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The 2016 No. 1 Document of CPC Central Committee clearly sets out a number of requirements, including developing agricultural futures products, conducting pilot for agricultural options, and steadily expanding the insurance + futures pilots, etc.
According to Dalian Commodity Exchange (DCE)’s spokesman, this shows that the CPC Central Committee and the State Council attach great importance to the functions of the derivatives market and the related innovative financial services. Next, DCE will vigorously work towards the steady listing of the soybean meal options, strengthen the market cultivation and services, and guide the market institutions to effectively use the new instrument for risk management. On the basis of the stable operation of the soybean meal options, DCE will introduce more agricultural options products at proper time, develop and list more agricultural futures products, and further expand the scope of the futures market serving the agriculture, farmers and rural areas. In terms of the pilot programs for "insurance + futures", DCE will further optimize and improve the pilot models, deepen the "insurance& futures" and "banking& futures" cooperation, expand the scale and range of the pilots.
Through agricultural options, the agriculture-related institutions can purchase options to lock in the minimum selling prices with a fixed one-off payment, i.e. options premium. Also, agricultural subsidy models can be improved. The soybean meal futures option will be DCE's first exchange-traded options product.
In the "insurance + futures" model, the insurance companies develop price insurance for agricultural products, the farmers or agricultural enterprises buy insurance to ensure the minimum selling prices or earnings, the insurance companies perform reinsurance by buying OTC options from futures brokerage companies, in order to hedge against the risks of agricultural commodity price decreases, and the futures brokerage companies perform relevant hedging operations at DCE. With the launch of exchange-traded options, the insurance companies will also be able to directly participate in hedging with exchange traded instruments.
According to the spokesman, with regards to the listing of agricultural options, DCE launched mock trading for soybean meal options in 2012, and set the launch of soybean meal options as one of the three key priorities for the transformational development of DCE in 2015. DCE has accelerated the preparatory work such as improving rules, upgrading IT system, market cultivation, mock trading, etc., and is basically ready for the listing of soybean meal options. In terms of the pilots for "insurance + futures", in 2014, DCE joined hands with the insurance companies, agriculture-related enterprises and large-sized grain growers to implement projects to use OTC options to serve "San Nong", such as "Yongan Yuntianhua", "Xinhu Ruifeng", etc., exploring the creation of all-win models that can enable farmers to increase income, cooperatives to stabilize operations, and financial institutions to earn appropriate revenues. Based on the experience accumulated, DCE continued to improve the pilot models in 2015 by bringing in insurance companies and banks, successfully implementing the "insurance + futures", "banks& futures market cooperation" and other innovative models. DCE carried out 8 projects related to soybean, soybean meal, corn and eggs, including the "Xinhu Ruifeng pilot of corn OTC options", the "Xinhu Ruifeng pilot of egg price insurance", and the "Mailyard pilot of egg target price hedging", etc., and achieved satisfactory results. The PICC Property and Casualty Co., Ltd., Anxin Agricultural Insurance Co., Ltd., the Agricultural Bank of China and other financial institutions actively participated in the program.
