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On the last trading day before the National Day, the China Securities Regulatory Commission (CSRC) announced the approval of the egg futures, which has met with intensive discussion among the market players. The market participants believed that currently China is at a critical stage for the laying hens breeding industry to transform from the scattered production to scale and standardized production, but the lack of information of market prices and the farmers’ inability of judging the whole situation have caused unstable scale of production and substantial fluctuations of egg prices and undermined the steady operation of the industry. Under the current situation, the introduction of the egg futures, which will result in the unified and authoritative future prices in the market and provide a hedging tool for the operators, will help stabilize the production, and push the domestic egg industry to a new stage of development. Therefore, it is just at the proper time to launch the egg futures.
The increasingly intense fluctuations of the egg price and the industry development cycle call for the egg futures.
The increasingly intense fluctuations of the egg price and the industry development cycle call for the egg futures.
According to the sources, the chicken egg (egg) is an important livestock product in China with the production accounting for about 84% of the total poultry eggs production and the per capita annual consumption of about 18 kg. From 1980 to 2000, China’s compound annual growth rate of egg production reached 10.6% and after 2000 the rate stood at 2.3%. In 2012 the total output of eggs amounted to about 24.3 million tons in China, accounting for about 36.5% of the global total with an average market size of about RMB 185.6 billion in the last 5 years, which has ranked first in the world for 28 consecutive years. With the growth of production, China’s scale breeding of laying hens is upgrading along with more frequent and substantial price fluctuations.
According to the data of China Animal Agriculture Association, the average price of eggs rose 64.5 percent in 2010 compared to 2000 nationwide, an average annual rise of 5.51%, with the upward trend in general as well as the distinct feature of price volatility which was periodic with increases lasting 2 to 3 years and decreases continuing in one year. Compared with broiler chicken and other animal husbandry breeding, the breeding of laying hens features long breeding cycle, more investments and low economic benefits, which lead to the disadvantage in drawing large investments of funds in the business, while the small-scale breeding features low risk tolerance and rapidly engaging in and quitting the business, which often leads to substantial fluctuations in the stock of laying hens and the egg supplies. When the average egg price reached the historical record high of RMB 11.03 / kg in 2011, a large number of farmers expanded the capacity blindly, leading to more supply than demand of eggs in 2012 coupled with the rapid decline of the egg price, which once fell lower than the cost featuring the conventional ratio of 3 : 1 for the egg price to the feed. As a result, some medium and small-sized farmers suffered heavy losses, quitting the business.
The insiders believed that the price fluctuations also brought about the fluctuations of the industry development cycle when the famers’ production regulation failed to keep pace with the changes of the relation of market demand and supply, which caused the periodic changes of the egg price. As the problem cannot be solved through the conventional means of policy regulation and commercial insurances, it has provided a new way of addressing the crux of the industry development to present the operators with early reference signals in the form of the future market prices formed on the futures market.
According to Wei Gang, the animal husbandry analyst of Huaxia Zhengmu Technology Co., Ltd., the egg price may be affected by various factors such as chicks prices, feed prices, diseases, other alternatives, seasons, weather and so on. Most of the breeding farmers and enterprises tend to blindly expand the capacity when the price is rising while neglecting their own conditions, the nationwide market situation and the future trend. As a result, they usually fall victim of losses in production when the supply is more than the demand and the price drops, which will also intensify the market volatility. Therefore, "under the current situation, the launch of the egg futures providing the predictive prices for the upstream feed and trade enterprises, the midstream breeding farmers and enterprises, the downstream egg and food processing enterprises, the terminal commercial enterprises and large supermarkets and other related enterprises and the introduction of some ways to avoid price risks will help reduce the blindness in the production and operation, control the huge impact of the industrial periodic fluctuations and conduce to the operators making full use of the hedging function of the futures to directly transfer risks, so as to improve the farmers’ incomes, draw large funds to the industry, optimize the industrial structure, enhance the whole industry’s ability of resisting risks, and promote the stable development of the industry,” said Wei.
In combination with the futures products of soybean meal and corn, the listed egg futures will form a complete hedging chain for the laying hens breeding industry so as to comprehensively manage the costs and profits of the laying hens production and improve the whole industry’s ability of resisting the risks. According to Shi Yan, vice director of the research institute of Xinhu Futures Company, corn and soybean meal are the main materials of the chicken feed, the cost of which accounts for more than 70% of the egg cost. After the listing of the egg futures, the farmers and enterprises may conduct the complete hedging operation for the materials and products. Another complete chain of futures products will be established after the complete hedging system of the soybean squeezing products, representing revolutionary progress for the development of the animal husbandry.
Optimizing the industrial structure and promoting the standardization of breeding industry
With regard to the egg industry, the hen egg futures will bring more positive energy to the industrial development. Wang Zhongqiang, Deputy Director of the National Poultry Industry Association of the China Animal Agriculture Association, believed that farmers can manage price risks and stabilize market price fluctuation through hen egg futures. But the prominent problems of the poultry industry at present is the low level of its scale and standardization and the out-of-order development of its market (however, the level of its scale should not be unlimitedly expanded and its scale should be moderate.), which can be better handled through the promotion and guidance of the hen egg futures.
It is learnt that China’s laying hen farmers/enterprises are mainly of small and medium size. In 2011, the amount of laying hen stock on hand of livestock farms with the annual laying hen stock of 500 and above in China is 1.27 billion, accounting for 82% of the total. In terms of the scale, the stock scale of 2,000-9,999 and that of 10,000-49,999 take up the largest proportions of 36% and 20% respectively. The number of laying hen stock on hand of laying hen farms with the scale of over 10,000 (the standard hen egg farmer) is 750 million, taking up 27% of the total. However, judging from the experience of China’s laying hen industry development in recent years, the industrialization and scale expansion is the trend of the development of the laying hen industry, as the price-finding and risk-avoiding functions of hen egg futures can help enterprises become stronger and larger and help to attract capitals to invest in the industry, thus playing a positive promoting role in the scale expansion and the regulated production of the industry.
“China’s laying hen breeding industry has always been in a messy situation. At present, the laying hen industry and other animal husbandry industries have all stepped into the middle and later periods of their development. Therefore, the organization of the industry should be further strengthened. The hen egg futures can effectively increase the overall management level of the industry and promote the planning and forseeability of the production and management of the industry.” said Wang Zhongqiang. He also said that futures as a mature price risk management tool in the financial market has been successfully applied in foreign hen egg industries. He thus believed that China’s hen egg futures will play a decisive role in getting over the unordered production of the laying hen industry.
The standardized and orderly development of the industry propelled by the hen egg futures is also reflected in the promotion of hen egg production standardization and food safety. It is learnt that relevant departments in China have formulated industrial standards for hen eggs from different angles. Those frequently applied in the spot market include the Fresh Egg Hygienic Standard of the Ministry of Health, the Pollution-free Fresh Hen Egg Standard of the Ministry of Agriculture, the Fresh Hen Egg Standard of the former Ministry of Internal Trade (now incorporated into the Ministry of Commerce), and the Export Fresh Egg Inspection Procedures of the China Commodity Inspection Bureau. However, some standards lack coerciveness and have relatively small coverage ratio in the hen egg output. On the contrary, the futures market has clear quality requirements for the trading and delivery varieties and there are strict inspection and quarantine in the later settlement. And relevant standards have been strictly executed in the futures market.
Wei Gang, Livestock Analyst of Huaxia Zhengmu Technology Co., Ltd., said that futures contracts are standardized contracts, where the market rule of “high quality and preferential price” can be well reflected and the transaction objects of which have corresponding quality standards. Besides, hen egg futures have explicitly stipulated the quality, specification, food safety, and other indexes of the delivery goods. Farmers/enterprises who want to participate in hen egg futures delivery must provide objects that meet the delivery quality standard of the hen egg futures contract, which will urge the them to speed up the process of variety and technology improvement, thus promoting the increase of the overall standardization level of China’s hen egg industry, helping to standardize China’s hen egg quality standard and classification work and to extend the standard and sustainable development of the hen egg industry, and facilitating the technological advance of the whole industry.
Mature conditions to launch hen egg futures
Market participants believed that judging from the stage and specific situation of the development of domestic egg industry, the current hen egg futures varieties have been equipped with the developing and launching conditions.
Relevant person in charge of the DCE Agricultural Products Division said that China’s hen egg varieties now have corresponding industry standard and there are clear stipulations in terms of hen egg technical requirements, test methods, production inspection, marks, package, transportation, and storage, which will help to achieve the standardization of the hen egg varieties and lay a foundation for the standardization of the futures contract. With regard to market capacity, the hen egg market scale has exceeded RMB 180 billion and has a high level of commercialization, and the hen eggs produced by the scaled laying hen farms can be used for delivery, thus ensuring the sufficient delivery amount. Hen eggs enjoy a high marketization level in terms of production, consumption, and trading and have full competition and no monopoly. In addition, the great and frequent fluctuation of hen egg prices, the high level of price relevance of different regions, and the obvious connection of the egg price trend across the country have provided a market basis for developing the futures. Among the existing livestock varieties, the egg is least directly influenced by epidemics, and as there is no compulsory quarantine in the selling and transportation of eggs, the egg variety will not encounter great potential risks and policy obstacles. All these have laid a solid basis for developing hen egg futures.
Seen from the history of hen egg futures trading, egg is also one of the varieties that have been developed for futures trading around the world and achieved success. America started the forward transaction of eggs and other commodities as early as in 1874 and since the establishment of the CME (Chicago Mercantile Exchange), egg has become a futures variety for trading. The hen egg futures stepped into the most prosperous period in the early 1960’s and became the world third largest futures variety in terms of the trading volume after the soybean and wheat. Since 1970’s, large chicken farms have directly supplied the goods to large supermarkets due to the changes in hen egg spot market in the United States, which has led to the gradual fix of price and supply and the decrease of industrial clients’ risk-avoiding demand. In 1982, CME cancelled the hen egg variety and Japan stopped the hen egg futures trading in 2010.
As for the future listing and operation of hen egg futures, people from all circles have shown their enthusiasm and expectation. However, they also believed that sufficient market cultivating period should be left for the hen egg futures, the first livestock futures in China, to lay a solid foundation. And the rush for quick success should be avoided.
“The launching of hen egg futures will bring a revolution to the development of the laying hen industry!” said Han Wei, President of China’s large egg breeding enterprise Dalian Hanwei Group when hearing the news of the approval of the hen egg futures. He said that China is a large agricultural country with the largest hen egg production quantity and egg apparent availability. Foreign countries have had the hen egg futures variety and China therefore should also have such variety. For many years, he has hoped to bring hen egg futures to the market through DCE. He said, “The hen egg industry is too backward and badly in need of the futures market. Therefore, as China’s largest egg breeding enterprises, Hanwei will join with DCE to cultivate the hen egg futures, thus being responsible for the customers, for the country, and for the whole nation.” He also pointed out that as the hen egg futures is still the newborn thing in China, market effect should not be expected immediately after its launching in its future operation and a cultivating process should be given to the market. And the most important thing right now is to launch hen egg futures as early as possible and allow the market to gradual adjust itself in the process of listed trading.
Liu Huaqiao, General Manager of Shendan Corporation (China’s largest egg products processing enterprise), said that the egg products industry is typical of the grass-roots economy. The inclusion of eggs into futures trading will benefit producers and consumers. Besides, Shendan will cooperate in the listing and operating of hen egg futures, actively participate in the hen egg futures market, and offer its opinions and suggestions for the development and improvement of the hen egg futures.
Administrators of the livestock and poultry industry have voiced the same aspiration. In March of this year, DCE held the hen egg futures demonstration meeting in Wuhan (Hubei Province), during which Chen Hongsong, Deputy Director of the Hubei Animal Husbandry and Veterinary Bureau, said that local farmers have a high expectation for hen egg futures as frequent fluctuation has been seen in hen egg prices in recent years. The abnormally-high price for a while and the ridiculous low price for a while have greatly tortured the chicken raisers and even made them suffer great loss. Therefore, they hope that the launching of hen egg futures variety will help promote the development of the livestock industry and stabilize the “company plus farmers” production mode of the breeding industry, so as to achieve the transformation of the development mode of the livestock industry. Therefore, “we are positive about the launching of the hen egg futures and expect its early launching. Hubei is willing to cooperate with DCE and become the test field for the hen egg futures.”
Futures companies also expect the listing of hen egg futures. Tian Yalin, General Manager of Everbright Futures Co., Ltd., said that futures companies are very familiar with hen egg variety and have contacted with many breeding enterprises and feed enterprises through soybean meal and corn feed raw materials. Therefore, they have a general understanding of the industrial pattern and know where to develop and cultivate the market after the launching of hen egg variety, which will make them carry out hen egg futures business with great facility. He said, “Feed and raw materials hedging business can be conducted with feed futures breeding farms and relevant enterprises and direct products hedging business can be conducted with eggs. And all these can be carried out through DCE’s industrial chain. As a result, futures companies are confident about this variety and customers itch to try the new variety. Everbright Futures will actively participate in this new variety and do well in market developing and cultivating, so as to contribute its due share to the successful operation of egg futures.”
