On December 19, the corn starch futures were officially listed and traded. Why has Dalian Commodity Exchange (DCE) launched the futures of corn starch, a downstream product of corn, which is also a traditional dominant product on the futures market? What impacts will the listing bring on the development of the industries and the futures market, and what important roles will it play? As the corn starch futures were listed, a DCE official answered the questions about the issues of concern in the market.
Q: Why has DCE selected the corn starch futures, and what conditions are there for the futures trading?
A: In recent years, the corn starch industry has developed rapidly, and as the prices are fully based on the market with significant fluctuations, and the enterprises have been looking forward to the introduction of the corn starch futures to guide production and manage risks and use the corn and corn starch futures to fix the prices of raw materials and products so as to stabilize the businesses. And in terms of physical attributes and market basis, the corn starch is suitable for futures trading. In the aspect of physical attributes, as a processed product of corn, the corn starch is the basic material for many industrial products such as the starch sugar, featuring stable quality and convenience in storage and transportation. With regard to the market conditions, in 2013 China’s corn starch output amounted to about 23.5 million tons with a market value of nearly RMB 70 billion and sufficient supplies available for delivery. The corn starch features significant fluctuations, and from 2009 to the first half of 2014, the average factory prices of corn starch nationwide were from RMB 1,606 to 3,134 / ton with a fluctuation range of 95%. Therefore, the market participants have urgent demand for hedging.
Q: What effects and impacts will the introduction of the corn starch futures have on the development of related industries?
A: The introduction of the corn starch futures will promote the sound development of the corn deep-processing industry and the entire corn industry. First, the corn starch futures will provide related enterprises with an instrument of risk management, and help the enterprises fix the operating costs and profits and enhance the anti-risk capability; second, the listing of the corn starch futures will provide the industry with real and effective future prices, which will help related enterprises organize and arrange production, and improve the operation level of the whole industry; third, it is conducive to guiding the industrial upgrading and eliminating the backward production capacity. At present China’s corn starch industry has been in the state of overcapacity. According to the data of China Starch Industry Association (CSIA), from 2009 to 2013, the corn starch producers in China recorded an average operating rate of about 65%. The listing of the corn starch futures will guide the industrial upgrading, speed up the pace of industrial integration and improve the overall strength of the industry through the designing of delivery quality standards and the arranging of the delivery warehouses.
Q: What do you comment on the role of listing the corn starch futures in improving and expanding the product line of the industry as the corn starch is a downstream product of corn, a listed futures product?
A: The corn starch futures have expanded and improved the product line of the industry in various aspects. First, the corn futures product line has been formed as well as expanded from the fields of grain and feed to the food, beverage and other diversified processing fields, having further deepening and broadening the service of the futures market for the industries. The corn starch is one of the basic materials in many fields such as starch sugar, beer and medicine, and especially the starch sugar, a downstream product of corn starch, has seen the usage amount increased year by year in the fields of food and beverage; second, the listing will promote trans-regional integration of corn. The production areas in Northeast China, North China and Huang-Huai region are different in both price systems and distribution channels, and the delivery regional distribution for the corn starch contracts has covered the abovementioned main production and sales areas, bettering the formation of the representativeness of the corn product prices and providing a feasible hedging path for the corn produced in North China and Huang-Huai region; third, the listing will provide the market with more abundant hedging instruments and arbitrage portfolios. The prices of corn and corn starch are highly correlated, and it is feasible and operable to use the corn starch and corn futures in cross-product and cross-contract hedging, which will boost the mutual development and functioning of the two products.
Q: What difficulties were found in designing the contracts and rules for the corn starch futures and what innovative breakthroughs have DCE made?
A: DCE has adhered to the principle of “adapting to spot trade practices and keeping compatible with the corn futures” in designing the contracts and rules for the corn starch futures. In the designing of the contracts and rules, difficulties were mainly found in two aspects: first, there are some differences in the requirements of the national standards and the spot trade for hygienic indicators; second, the price difference in North China and Northeast China fluctuates significantly in some time, resulting in some difficulty in designing the premiums and discounts. In terms of the problem of hygienic indicators, DCE worked with CSIA to formulate scientific and reasonable hygienic indicators by conducting widespread quality general survey and sampling inspection, commissioning a number of quality inspection institutions to make the benchmarking inspection and taking the national standards and demands of the spot market into consideration. Regarding the regional price differences, DCE has made in-depth analysis of the corn starch price differences across China from 2007 to 2014, and according to the opinions of the industrial clients and the actual market conditions, DCE has set the premium and discount at RMB 95 / ton between the two main production regions of Shandong and Jilin, which has been recognized by all the market participants. In addition, considering the close relationship of arbitrage between corn and corn starch and in order to facilitate the participation of investors in the two products at the same time, DCE has kept the compatibility between the two products when designing the corn starch contracts and made the same settings as the corn in contract month, contract size, quote unit, tick size and other aspects.
Q: Would you brief us on the process of developing and listing the corn starch futures, and what are the prospects of the corn starch futures in your opinion?
A: In 2012 DCE launched the research in the corn starch futures. With the support and assistance of CSIA, member units and leading enterprises in the industry, DCE has carried out extensive and in-depth survey of over 100 enterprises on the industry chain in more than 10 provinces and municipalities, systematically solicited opinions and suggestions from enterprises and experts in the industry, held 13 forums attended by enterprises in the industry and the member units to discuss and optimize the designs for the contracts and rules, and formed the final scheme. The project of the corn starch futures was approved in August and the futures trading was approved in late November.
Currently the market is unanimously optimistic about the development of the corn starch futures. On one hand, the development of the corn futures market has laid a solid market foundation including the investors for the operation of the corn starch futures; on the other hand, as a fully market-oriented product, the corn starch features sound market operating environment and broad space for development. In the process of early market survey and discussion on the contracts and rules, the industrial clients had expressed the willingness to actively participate in the corn starch futures. In addition, the formation of the corn and corn starch product chain of hedging and arbitrage has made the investors put high expectations on the corn starch futures, which are expected to take the important task of hedging for the corn deep-processing enterprises just as the important task of the soybean meal futures for the oil squeezing industry. Therefore, we are fully confident in the sound development and functioning of the corn starch futures in the future.
After the listing, DCE will continue to strengthen the promotion and cultivation of the corn starch futures and guide the industrial clients and investors in actively and rationally participating in the product, while intensifying market supervision and prevention and control of risks, so as to stabilize, expand and strengthen the futures product, bring the market functions into effective play and serve the industries and the real economy.