Korea Starts Asia's First Hog Contract Amid Concern Over Volume

By Sungwoo Park

July 21 (Bloomberg) -- South Korea, Asia's fourth-biggest economy, introduced trading of lean hog futures today amid concern that the first contract for the commodity in Asia may fail to attract investor interest.

Hogs will also be the first agriculture-linked contract offered by Korea Exchange Inc. The bourse, operator of the nation's equities and futures markets, lists stock-based contracts and in 1999 introduced a little-traded gold contract.

``We are a bit skeptical if trading will go okay with enough liquidity because the number of players is limited,'' C.H. Lee, team leader of retail sales at Woori Futures Co. in Seoul, said before trading began. ``You can secure liquidity when even ordinary individuals participate, but they don't seem to be interested and only some livestock people are.''

Pork is Korea's second-largest agricultural product by value after rice and the contract offered swine producers and processors a way to manage price risk, the exchange said June 29. Pork-related futures trade in the U.S. and Germany, it said.

Lean hogs for August delivery traded at 3,920 won per kilogram at 11.30 a.m. in Seoul after opening at 3,950 won, according to the exchange. Sixty-six contracts were traded.

``Listing lean hog futures can extend derivatives to general products and make a contribution to the development of capital markets by providing a proper hedging tool for industries other than the financials,'' the bourse said.

South Korean pork output was valued at 3.6 trillion won ($3.5 billion) in 2006, the exchange said.

Volume Challenge

``I don't think it's going to be a big player,'' Lawrence Kane, a market adviser at Stewart-Peterson Group, said on July 17 from Peoria, Illinois. ``Their biggest challenge is to create volume over the next couple of years.''

Hog futures volume averages about 29,000 contracts a day on the Chicago Mercantile Exchange, the Korean bourse said.

Korean pork prices fluctuated by 27.2 percent last year, compared with 23.1 percent for the Kospi 200 Index and 0.5 percent for 3-year government bonds, it said. Hog futures prices will be based on average prices of the meat traded in 11 local markets, it said.

``The question is whether they can attract many of the farmers'' to use the contract and increase liquidity, Chris Yoo, a manager at global commodities with Samsung Futures Inc. in Seoul. ``Pork farmers look at pig hips, not PC monitors for future prices.''

Korean Doubts

Overseas investors and market analysts expressed doubts about initial contract volumes.

``If you'd have said China, I would think that would be a little more of interest, but Korea,'' David Bauer, President of Brite Futures Inc. in Milwaukee, said on July 17.

South Korea, which is about 78 percent self-sufficient in pork, consumes 870,000 metric tons of the meat a year, or 18 kilograms per person, the Korean bourse said.

``The outlook is not all that pessimistic because hogs are the single-biggest commodity in Korea in terms of the number of market participants, and there's a need out there for hedging against price fluctuations,'' Samsung's Yoo said.

Korean hog futures will be settled in cash, with each contract equal to 1,000 kilograms, the Korean exchange said. Trading will be from 10:15 a.m. to 3:15 p.m. local time, it said.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Molly Seltzer in Chicago at Mseltzer3@bloomberg.net