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Since April the egg prices have dropped sharply as the average price nationwide fell from RMB 2.33 / 500 g on April 8 to RMB 1.93 / 500 g on April 24, representing a decrease of 17.17%. After April 24 the egg prices picked slightly and the average price nationwide stood at RMB 2.02 / 500 g on April 28.
The farmers suffered a lot from the sluggish market prices. And the implementation of the new egg futures delivery system was just timely. In the new rules, the most highlighted are the system of each day selectable for delivery in the spot month and the mode of vehicle-board delivery. The new rules took effect from the 1703 Contract. From April 25 to 27, the reporters of the Futures Daily followed the inspection team of Dalian Commodity Exchange (DCE) to visit the farmers in Hubei region and learn about the operation of the local egg market as well as the utilization of the egg futures instrument among the local farmers and enterprises after the enforcement of the new rules. It was found that thanks to the futures market, several laying hen farming enterprises, processors and trade companies have withstood the most serious downtrend in over 10 years.
"I believe that without the utilization of the futures instrument, it would be difficult for Jiahemei to survive in the industry,” said Yan Tieshan, General Manager of Hubei Jiahemei Food Co., Ltd. (Jiahemei for short). Jiahemei has conducted relevant hedging with regard to their own risk exposure. Yan said, “In March, we purchased 10,000 crates of eggs at the price of RMB 99 / crate and at the same time hedged on the JD1704 Contract for the eggs. As the selling prices of the futures are about RMB 2,860 / 500 kg (RMB 126 / crate), we locked up the selling prices of the eggs. Later when the spot price increased to RMB 126 / crate, we sold the eggs in the spot market while liquidating the positions in the futures market. Although we did not earn profits from the futures, the spot prices went up. Without the hedging in the futures market, we would not have dared to purchase the 10,000 crates of eggs, let alone hold the eggs and wait for the spot prices to rise.”
Li Qingyi, Executive Vice President of Hubei Shendan Healthy Food Co., Ltd. (Shendan for short), said that since the egg futures were listed and traded in 2013, the company has been seeking to lock up the costs and profits through hedging. “This year the company’s hedging volume has increased by nearly 50% year on year.”
"As a large-sized independent farm, we have achieved automated process with relatively high investment in hardware, and our cost price is estimated at about RMB 3.2 / 500 g. When the egg futures price is higher than the cost, we would conduct hedging as appropriate. Now the egg price in the spot market is about RMB 2 / 500 g, with the loss at RMB 1.2 / 500 g. If we conduct hedging in the futures market, we can basically break even,” said Li with his analysis.
In addition, based on the price discovery function of the futures market, the enterprises and farmers can timely adjust the timing and scale for adding and eliminating inventory of laying hens, thus controlling the scale of farming.
According to Li, Shendan organizes three rounds of training for cooperative farmers every year. In the past the training was mainly in the food safety and later the contents of rationally using the futures instrument were included. It is gratifying that the training has achieved remarkable results. "Among the trained farmers, about one third of them successfully avoided the risk and basically broke even amid the falling prices.” In Li’s opinion, it takes time for the farmers to accept a new thing, but with the model of the bellwethers, others will follow up gradually.
In December 2015, DCE introduced a series of rules to improve the egg futures, including the system of each day selectable for delivery in the spot month that adapts to the feature of continuous production and sales every day in the egg industry, as well as the vehicle-board delivery mode widely used in the spot egg market. The new rules came into effect from the 1703 Contract.
The rules have reduced the delivery costs and increased the volume available for delivery. A DCE official said that a total of 156 contracts of the JD1703 and JD 1704 Contracts were physically delivered, including 16 contracts with vehicle-board delivery and 140 contracts with warehouse receipt delivery. The delivery was smooth and the delivery volume exceeded the total of the first three years since the listing of the egg futures.
According to Yan, since the implementation of the new rules on JD1703 Contract, the futures-spot price convergence became more obvious.
Going forward, DCE will consider increasing the position limit based on market demand. In addition, DCE will try to improve the liquidity of the contracts other than January, May and September, by measures such as reducing the trading fee, in order to better support the development of the egg industry.
As the farmers have little knowledge of the egg futures, it is difficult for the small-sized and individual farmers to participate in the futures market. However, the introduction of OTC options, "insurance plus futures" and other OTC tools has enabled the farmers to take advantage of the benefit brought by the futures market.
“Before the New Year’s Day we had expected the market in 2017 to be bad. We warned the egg farmers about that and suggested that they do some short hedging in the futures market. But the farmers did not understand futures. However, in Xishui County, Hubei Province, if you talk about price insurance, you would receive many active response from the farmers. The reason is that in the past two years in the county, there were several successful cases of ensuring farming earnings through the OTC options and ‘insurance plus futures’ program.”
Wu Hong, Chairman of Wuhan Ronghuaxing Asset Management Co., Ltd., shared a successful case of the egg OTC options program. In November 2016, with the support and guidance of DCE, Haitong Futures launched an optionS product for managing the risks related to the profits of egg farming. The farming profit put options were contructed by making use of the soybean meal, corn and egg futures. The product issued covered a total of 700 tonnes. With the egg prices falling continuously and the farmers reporting large losses, a total of RMB 280,000 was paid to the farmers as compensation.
