To Stabilize Vegetable Prices, Why Not Set Up a Vegetable Futures Market

Vegetable farmers (or vegetable buyers) decide how much to produce the following year based on futures prices, and hedge by taking short positions; vegetable markets (or wholesale markets) decide how much to buy the following year based on futures prices, and hedge by taking long positions.

According to a report in the Wuhan Evening News, this year Wuhan had 2500 mu and 28 million jin of winter melons unsold. Last year winter melons sold for 4 mao to 8 mao per jin, and buyers competed to purchase them; this year they were 4 fen, and no one came to buy. The vegetable farmers calculated that even if they sold them, they could not earn back the shipping cost. Many simply abandoned the winter melons in the fields and let them rot.

⟦NL> Reports can often be seen of Chinese agricultural producers suffering losses because of a bumper harvest. This happens with pork, rice, vegetables, and so on. The reason a bumper harvest instead harms farmers is, materially, that agricultural products have a short shelf life and cannot be preserved in their original quality for months on end. The deeper reason is that the price elasticity of agricultural products is small, so once the supply changes, it causes even greater price fluctuations.

This characteristic of agricultural products is a worldwide problem. To solve the problem of agricultural product prices being abnormally low in bumper years and abnormally high in poor harvest years, and at the same time to reasonably balance the annual supply of agricultural products, developed financial markets introduced agricultural product futures, such as wheat, soybean, and live hog futures. China's Dalian and Zhengzhou futures exchanges also have some varieties of agricultural product futures.

But for the largest category of agricultural products, namely vegetables, including in China, there is still no mature vegetable futures. China's primary industry has a huge workforce, and price fluctuations in vegetables and other agricultural products do great harm to farmers and the agricultural industry. Therefore, China's expectation for a futures market in vegetables and other agricultural products is higher than overseas. On the question of vegetable futures, there is no need to wait until a mature futures market exists internationally and then "copy" it; we can absolutely explore a feasible vegetable futures market and its operating mechanism on our own.

The rationale for establishing a vegetable futures market is very simple. Vegetable farmers (or vegetable buyers) decide how much to produce the following year based on futures prices, and hedge by taking short positions; vegetable markets (or wholesale markets) decide how much to buy the following year based on futures prices, and hedge by taking long positions. Then the price of vegetables can be known a year in advance, and the supply volume will also be roughly determined, so there will be no phenomenon of alternating large and small supply years, and no phenomenon of sharp price rises and falls. Even if prices fluctuate, if prices fall, although the price of the vegetable farmer's vegetable spot goods falls, through short hedging the loss in the spot market will be offset by money earned from selling short in the futures market; correspondingly, for the wholesale market, if prices rise, the loss in the spot market can be offset by going long in the futures market.

At present some places have things called vegetable futures markets, but the vegetable futures market discussed in this article is a standardized financial market. To enable the vegetable futures market to operate stably and not be manipulated by power, capital, or shady dealings, certain conditions must be met. The first is entry trading, that is, futures contracts must be traded on China's three major futures exchanges. The second is restrictions on the identity of traders, who must be vegetable farmers (or vegetable buyers), vegetable markets (or wholesale markets), to prevent capital manipulation.

Also relatively important is the standardization of trading contracts. Because China is vast, and vegetable types and production periods and maturity periods differ from place to place, exchanges can formulate vegetable varieties of different types and different regions according to local conditions, and set up delivery warehouses or venues in various places according to natural conditions.

The proportion of China's primary industry is still relatively large, and in particular the number of people employed in China's primary industry is extremely large, so the demand for launching vegetable futures is the greatest. Now China's transportation conditions and communication conditions and other material conditions are already quite developed, and the problems of transport and storage for a certain period are already easy to solve, which lays a very good material foundation for the launch of vegetable futures.