Published On: Mon, Mar 12th, 2012

DCE: Using Futures Market to Support Spot Agriculture

Liu Xingqiang DCE President

Liu Xingqiang DCE President

This year’s No. 1 document from the central government made the proposal of “bringing into full play of the positive role of the agricultural futures market in guiding production and avoiding risks”, and the government work report also proposed to treat the issue of “agriculture, rural areas and farmers” (“three rurals”) as the ultimate top priority, among all works. The domestic agricultural futures market has explored and currently found effective ways to service the “three rurals”, however, in order to broaden and deepen the essential functions of the futures market in servicing the “three rurals”, we need to take practical measures to fully implement the No. 1 document to advance the development of the agricultural futures market and to improve its external environments. Functionalities of price discovery and hedging of the futures market confer a unique advantage to farmers in helping them plan farming and selling grains. Last century, the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of Agriculture (USDA) jointly carried out risk-management education to U.S. agricultural producers, the U.S. government further encouraged farmers to participate in the option derivatives market by assuming option premiums and paying brokerage commissions, consequently established the dominant and leading position of the U.S. futures markets in the development of modern agriculture and international trade of agricultural products. China has currently listed 13 agricultural futures including grain, cotton, oil and sugar with 2011 agricultural futures trading volume of 573 million, accounting for 54.33 percent of the total market share, and has become the world’s second largest agricultural futures market. Corn, soybeans and a number of other agricultural futures have become domestic market pricing reference centers, providing price guidance and operation safe-haven for farmers in their farming planning and grain sales as well as for enterprises in their production. But generally speaking, because of numerous issues such as dispersed domestic agricultural production, low degree of organization, insufficient understanding of futures by various sectors of the society including farmers, limited resources and scarce capital possessed by farmers and agricultural enterprises, along with many factors constraining its own development of the agricultural futures market, there is still a lot of work to finish before the agricultural futures market can realize its full potential to service the agricultural industry and to increase farmers’ income. Therefore, we recommended the following measures:

(A) To incorporate training of market knowledge including futures knowledge into modern farmer training programs and to provide market risk management education to farmers as well as small- and micro-size enterprises. We recommend to develop risk management training plans for farmers and agribusinesses and to be included in the rural training programs of the Ministry of Agriculture’s “12th Five-Year Plan”, to specify training missions for existing farmer training channels such as various levels of agricultural broadcast and television schools, farmers’ science and technology training centers and various levels of agricultural technology extension stations, to advance teaching and training of market knowledge for farmers with strategic and global perspectives, and to grow a new generation of farmers with “knowledge, skills and business acumen”.

(B) To launch pilot projects to support rural economic organizations and agricultural enterprises to use futures markets to hedge and to increase farmers’ income. At present, rural economic organizations and spot enterprises have to pay 25 percent income taxes on profits gained from futures hedges, and need to additionally pay 13 percent VAT upon physical delivery, and in addition, futures hedges are unable to obtain credit support. We propose to appropriately reduce income taxes on futures hedge gains by rural economic cooperative organizations and agricultural enterprises, and to provide credit support to rural economic cooperative organizations and agricultural enterprises in their legitimate hedging, under conditions of closed capital flows among the economic cooperative organizations or agricultural enterprises, futures companies and banks and guided by conventional practices of U.S. financial institutions to provide credit support for enterprises to hedge. Furthermore, we propose to explore novel modes and mechanism of subsidies, to study pilot projects of financial aids via “risk funds” to subsidize futures hedges for rural cooperative organizations, and so on.

(C) To intensify support for agricultural futures innovations and policy improvement, and to increase efficiency and service capabilities of the agricultural futures market. We need to accelerate the pace of innovations on futures products, to encourage and support listing more agricultural products, and to introduce agricultural products indexes and options etc in order to enhance market efficiency and to improve the price discovery and hedging mechanism of the futures market. At the same time, we should actively improve the market mechanism of listing agricultural products. On market regulations, we should also study and adopt differential regulatory policies and measures on the agricultural futures market, underscoring our fostering and support for the agricultural futures market.

(D) To optimize investor composition, to encourage relevant institutions to actively participate in servicing the agricultural industry, and to enhance the service capabilities of the futures market. We should provide policy guidance in training professional agricultural futures investors, such as exempting them from income taxes on investment gains in the agricultural futures market, in consistent with the securities investment funds temporarily exempted from income taxes on investment gains in the stock market. The agricultural futures market may be given priority in experimenting with futures investment funds, qualified foreign investors may be safely and steadily allowed to participate, and so on. Meanwhile, due to the high operating costs and low profit margin of agricultural futures, it is recommended that futures companies are condoned with corresponding tax relief when operating in the agricultural futures business to enhance futures intermediaries’ enthusiasm in expanding their operations in agricultural futures and services for the agricultural industry.

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