because of the impact of the epidemic, we were tired of tactics and survived. Now is the time to think about strategy. Because life is not only an immediate survival, but also poetry and distance. The things that you strive for are called vision and values.