The Dalian Commodity Exchange (DCE) was approved to trade live pig futures, the first financial derivative based on a live animal in the world’s top pork-producing country.

The introduction of hog futures is an important step for the country’s futures market to serve the development of the real economy, the China Securities Regulatory Commission said in a statement on its website.

Hog futures will play a positive role in improving the mechanism of pig pricing formation, improving the risk management ability of market players and boosting the development of the pork industry, the regulator said.

The exchange said the degree of standardization of hog breeds is increasing and live pig trading is active, which creates mature conditions for the new animal futures.

China produces and consumes about half of the world’s hogs. Last year, farmers raised 540 million pigs, producing more than 42 million tons of pork, down from about 50 million tons typically. As a result of rising pork prices, the live pig market has doubled to nearly 2 trillion yuan ($282 billion) from 1 trillion yuan in a normal year.

Futures contracts allow buyers and sellers to agree on the price of a commodity at a certain future date. Pig futures would allow farmers to lock in prices and hedge against declines.

The hog market used to be dominated by small-scale farms with different breeds and farming practices. In recent years, especially after the African swine fever epidemic significantly reduced the market share of smaller farms, large-scale and standardized pig enterprises have been expanding. Such large producers usually use unified supply of piglets, feeds, veterinary practices and slaughtering technology.

The African swine fever since 2018 and the ongoing human Covid-19 pandemic starting late last year have added volatility to pork prices. At the initial stage of pig futures, prices may have larger fluctuations under the impact of the spot market, but the risk-hedging function of futures should play out as the market stabilizes, a futures industry participant said.

The DCE did not say when trading would start. At present, the overall design of pig futures contracts and trading rules have been completed, and submission of delivery warehouses is advancing, the exchange said.

The exchange acknowledged the complexity of the spot pig market under the impact of the African swine fever and Covid-19 pandemic and pledged strong supervision and risk control once the futures contracts start trading.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)