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Developing Livestock Husbandry Futures Products and Serving Industry’s Steady Development
China’s first husbandry and fresh agricultural product of egg futures will be listed for trading at the Dalian Commodity Exchange (DCE) on November 8. Why did DCE choose the egg futures? What is the significance of the listing of egg futures on the industry and on the domestic market development? How will DCE ensure the safe and steady operation and the function display of the egg futures? Before the listing of the egg futures, relevant person in charge of DCE answered the questions of market concern.
Q1. Why did DCE choose the egg as a futures product and what are the influences of the listing of egg futures on breeding and its related industries?
The laying-hen breeding industry is an important part of the livestock husbandry and belongs the issues of “agriculture, farmer, and rural area” with major national support. At present, the stock of laying hens is about 1.5 billion and the number of scaled farmers reaches 300,000 with the total employees of 10 million. The annual production value of relevant industries exceeds RMB 350 billion, which has exerted great influence on the development of rural economy. However, in recent years, the development of China’s laying-hen breeding industry has faced many restrictions. For example, the relatively violent fluctuation in egg prices has presented farmers and wholesalers with larger market risks; the promotion and implementation of industry standards are not satisfactory; most of the small and medium-sized chicken farms of small scale lack medium and long term planning, thus blindly entering in and exiting from the market and presenting weak risk-avoiding capacity. As an exchange starting from the agricultural products and still maintaining an important position in current agricultural products futures trading, DCE hopes to launch the egg futures to expand the market service to the new field of livestock husbandry and to serve the steady development of the industry. Meanwhile, the egg futures have been successfully operated in the international market and, judging from the domestic market scale, the marketization level, and the standardizable level of the eggs, the characteristics of the egg product meet the requirements for engaging in futures trading.
The listing of egg futures can provide egg and relevant enterprises with risk-avoiding tools and help to enhance their management level. It will also help to from expected price and lead farmers to reasonably adjust their breeding scale, so as to help enterprises control the great impact brought about by the periodic fluctuation of the industry and to attract capital invested in the industry, thus optimizing the industrial structure, promoting the standardized breeding, and enhancing the risk-avoiding capacity of the whole industry. Besides, it can also publicize the standards of the egg industry through the influence of the futures market, which will help to standardize and guide the industry development. Therefore, the launching of egg futures will play a positive role in promoting the sustainable development of relevant industries, expanding the employment of farmers, increasing their income, and enhancing the development level of rural economy, and it is also of great significance in strengthening the market service for the “agriculture, farmer, and rural area”.
Q2. The egg futures is the first husbandry futures product in China. So what is the significance of its listing on Dalian futures market and on domestic futures market?
In domestic futures market, there are no products related to husbandry which is an important part of commodity futures in the international market. The egg is China’s first husbandry and fresh agricultural product and the launching of the egg futures will fill in the gaps of China’s futures market in livestock husbandry, thus greatly expanding the scope and depth of domestic futures market in serving the “agriculture, farmer, and rural area”.
The egg and its related industries have similar features with other husbandry products. For example, the overall standards of these industries need to be further enhanced and, unlike traditional agricultural products such as the grain, the quality guarantee period of eggs and other husbandry products are very short. Therefore, the launching of egg futures will explore experience and provide reference for developing other livestock husbandry products. Meanwhile, as the egg is closely related to people’s lives, the launching of egg futures will greatly promote the understanding and recognition of all sectors of society about futures market and help to publicize the futures market in a wider scope.
As for DCE, the listing of egg futures will help to form the focusing effect of products and form the professional advantages of developing and managing husbandry products. With regard to the industry chain of the egg, the corn and soybean meal, the upstream raw material of the egg, have been developed as futures products and the listing of these three products at the DCE will bring convenience to consider the compatibility of existing products in the product design and will also help to form the focusing effect of products, thus enabling risk-avoiders and investors to simultaneously trace and pay attention to the relation of different products to conduct hedging and arbitrage. Besides, as the industrial customers of these three products are overlapped, the listing of egg futures at DCE will bring more convenience for industrial customers to participate in and make use of the market.
Q3. What are the principles of designing the egg futures contract and rules? How can they reflect their service for the industry and the real economy?
The design of the egg futures contract reflects the principles of closing to industrial demands, ensuring food safety, and controlling operational risks.
First, the design of egg futures has adhered to the principle of closing to industrial demands and, having taken a full consideration of such realistic conditions as the scattered production areas and the relatively small breeding and trading scale of China’s egg industry, formed the design scheme that is convenient for small and micro enterprises to participate; second, as the egg is an important nutrition of the general public, DCE has attached the greatest importance to the safeguarding of the safety of eggs for futures delivery when designing the contract and aimed for strict requirements on delivery quality standards and innovation in delivery system, so as to ensure the egg safety for futures delivery from all dimension; finally, DCE has, by drawing other countries’ experience in designing the egg futures and in accordance with the operational features of China’s egg industry, made the operational security of the whole market as the most important design rule and reasonably set up the position limit for each customer, so as to make the futures market operation conform to the characteristics of the spot eggs. In addition, we have mapped out the risk-handling measures against emergent incidents such as the epidemics, so as to ensure the overall market operational safety of China’s first husbandry product and bring the due functions of the futures market into full play.
In designing specific contract and rules, we have, in accordance with the actual situation of the egg enterprises, specifically designed the rules, the procedures, and relevant parameters, so as to reflect their service for the industry. For example, the contract size has been decided according to the daily output of China’s breeding farmers of average scale, which will bring convenience for small and medium-sized breeding farmers to participate; and the position limit in delivery month has been set in line with the practices of spot trading and the actual situation of the small and medium-sized traders, so as to adapt to the small size of the egg industry.
Q4. Preventing epidemic risk transmission and ensuring the safe operation of the market is one of the issues to be taken into account in designing the egg futures. How can the Exchange effectively prevent possible risks at the epidemic outbreak?
The egg is the product with the least food safety risk and the best quality safety of all husbandry products, which is one of the reasons that DCE has chosen the egg product as the breach of the husbandry products futures. In order to prevent epidemic risks, DCE has specially set up the epidemic-handling system and the specific contingency plan against epidemics: first, DCE will set up delivery warehouses in the main egg producing and selling areas of China, so as to ensure sufficient deliverable storage capacity in the case of concentrated outbreak of epidemics; second, it will take such measures as suspending warehouse receipt registration at the delivery warehouses in the epidemic-outbreak areas and compelling the sellers to change goods at the non-epidemic delivery warehouses, so as to ensure the quality safety of eggs during the epidemic outbreak; third, when the number of delivery warehouses in the epidemic area reaches a certain proportion, it will adopt such measures as suspending or stopping trading after reporting to the China Securities Regulatory Commission (CSRC), so as to reduce the epidemics’ influence on the market in extreme conditions. On the other hand, DCE will keep close contact with the Ministry of Agriculture and relevant ministries and commissions, so as to get the epidemic information in time and strengthen the efforts on supervising the quotation prices. It will also stress the popularization and publicizing of knowledge on avian influenza, establish correct investment ideas, and educate investors to avoid irrational speculation, so as to reduce the possible influence of epidemics on egg futures price.
Q5. The egg has a wide influence in the market. After the listing of egg futures, how will the Exchange ensure the safe and steady operation of the market and promote the display of market functions?
After the launching of egg futures, DCE will give the basic functions of the risk management system into full play and carry out supervision and inspection on the market, so as to prevent market risks from all dimensions and ensure the safe and steady operation of the market.
DCE has set up strict risk management system for the egg futures and adopted several measures to prevent market risks such as the trading limit, the position limit, the response against epidemics, and the cash payment of delivery default fine. These measures are of high pertinence and stricter than those of other products and therefore can ensure the safe operation of the market. During the operation of the egg futures, DCE will strengthen market supervision and carry out advanced research and judgment on market risks, earnestly implement the supervision and duties in every important link of trading, settling, delivery, and inspection, and effectively display the synergistic supervising function, so as to effectively prevent and resolve market risks. It will also conduct investors training and market cultivation and lead main participants of all kinds to reasonably participate, so as to ensure the safe and steady operation of the market and promote the display of the market function.
In addition, at the initial stage of the launching of the egg futures, DCE has, in order to prevent and restrain over-speculation, carefully studied all trading parameters and adopted relatively strict risk management system, such as increasing the margin to 8% from the original 5% and no half-off commission privilege in opening or closing a position, to ensure the steady start of the egg futures.
Q6. Please briefly introduce the progress of developing and launching the egg futures of DCE. What do you think of the prospect of the egg futures development?
Several years ago when studying the broiler and relevant futures products, DCE began to notice the egg futures. DCE officially launched the development of egg futures at the beginning of 2012; the project of egg futures was approved in May, 2012; the listing of egg futures was approved in March, 2013; and the contract and rules of the egg futures was approved by the CSRC in the end of September, 2013. During the development of egg futures, the designers have visited over one hundreds units, including local government departments, industry associations, scientific research institutions, spot enterprises, and quality inspection institutions, to carry out research and investigation. They have held nearly ten industry and enterprise demonstration meetings and organized over one hundred egg futures trainings and promotion activities, which have greatly publicized the egg futures during its research and development.
As China’s first livestock husbandry futures product and the first fresh agricultural product, the egg futures has received high attention from all market participants. After the listing of the egg futures, we are confident in and capable of ensuring the steady start and healthy development of the egg futures under the current system guarantee and effective supervision. Of course, like any other new products, the egg futures will experience a cultivation process in the preliminary period after its launching. As the egg futures is the first husbandry product in China, its management and cultivation should be different from those of the traditional products, which will require more efforts. Therefore, all market participants should give more support and understanding to this product and leave enough time and space for its cultivation and development.
