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Chinese government directs the way for the agricultural derivatives market
This year’s report on the work of government proposed to "speed up efforts to develop modern agriculture and ensure sustained increases in rural incomes”. “we will speed up the structural adjustment in agriculture,” The Chinese authorities wrote it in the report. “Following the principle of letting the market determine prices and delinking subsidies from prices, we will reform in an active yet prudent way the system of corn purchase and storage to ensure reasonable returns of corn-growing farmers.”
“We will develop agricultural futures products and launch pilot schemes for options of agricultural products,” Chinese authorities said in NO.1 central document. “We will steadily expand pilot projects of insurance + futures, and reform to improve the mechanism for setting prices and the system of purchasing and storage of the agricultural products.”
These reports issued by Chinese authorities send us a message that one of the means to promote reform on the supply side in agriculture and accelerate agricultural modernization is to develop the agricultural derivatives market and make it function well.
The work DCE did and will do
Last year, Dalian Commodity Exchange (DCE for short) recorded a trading volume of 1.116 billion contracts (unilateral, the same below) and a turnover of RMB 41.94 trillion, including 596 million contracts and RMB 20.92 trillion of agricultural futures, accounting for 53.43% of the total on DCE. It continues to remain the top 3 among global agricultural futures exchanges. In terms of corn futures and corn starch futures, they grew fast last year in anticipation of adjustments on purchasing and storage policies with a trading volume accounting for 11.59% of the total DCE agricultural products and 6.35 times than that in 2014.
price discovery and hedging. Adhering to the objectives of serving industries and the real economy, DCE has standardized its management on markets and given a relatively full play to the functions of the agricultural futures market in price discovery and hedging for a long time. Now the prices of agricultural futures are appropriate and authoritative. Especially, the correlation of soybean oil, palm oil and soybean meal between the futures prices and spot prices is above 0.9, making them play a role in predicting future prices in advance. These futures prices become benchmarks for reference in domestic market and vanes to the domestic spot prices. For farmers and enterprises, these futures are price compass and operational safe haven. At present, basis pricing is adopted by 70% of the palm oil spot trade, over 50% of soybean meal spot trade and 40% of soybean oil trade. Basis pricing is a pricing mode generally accepted and adopted by international market, where both traders should sign contracts about trading at the price of selected DCE futures price plus the pre-agreed basis.
Serving agriculture, rural areas and farmers. DCE has long been making efforts to serve the agriculture, rural areas and farmers. Several years ago, it started “thousands of villages and tens of thousands of farmers” Project to aid farmers for selling, and “thousands of factories and tens of thousands of enterprises” Project to help factories and enterprises upgrade their management by participation in futures market. Later, a number of industrial conferences were hosted by DCE. Now, it continues its services by means of pilots projects including basis pricing, OTC options, and insurance + futures，a model to combine insurance on prices of agricultural products with futures. The next breakthrough of DCE may come from the innovation of futures and other tools and development of OTC market. At present, DCE has been almost ready for the contracts of soybean meal futures options, and its related rules, systems, technical systems, market cultivation and other preparations. DCE options business system has come online; OTC market technical system has been developed and its business mode has been almost determined.
In 2016, DCE will continue to draw up a blueprint for agricultural products system and steadily push forward the development of new products and new instruments. The existing contracts and rules shall be improved to meet the market changes and demand. The quality and efficiency of the market will be raised and the supervision will be strengthened. Safe and prudent operation is ensured and the market will function well.
