Published On: Mon, Mar 12th, 2012

DCE: Developing Option Trading on Agricultural Products

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Liu Xingqiang DCE President

Liu Xingqiang DCE President

The issue of “three rurals” is a global and fundamental issue affecting national development. Over the years, the central government has always attached great importance to the market mechanism to realize its full potentials in promoting agricultural development, increasing farmers’ income and maintaining rural stability. As judged from the experience of developed countries in Europe and the United States in their development of options of agricultural products, options have exerted positive effects on protecting the interests of farmers, avoiding risks of price drops of agricultural products and encouraging farmers to participate in pricing of agricultural products. In order to realize the functions of the futures market in guiding production, stabilizing markets and avoiding risks, we propose to introduce options on bulk agricultural commodities, to promote public awareness and utilization of options and to initiate pilot financial subsidies in options trading at an appropriate time.

Options confer their holder the right to buy from or sell to the counterparties certain amounts of specific products within a certain period of time in the future and with certain prices, but without the obligation to actually buy or sell. As sellers of agricultural products, farmers usually buy put options. Compared with the futures, put options have many advantages in avoiding price risks for the producers. Ever since its introduction in 1973, options trading has been growing at an alarming rate, according to the statistics of the U.S. Futures Industry Association, the global traded options contracts in 2010 amounted to 11.1 billion, comparable with the amount of futures contracts traded over the same period of time. As the world’s largest agricultural futures exchange, CBOT since 1982 launched options trading on futures of soybean, corn and wheat among others, numerous spot market merchants, farmers and corporations undertook hedging or risk-aversion via participating in options trading. Trading in options is also the important way for the U.S. agricultural industry to avoid price risks and for the U.S. government to provide agricultural subsidies. U.S. farmers, based on their risk tolerance, enter into forward contracts, i.e. order contracts, with cooperative organizations or purchasing and storage enterprises, while the cooperative organizations or purchasing and storage enterprises undergo hedging in the futures or options markets according to types of contracts and risk assessment. This “organizations (enterprises) + farmers” and “futures (options) + orders” model is the basic operation model of the U.S. agriculture. The U.S. government also utilizes options trading as an important way of agricultural subsidies, the U.S. Department of Agriculture has tried with the options to replace agricultural subsidies, which greatly enhanced farmers’ enthusiasm in participating in the options market and awareness of active risk aversion, thus shifted and dispersed huge price risks of agricultural products through options trading, and maintained the market price mechanism of agricultural products.

In recent years, as China’s commodity futures trading is growing, corn and soybeans among other agricultural futures are now fully market-oriented with active trading, and are increasingly correlated with international prices, so the futures market is efficient with smooth operations and has already possessed the basic conditions to warrant option trading. Trading of options on bulk agricultural commodities has played positive roles in stabilizing agricultural production and protecting farmers’ interests. In order to let the agricultural future market to better service the “three rurals” and to accelerate the development of modern agriculture in China, we therefore propose:

(A) To choose, list and improve mature futures varieties of bulk agricultural commodities and to introduce pilot trading on corresponding options. He said that, after development for nearly two decades, China’s agricultural futures market has perfected trading systems for futures of corn, soybean oil and other bulk agricultural commodities with active trading and fully realized functionalities, and therefore, absolutely possesses the basic conditions to develop option trading. At the same time, the exchanges have analyzed and carefully studied options trading on bulk agricultural commodities for nearly 10 years, and are thoroughly prepared in various areas such as rules and system.

(B) To intensify options education and promotion and to experiment to use options trading to achieve market-oriented transformation of agricultural subsidies. Once options are listed, we propose to borrow from the American experience, to use part of the funds for agricultural subsidies to support pilot options trading in agricultural producing regions, to use farmers’ cooperatives as intermediaries to let the government pay options premiums for farmers to participate in options trading to stabilize farmers’ income, to enhance their market awareness and to improve the market-oriented regulation of agricultural production.

(C) To innovate rural financial services, and to include agricultural futures and options in the scopes of rural financing. In the service activities of “one thousand villages and ten thousand households” implemented by the DCE over the years, we actively promoted the producing business model of “companies + farmers, orders + futures”, provided services for farmers via three pilot projects of selling first then planting, grain banks and credit support, and has achieved great successes. We propose to establish innovative rural financial service system, to broaden scopes of agriculture-related financial services, to employ trading of futures and options as intermediaries between farmers and financial institutions, to fulfill capital needs of farmers and to reduce credit risks.

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