Futures Market Boosts Development of New-Type "Grain Banks"
Our newspaper's trainee reporter Liu Quanjiang. Giving full play to the due function of futures in serving the real economy is an important proposition for the commodity futures market. “The role of market mechanisms in resource allocation should be brought into play, and a new-type ‘grain bank’ business that effectively connects the futures market with traditional ‘grain bank’ business should be explored. This is a new and inevitable choice for ‘three rural’ services under the new situation.” At a recent “Seminar on the Futures Market Promoting the Development of ‘Grain Banks’” jointly held by the Dalian Commodity Exchange (hereinafter referred to as “DCE”), COFCO Group and SDIC Zhonggu Futures Co., Ltd., the new-type “grain bank” business formed through close integration with the futures market drew attention from representatives of relevant national ministries and commissions, local governments, agriculture-related enterprises, financial institutions and large grain growers. Participants enthusiastically discussed the new changes and new vitality that futures bring to the development of traditional “grain bank” business.
“Grain Banks” Are a Necessary Exploration in Serving “Three Rural” Issues
China is a major agricultural country, and issues such as the “three rural” issues and food security have become major topics of strategic significance. In recent years, however, some state policies adopted in the circulation sector to promote farmers' income growth and ensure food security, while playing a positive role, have also affected the normal functioning of market mechanisms and caused waste in resources and public finances. On this basis, it has become necessary to explore new ways of resolving related problems through market-based mechanisms such as “grain banks.” At the seminar, experts introduced the topic of “grain banks” from the perspectives of “three rural” services and food security.
At the seminar, participants calculated an account of the current grain purchase and storage costs. For example, in corn purchase and storage, the state currently purchases and stores corn in the three northeastern provinces and Inner Mongolia, four provincial-level regions, at a price of 2240 yuan/ton. If purchase and storage are calculated at 7000 million tons, the total cost is 156.8 billion yuan, and more than 20 billion yuan in fiscal costs for shared expenses, storage fees and interest must also be paid. Moreover, because the purchased and stored grain is kept for a long time, new grain becomes old grain and the mildew rate increases, causing waste of grain resources and, to a certain extent, becoming one of the factors threatening food security; the purchased and stored grain is not circulated according to market rules, causing processing enterprises to lack processing raw materials and to be able to obtain only high-priced raw materials through auctions, forming a vicious circle. If “grain bank” business is promoted, this situation can be effectively alleviated.
⟦NL> A “grain bank” is a new-type grain business model in which agricultural enterprises, on the basis of providing traditional business operations such as grain storage and purchasing, rely on enterprise credit and use farmers' stored grain as the carrier to provide farmers with a series of value-preserving and value-added services such as deferred point-pricing purchasing, short-term financing and stored-grain price insurance. Developing “grain banks” can not only ensure that enterprises obtain the raw materials needed for continuous operation, but also reduce grain storage losses and save farmers' grain storage costs, playing a positive role in increasing farmers' income.
A person in charge of the relevant department of the National Food and Strategic Reserves Administration introduced that China began piloting “grain banks” in 2008. As of June last year, according to incomplete statistics on more than 200 enterprises in more than ten provinces across the country carrying out “grain bank” business, the business had cumulatively handled 12 million tons of grain and driven an increase in farmers' income of 1.2 billion yuan.
The Futures Market Innovates the “Grain Bank” Model
While seeing the win-win effects brought by “grain banks,” participants also had to recognize that the current pilot methods of “grain bank” business in China are still relatively simple and carry a relatively large risk exposure. This has become an important bottleneck restricting the scaled development of “grain banks” and requires support from financial markets including futures, options, insurance and banks to form new-type “grain banks” suited to China's current market economy environment.
Representatives of participating pilot enterprises said that, apart from factors such as insufficient inventory and operational supervision, price fluctuation is the main risk faced in carrying out “grain bank” business. According to reports, under the current practices of pilot enterprises, if the listed price on the farmer's settlement day is lower than the price on the grain delivery day, the enterprise settles at a price 10 yuan/ton higher than the grain delivery day price. If the market price falls relatively sharply, the 10 yuan/ton subsidy is only a drop in the bucket for farmers, while increasing the subsidy would have a relatively large impact on the enterprise's operations. The overall downward price risk in the market will still expose farmers to unexpected losses; if the market price rises, while it benefits farmers, it increases the enterprise's procurement cost and affects the enterprise's production and operation to a certain extent. Therefore, the use of hedging tools such as futures and options became the focus of participants' attention.
Because the futures market has the unique functions of price discovery and hedging, it can not only provide benchmark price support for point-pricing purchases and sales by “grain banks” and stabilize enterprise financial costs, but also reduce grain storage turnover costs and improve operating efficiency through targeted measures such as enhancing enterprise delivery convenience. The close connection between the futures market and the operation and development of “grain banks” will also push public finance and financial institutions such as banks and insurers to help farmers and enterprises resist market risks through measures such as price insurance and pledge financing. Therefore, new-type “grain banks” need the escort of a financial system composed of the futures market, insurance companies, banks and others.
A Complete Value Chain Promotes New Development of “Grain Banks”
At the seminar, participating representatives believed that the Third Plenary Session of the 18th Central Committee proposed to “give play to the decisive role of the market in resource allocation.” The new exploration of using financial services to support “grain bank” business is precisely intended to fully bring into play the role of the market in the grain circulation sector and use modern financial means to help farmers and agriculture-related enterprises avoid risks and protect their returns and enthusiasm.
Regarding future work to support grain banks, a relevant person in charge of DCE said that DCE's overall goal in assisting new-type “grain banks” is to provide the market with price risk management tools while supporting insurance companies, banks and others in providing risk management services to “grain bank” services.
It is understood that, on the basis of fully giving play to the futures market's two major functions of price risk and risk avoidance, DCE is studying and improving new levers for the futures market to serve new-type “grain banks.” These include actively developing options trading tools so that grain enterprises and insurance companies can conduct “reinsurance” through options trading, broadening risk management channels; studying the addition of delivery warehouses in major grain-producing areas to facilitate grain enterprises in generating warehouse receipts and purchasing and selling grain; and, in conjunction with DCE's bank-futures cooperation project, providing commercial banks with the necessary information on futures warehouse receipts and supporting their development of futures warehouse receipt pledge business.
Industry insiders said that through the above work, exchanges together with insurance companies, banks and other financial institutions can add wings of risk management to traditional “grain bank” business, so that it is no longer limited to the traditional form of grain purchase and storage, thereby forming a complete chain in which price, credit and bank-run risks are shared.