Research On Derivatives Hedging Strategy Of Pig Breeding Enterprises

The swine industry is an important pillar industry of China’s livestock industry.For many years,the consumption of pork in China has ranked first around the world.As a reflect of Chinese dietary habits,pork has also been the top consumer animal protein product for a long time.Therefore,a sustainable development of the swine industry is an important issue concerned about the national material life demand,economic and social development as well as national food security.However,our swine industry has been suffering from "Swine Cycle" for quite some time.Sharp fluctuation of pork price during the Cycle has a negative influence on stable operation of pig breeding enterprises,which is harmful to the stable supply of pork and the sustainable healthy development of China’s swine industry.Since 2013,many pilot areas in China have started to adopt hog price index insurance.However,due to institutional and technical issues,hog price index insurance products have always faced with unreasonable pricing,insufficient product types,low and single level of security and other problems.Therefore,it’s difficult for the insurance to avoid risks.Since the listing of live hog futures on January 8th,2021,it has been gradually recognized and accepted among swine industry.On the one hand,hog futures prices serve as a guidance for pig breeding enterprises and farmers to make their production plans and forecast the future market.On the other hand,by using derivatives such as hog futures and over-the-counter options to hedge,pig breeding enterprises are able to lock in profits in advance,which helps to arrange production and operation in advance,reduce production capacity fluctuations and improve the anti-risk ability.Although hog futures have just been listed,many pig breeding enterprises have already started to carry out derivative hedging business.OTC options have gradually become an effective risk management tool for pig breeding enterprises under financial pressure due to their small capital cost and the ability to "tailor" their risk management needs.This paper takes the OTC option project of pig breeding enterprise A as a case study,analyze the risk avoidance effect of hog OTC option hedging strategy,summarize the successful experience and several problems of the strategy,including the lack of rigour in estimating hedging ratios,the execution of OTC hedging strategy is relatively simple,the selection of single hedging varieties fails to cover spot risk exposure,the high cost of OTC options rights of live hog and the limited understanding of OTC derivatives lead to the easy occurrence of speculative behavior in the plate profit,etc.In view of the above problems,this paper introduces the ECM model to optimize the hedging ratio of enterprises in the case,designs the optimized derivatives hedging strategy under the background of the original case,and compares the risk avoidance effect and capital occupancy between the optimized strategy and the original hedging scheme,and summarizes the advantages and disadvantages of the strategy and the application of the scheme.Finally,based on the experience and shortcomings of OTC option hedging in the case,this paper proposes that pig breeding enterprises should consider exploring a combination of options to reduce royalty costs,constructing a hedging scheme for the whole swine industry chain,grasping the timing of hedging to avoid speculation and improving the internal risk control system of enterprise hedging,with a view to providing certain experience for other enterprises in swine industry to carry out derivative hedging business and exploring a new path for stable business operation.