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After the trading of the egg futures on Dalian Commodity Exchange (DCE) was approved at end of September, DCE is now actively preparing for the listing, which marks the upcoming “birth” of China's first livestock futures product. Insiders said that the approval of the egg futures is to open up a new field of China’s agricultural futures, indicating that China has made substantial progress in the development of the livestock futures products.
As a great power of animal husbandry, China has seen rapid development of the industry in the recent three decades. The "Twelfth Five-Year Plan" has confirmed that the animal husbandry has become a pillar industry in China’s agricultural development with its output value accounting for 36% of the total output value of agriculture, forestry, animal husbandry and fishery. According to statistics, in 2012 the number of China's fattening pigs reached 714 million, ranking first in the world; the egg production amounted to 28.61 million tons, ranking top in the world; the milk production stood at 37.44 million tons, ranking third in the world. With the rapid development and expansion of China’s animal husbandry, affected by the distinct seasonal characteristic and other factors, the eggs, live pigs, chicken and other products have seen significant price fluctuations and highlighted business risks. Therefore, in reality, the farmers and spot enterprises require the market to provide the corresponding platforms and instruments for risk hedging.
As early as the middle and late 19th century, the international markets introduced the egg, pork, live cattle and other livestock futures products to provide all the market players with price references and operational guidance. As the livestock futures products are highly complicated, the development of China’s livestock futures has lagged behind. DCE began to research the live pig futures in 2004 and the chicken futures in 2006, in the hope to open the channels to the livestock products from the traditional international livestock futures products. In 2012, against the general background of serving the “San Nong (agriculture, farmers and rural areas)” and in order to give full play to the positive role of the agricultural futures market in guiding production and avoiding risks, the China Securities Regulatory Commission (CSRC) opened the “green channel” for listing the agricultural futures contracts. Take this opportunity, DCE has made significant progress in the research of the egg, live pig, chicken and other agricultural products. And the introduction of the egg futures, the first of its kind, will initiate the establishment of China’s greater agricultural futures products system, as a pathfinder for the listing of other livestock futures products.
As a pioneering novelty in China, the egg futures are an old product on the futures market in the world with a long history and brilliant "achievements". The egg was one of the futures products traded in the U.S. long time ago: in 1874, the forward trading of eggs began in Chicago, in 1898, Chicago Butter and Egg Board, CME's predecessor, was established, and in 1919, the eggs began to be traded as a futures product. With the growing participation of industrial clients, the egg futures played an important role in the industry in the U.S. In 1929, the trading volume of the egg futures was 20 times the volume of spot trading, and from 1960 to 1961, compared with the then listed products, the trading volume and turnover of the egg futures were only less than those of soybean and wheat.
During the early period of the development of the egg industry in the U.S., the substantial price volatility of eggs brought big risks to egg farms, egg traders and downstream consuming clients, and after the listing of the egg futures, the businesses effectively avoided the risks and achieved stable operation through the hedging with the egg futures. As the egg futures were increasingly mature, more and more industrial clients engaged in the egg futures and the price fluctuations of eggs were significantly reduced in the U.S. From 1961 to 1965, the average spread between the year high and low of the egg futures fell by 29.9% than that from 1941 to 1945. However, as the scale development of the industry went on later, the egg price tended to stabilize, the changing trends became predictable, the spot enterprises no longer faced the risks of price volatility, and the demand for hedging reduced substantially, the egg futures were delisted in the United States in 1982 after completing the historic mission. The futures were also delisted in Japan in 2010.
Unlike the grain, feed, oil and other existing agricultural futures products, the egg is a fresh product, resulting in the big differences in the requirements for storage, preservation and transportation in the processes of trading and delivery, and moreover, the egg is highly related to the daily life of ordinary people, which requires for the design of contracts and system rules in strict accordance with the characteristics in the processes of production, trade, storage and consumption of eggs during the course of the development of the egg futures, in a bid to make the egg futures reflect the spot market and the actual conditions to the most and effectively prevent and control risks as well as ensure the safe and stable operation and functioning of the market.
On the basis of taking full account of the particularities of the egg product and by drawing on the relevant experience in the spot trade coupled with the innovations in systems, the DCE has solved the problem of keeping the eggs fresh, taken various measures to ensure food safety, and properly designed the risk control system to ensure the safe trading while strengthening risk prevention by making the plan for dealing with epidemic diseases.
First of all, strict control has been implemented in each process to ensure the freshness of the eggs. The Haugh unit featuring a short time of test, low test cost and high accuracy has been selected as the test indicator of the egg freshness, which serves as a fundamental guarantee for the freshness of the eggs. The constant temperature warehouse delivery and the factory warehouse delivery at large layer farms have been adopted at the same time and the delivery with recommended brands is implemented to ensure the egg freshness. Meanwhile, considering that temperature is an important factor affecting the freshness changes of the eggs, the hottest months of July and August have been ruled out in setting the contract months of the egg futures so as to slow down the freshness changes of the eggs before entering the warehouses as well as facilitate the delivery from the warehouses for the buyers in favorable conditions.
Second, various measures have been taken to ensure food safety. The delivery quality standards will refer to the experience of quality safety control for the eggs supplied to Hong Kong, the package will adopt the egg carton generally used in trans-provincial long-distance transport, so as to decrease the rate of crushing in the process of warehouse inbound and outbound and reduce the interaction among eggs. With regard to delivery system, such measures as checking the “three certificates”, reducing the in-stock time of egg futures, regular spot checking by DCE, making payment by the receiver after confirming the quality, and exchanging goods for free in case of sanitation and quality problems will help to establish a whole set of system that ensures the food security of eggs for delivery that includes strict warehouse inbound and outbound, safe storage, and after-sale tracing.
Third, efforts have been made to set out detailed response plan according to the characteristics of China’s epidemic outbreak, so as to strictly prevent and control the epidemic. When designing the delivery site, DCE has considered the characteristics of China’s egg production and selling areas and tried its best to cover all the major production areas and selling areas. When an area is confirmed to be an epidemic area, the delivery warehouses in the epidemic area should stop any warehouse inbound and customers who have made warehouse inbound in the epidemic area can exchange goods in the delivery warehouses in non-epidemic areas. When the number of delivery warehouses in the epidemic area reaches a certain proportion, DCE will, in accordance with the “Risk Management Measures of DCE”, adopt such measures as suspending trading and stopping trading to control market risks. These rules can help to reduce the impact of the epidemic on the delivery process to the lowest level and can effectively guarantee the safety of trading and delivery.
Market participant believed that the launching of egg futures will have profound significance to both relevant industries and China’s futures market. First, egg is a typical product of “agriculture, farmer, and rural area” and the listing of egg futures will therefore exert obvious effectiveness in serving the “agriculture, farmer, and rural area”. The listing of egg futures will help promote the standards of the egg industry, promote the sustainable development of the industry, and play an active role in expanding farmers’ employment, increasing farmers’ income, and enhancing the development level of rural economy, all of which have shown its obvious effectiveness in serving the “agriculture, farmer, and rural area”. Second, the egg futures have a high level of relevance to the existing varieties of DCE, which will help to perfect the variety sequence. Judging from the industry chain where the egg lies, the upstream materials of the egg is chicken feed and the corn and soybean meal which have been engaged in futures trading are the major raw materials for chicken feed. Therefore, the egg futures will form a hedging system with the existing varieties, thus helping to perfect the existing variety sequence. Third, the egg futures will help to form the professional advantage of the development and management of husbandry varieties. As China’s first futures variety of husbandry products, the design of egg futures contract will explore experience for developing husbandry products and provide reference for the design of live pig, broiler, milk, and other varieties, thus greatly enhancing the professional level of China’s futures market in developing and managing husbandry products.
Relevant person in charge of DCE said that at present China’s listed commodity futures varieties have covered the agriculture products industry, the chemical industry, the energy industry, the non-ferrous metals industry, the ferrous metal industry, and the precious metal industry, but there is still no husbandry-related products. Egg is the first variety of the husbandry futures and its listing will help to enrich the sequence of China’s futures varieties and expand the scope of futures market in serving the “agriculture, farmer, and rural area” and the national economy. In addition, it will also, under the good foundation laid by the egg futures, provide useful experience in continuously research live pig, live chicken, and other husbandry varieties and construct DCE’s agricultural futures varieties system, so as to continue to increase the market’s service for the agricultural industry and the real economy to a new height.
