Solving the difficulty of selling grain: how far are farmers from the futures market?
At present, China has basically established a futures variety system for agricultural products including more than 10 varieties such as cotton, grain, oil and sugar. Futures market prices have become an important price signal for arranging agricultural production and adjusting planting structure, which is conducive to alleviating the contradiction between small-scale agricultural production and the large market. But there are still many constraining factors in how to enable farmers to participate better in the futures market and how to effectively use the price discovery and hedging functions of the futures market.
For a long time, relying on the weather has been an unavoidable reality for many farmers, and agricultural product futures still seem to be somewhat distant from rural areas. Farmers see it as close, but in fact it is still very far away. In fact, relevant documents have repeatedly proposed innovating the circulation methods of agricultural products, improving futures trading varieties for bulk agricultural products, and actively guiding farmers to participate in the futures market.
This year's No. 1 Central Document once again put forward clear requirements for the construction of the agricultural product futures market, calling for developing agricultural product futures trading and developing new varieties of agricultural product futures. It is understood that the Zhengzhou Commodity Exchange and the Dalian Commodity Exchange are strengthening research and development of new agricultural product futures varieties, and cotton yarn, livestock products, forest products, seafood products and others are all under research and preparation.
What to do when difficulty in selling grain arises
How can members be helped to sell their corn? Facing mountains of corn piled up in the yards of several hundred farming households, Shang Guiyong, chairman of the Guiyong Corn Planting Professional Cooperative in Yi County, Liaoning Province, was at a loss.
Shang Guiyong told reporters that their cooperative currently has more than 500 member households and grows more than 8,000 mu of corn. Last year they suffered a severe drought, and they did everything possible to preserve the corn yield, only to encounter the market risk of falling corn prices. Yi County has still not started temporary storage purchases of corn, and most grain trading enterprises have not entered the market to purchase. Shang Guiyong did not know where to sell the corn. He tried contacting a futures company, hoping to find a way through the futures market.
In recent years, the state has implemented price-support purchases for bulk agricultural products such as rice, wheat and corn, and grain market fluctuations have been very small. Farmers' awareness of risk management is weak, and they believe there is no need to avoid risks through the futures market. “Now that the temporary storage policies for soybeans and cotton have been cancelled, market price fluctuations may intensify.” said Liu Zhaofu, chairman of Heilongjiang Bolang Investment Consulting Co., Ltd.
When reporters conducted research in Northeast China, they learned that in the pilot areas for the soybean target price subsidy policy, the expected active soybean trading market did not appear. Farmers believed soybean prices were low and held their grain for sale, while enterprises believed soybean prices were high and adopted a strong wait-and-see attitude, leaving soybean trading at a stalemate. Wang Xiaoyu, deputy secretary-general of the Heilongjiang Soybean Industry Association, believes this is mainly because farmers and enterprises have different interest demands: farmers hope soybean prices are as high as possible, while enterprises hope they are as low as possible, and there is a lack of a purchase and sales system that can satisfy both sides. In the United States, however, farmers and enterprises can connect through the futures market. Farmers can sell grain at an appropriate price through the futures market for hedging before the grain is harvested or even before it is sown, and grain processing enterprises can purchase raw materials at appropriate prices through the futures market.
The futures market has the dual functions of price discovery and avoiding market risks. Farmers can use the price discovery function of the futures market to understand agricultural product price trends and grasp market rules, and can also use the risk avoidance function of the futures market to strengthen risk management by cooperating with market organizations or leading enterprises. “Now we should actively guide farmers to understand the futures market, participate in the futures market, and connect with enterprises through the futures market to defuse market risks.” Wang Xiaoyu said.
The Dalian Commodity Exchange is an exchange mainly focused on agricultural product futures, and 10 of its 16 futures varieties are related to agricultural products. Since 2005, DCE has launched the “Thousand Villages, Ten Thousand Households” market service project, conducting training, information services, and pilots for “company + farmers, orders + futures.” By the end of 2013, DCE had trained more than 70,000 person-times of farmers, heads of agricultural cooperatives, agricultural system cadres and marketing personnel.
How to participate in the futures market
Chen Yanjun, a senior analyst at the Henan Zhengzhou Grain Wholesale Market, believes that the futures market is a virtual market, and agricultural product futures prices are affected not only by spot fundamentals but also by factors such as the macroeconomy and monetary policy. Participating in the futures market requires strong professional expertise. At present, the possibility of farmers directly participating in the futures market is very small, and they can cooperate with new types of agricultural business entities such as cooperatives and leading enterprises to participate indirectly in the futures market.
Last year, DCE and relevant market institutions explored the “Yuntianhua model” of “minimum-price land lease agreement + futures + over-the-counter options.” The specific operation of this model is that farmers sign a minimum-price land lease agreement with the Jilin Changling Yuntian Agricultural Professional Cooperative, and the cooperative provides farmers with agricultural materials and modern equipment, carries out specialized management of corn planting, and guarantees grain quality. The risk management subsidiary of the futures company signs a spot purchase contract with the cooperative. When the corn purchase price is higher than the temporary storage price, the risk management subsidiary of the futures company purchases the corn spot and then gives the cooperative a second pricing opportunity before selling the corn. During the price protection period, if grain prices fall, the original hedged price is implemented; if prices rise, the cooperative can conduct a second settlement according to the actual priced price (the price actually appearing in the market). In this way, the cooperative transfers market risk to the risk management subsidiary of the futures company, and the risk management subsidiary of the futures company then hedges the risk through the futures market.
In fact, farmers can also participate in the futures market by cooperating with leading enterprises. It is understood that at present more and more domestic grain enterprises are participating in the futures market. Large grain and oil processing enterprises such as COFCO Group and Jiusan Oils have already skillfully used futures market hedging operations to avoid market risks. But at present, many grain enterprises are constrained by factors such as a lack of talent and limited own funds, and do not yet have the conditions to participate in the futures market.
Among the many models for farmers to participate in the futures market, the “grain bank” may become another form of guiding farmers to participate indirectly in the futures market. In recent years, China has launched pilots for “grain banks,” in which grain processing enterprises, while providing farmers with grain storage and purchasing services, also provide farmers with a series of value-preserving and value-increasing services such as deferred pricing purchases, short-term financing and grain storage price insurance.
From the current point of view, there are still some bottlenecks constraining the large-scale development of “grain banks.” The growth and expansion of “grain banks” requires support from financial markets including futures, insurance and banks. It is understood that DCE has begun researching how to strengthen and improve supporting measures for the futures market so as to better serve “grain banks.”
Entering the market requires acting within one's means
At present, smallholder production by individual households still occupies the dominant position in China, and they have neither the ability nor the awareness to participate in the futures market. Although new types of agricultural business entities such as agricultural cooperatives are continuously expanding in scale, are more sensitive to market risks, and are more eager for effective risk management methods, the vast majority of new types of agricultural business entities still do not have the awareness to avoid market risks through the futures market.
A relevant person in charge of DCE told reporters that to guide farmers to participate in the futures market and better give play to the role of the futures market in serving “agriculture, rural areas and farmers,” efforts must be made in many aspects.
First, efforts to cultivate farmers' modern market awareness must be increased. Attention should be paid not only to technical training for farmers, but also to guiding farmers to learn to use the futures market, grasp the initiative in production and operation, improve their ability to navigate the market, and escape the dilemma of “increased production without increased income.”
Second, large-scale agricultural operation must be continuously promoted to improve the ability to withstand market risks. Some experts suggest organizing the millions of farming households, connecting them with cooperatives or leading enterprises, pooling farmers' production and operation risks, and having cooperatives and leading enterprises transfer them out through the futures market.
It is also necessary to further promote innovation in varieties and tools, launch agricultural product options such as soybean, soybean meal and cotton as soon as possible, and enrich market tools. Agricultural product options are equivalent to price insurance. After paying the option premium, this “insurance fee,” one can achieve gains when grain prices rise and protection when they fall.
The futures market is a standardized market with specific requirements for agricultural product quality and delivery regions, but the consistency of domestic agricultural product quality is still not strong, and the market is broad and scattered. This requires the futures market to make further breakthroughs and innovations, strengthen the construction of the over-the-counter market by relying on the exchange-traded market, amplify market functions, and further enrich and improve services for the agricultural industry. It is understood that DCE futures delivery warehouses are now gradually shifting from sales areas to production areas, a soybean delivery warehouse has already been established in Harbin, Heilongjiang, and a plan to add extended delivery warehouses in production areas has been studied.
With the in-depth development of China's agricultural modernization, financial tools such as futures are becoming powerful means to support the development of “agriculture, rural areas and farmers.” However, some industry insiders believe that the futures market is a “double-edged sword,” and whether farmers, large grain growers, farmers' professional cooperatives or agricultural leading enterprises, all must participate in the futures market scientifically and rationally. Under the current situation, farmers should mainly make good use of the price discovery function of the futures market and grasp the initiative in production and operation; farmers' professional cooperatives and agricultural leading enterprises should shoulder certain responsibilities, take over the operational risks of ordinary farming households, and use the risk avoidance mechanism of the futures market to defuse risks.