In December 2013, Dalian Commodity Exchange (DCE) launched the pilot program for switching warehouse receipts between intra-group factory warehouses for soybean meal futures. In July 2014, the number of groups selected to participate in this pilot was expanded from 2 to 9. Over the past year, the warehouse receipts switch system has facilitated participation in futures delivery by medium, small and micro-sized mid-stream and downstream enterprises along the industry chain, and further advanced the linkage between the futures and spot markets.
In order to solve the problem of receiving delivered goods at different locations and eliminate the barriers for medium, small and micro-sized enterprises to participate in futures trading, DCE has gradually introduced rules for warehouse receipts switch. Soybean meal was selected for reasons such as market structure characteristics.
In China, large oil mills such as Yihai, COFCO, China Grain Reserves Corporation and Cargill have all set up crushing plants in main coastal crushing areas. For example, Yihai Group has 16 crushing enterprises in 13 provinces including Heilongjiang, Liaoning, Shandong, Jiangsu, Guangdong and Fujian, and the COFCO Group boasts 16 crushing enterprises in 10 provinces such as Liaoning, Hebei, Shandong, Jiangsu and Guangdong. The grouping operation and the market structure of the industry has provided conditions for DCE to resolve the constraint in delivery sites.
As the first contract since the pilot of warehouse receipts switch started, the Soybean Meal 1401 Contract totaled a delivery of 15,580 tons, with the volume for warehouse receipts switch reaching 3,900 tons.Four feed enterprises from Hunan, Anhui and other regions participated in the warehouse receipt switch. At that time, the above-mentioned enterprises received the warehouse receipts of the Cargill factory located in Yangjiang, Guangdong Province, which is far from the business sites of the enterprises. Eventually, the receipts were switched for those of Cargill located in Nantong, Jiangsu Province. The feed company based in Hunan, which is the closest to the delivery site in Yangjiang, Guangdong Province among others, for example, reported a switch cost of RMB 41.4 /ton (including a regional price differential of RMB 11.4 per ton and a production adjustment fee of RMB 30 per ton), saved a logistics cost of RMB 180 / ton.
Since the pilot was officially launched in December 2013, the number of market players participating in warehouse receipt switch has reached 30, including 8 sellers and 22 buyers. Among the buyers there are 20 feed enterprises, who reported a switch volume of 12,730 tons, accounting for 86% of the total switch volume. Although the volume was not high, the introduction of the warehouse receipts switch system has eliminated the worries of the feed enterprises and other medium, small and micro-sized buying clients about the uncertainty in delivery sites, thus better motivating those buyers with relatively weak market power to more actively participate in futures trading and delivery. Since September 2013, the delivery volumes of the feed enterprises have increased significantly, growing from 0 tons in 2012 to 20,400 tons in 2013 and 105,000 tons in 2014.
The warehouse receipts switch system has attracted more medium, small and micro-sized enterprises to participate in and utilize the futures market, effectively enhancing their risk management ability and the ability to adapt to the modern market, thus promoting the growth of the enterprises.The warehouse receipts switch has not only made it possible for the medium, small and micro-sized enterprises to receive goods at a closer site, but more significantly, improved the oils and oilseeds market's transparency and rationality in pricing and other aspects. Since the introduction of the switch system, the futures and spot prices of soybean meal have seen effective convergence, the front-month contracts of soybean meal have significantly become more active. Before the introduction of the warehouse receipts switch system, the concerns of the buyers about the remote delivery and the price convergence resulted in a large number of positions closed out in the periods close to the delivery month and the low liquidity of the front-month contracts. After the system was launched, the relevant open positions have increased sharply. For example, from 2012 to 2014, the dominant September contracts of soybean meal recorded 80,000 contracts, 180,000 contracts and 330,000 contracts of open interest (unilateral) respectively on the first trading day in the month prior to the delivery month, showing significant increases. Meanwhile, since the introduction of the warehouse receipts switch, the futures-spot price differences have been narrowed substantially with the basis of the dominant soybean meal contracts narrowed by RMB 16 to 192 / ton on average compared with the same periods in the past 6 years. The forward sales basis has also decreased notably, and the sales basis of forward delivered soybean meal dropped from about RMB 250 / ton in the period before September 2013 to RMB 100 / ton or less in September 2014. Based on recent information about September 2015 basis sales contracts, an average basis at or below RMB 100 / ton has become normal, showing that the price discovery function of the soybean meal futures market has been further improved.
Warehouse receipts switch has also helped to generate widely recognized reference for regional price differentials. As the radius of soybean meal sales is typically within 200 km, the regional disparities in supply and demand and other factors have made the price differences on the spot market of soybean meal comparatively remarkable. In order to enhance the transparency of the regional price differentials of soybean meal, DCE releases the regional price differentials on its official website each month, with the underlying data derived from market quotation from third-party market institutions and factory warehouses. The regional price differentials are calculated on the basis of 5-day average values. Since the launch of the pilot, the regional price differentials have provided important reference for the 2 sides of the warehouse receipt switch transaction, significantly improved efficiency of the negotiation process. Also, it has added further impetus to the formation of a national oils and oilseeds spot price system.
