Longing for meat futures, traders turn to Chinese eggs to cash in on ASF

14 Nov 2019 | Andy Allan

With the ongoing outbreak of African swine fever in China injecting inflation into food markets in the world’s most populous nation, traders seeking to get a piece of the action have turned to an unlikely commodity: eggs.

With estimates suggesting that 50% of the nation’s pig stocks have disappeared in a year, traders that are seeking to make money from the protein shortage firstly turned to stocks in meat companies as pork prices surged 150% on the year.

But with those stocks already sky-high and more and more companies declaring themselves as pig breeders, traders have been increasingly turning to other futures contracts – notably the fresh egg contract on the Dalian Commodity Exchange.

“Egg has been the proxy for the protein market in China,” one trade source told Agricensus.

According to exchange data, prices in eggs have surged from around CNY4,000 per lot in June to a high of CNY5,000 per lot in late October.

While current prices have fallen back to CNY4,500 in the past two weeks as traders have taken profits, daily trade across the futures curve is huge at 370,304 lots with open interest only marginally higher at 424,278 lots.

With each lot worth 5mt (or 90,000 eggs), open interest is 38.2 billion eggs – equivalent to more than 10% of national demand.

“These egg contracts are the only direct exposure to consumer protein that you can get,” said one former trader at an international trading house who has started up day trading on his own account.

In the fickle world of Chinese commodity markets, it is not unusual to see wild swings in prices of commodities such as soymeal, plastics and eggs.

Unlike western exchanges, where individual accounts are estimated to make up 20% of the total accounts versus institutions at around 80%, it is almost the exact opposite in China.

And what drives that are market rumours and the personal experience of the individual who has seen the prices of chicken, beef, pork and eggs rise sharply in shops and supermarkets in bustling megacities such as Shanghai as well as in rural provinces such as Tibet.

“It’s a nation of traders. Everyone… trades their own book. If the Dalian had a meat contract they would be killing it,” said a second market source.

With China being the world’s biggest pig-eating country, Dalian has long coveted a pork contract and was said to be inching closer to launching one last year.

However, the outbreak of the fatal pig disease stalled that process.

Market sources said that a physical delivered contract could contribute to a spread of the disease, as well as create the necessity to test all pigs – something that sellers necessarily wouldn’t want.

“No-one would want to get a test that confirms ASF,” said the second source, referring to the fact that to do so would involve the loss of all pigs on the seller farm for inadequate government compensation.

The desire for a consumer protein contract is also driven by the fact that there is poor data on export sales of pork, which leaves consumers to trade on their own personal experience of prices and market rumours.

Unlike in soybeans and grains, the US does not strictly enforce all sellers to declare their international sales.

That is due to poor definition of what is required to be declared – whether it is a cut or a carcass.

As such, traders have to wait for official export figures to determine supply.

And with other European nations not having the same sales reporting system, it is driving speculation in the protein market.

Earlier last year at least two brokers sought to build pork indices for a financially settled contract that would enable their clients to manage the risk of selling pork for export forward.

However, little has come out of those attempts, leaving China’s army of private traders to look at the humble egg.