IndustryHow can futures empower the corn industry chain?
With the advancement of the marketization process of corn, from planting to acquisition, from circulation to processing, the demand for safe haven in various links of the corn industry chain has significantly increased. In this context, corn futures emerged. Since its resumption of listing in September 2004, corn futures have been deeply integrated into various links of the corn industry chain after two decades of ups and downs. After the listing of corn starch futures in December 2014, it further provided richer hedging tools for the corn deep processing industry chain.
Corn is currently the crop with the largest planting area and total output in China, involving thousands of farmers. Corn is still the longest grain variety in the industry chain and the most abundant in downstream products. Therefore, every policy adjustment and price fluctuation related to corn will have a wide-ranging and far-reaching impact.
With the advancement of the marketization process of corn, from planting to acquisition, from circulation to processing, the demand for safe haven in various links of the corn industry chain has significantly increased. In this context, corn futures emerged. Since its resumption of listing in September 2004, corn futures have been deeply integrated into various links of the corn industry chain after two decades of ups and downs. After the listing of corn starch futures in December 2014, it further provided richer hedging tools for the corn deep processing industry chain.
Regarding corn starch futures, the optimization of packaging specifications for delivery products by the Dalian Commodity Exchange in November 2024 has also been widely welcomed by the industry. The reporter learned that in the early stage of the listing of corn starch futures, in order to take into account different packaging specifications in the market, it was stipulated that the delivery product packaging could be one large and one small. However, with the increasing concentration of the corn starch industry, the mainstream packaging specifications have undergone significant changes, and the proportion of large packaging continues to increase. In addition, different packaging of corn starch is difficult to be compatible during transportation and downstream processing feeding, and it is imperative to improve the adaptability of packaging specifications.
In this context, Da Shang conducted thorough research and demonstration on the market, and finally determined the plan. The revised delivery quality standards no longer limit the packaging specifications of the delivery products to 40kg or 830kg, but can be negotiated between the factory warehouse and the delivery party. If the negotiation fails, the delivery party can choose from 1 to 3 bottom packaging specifications provided by the factory warehouse. The optimized rules were released to the market in November 2024 and implemented on newly registered warehouse receipts from December onwards.
Accompanying the adjustment of delivery quality standards is the expansion and optimization of delivery regions and systems. In 2016, after the adjustment of the corn temporary storage policy, corn futures will face the challenge of a large amount of temporary storage corn entering the market and a possible significant increase in delivery volume. Corn delivery warehouses concentrated in coastal ports and surrounding areas of Liaoning will also face pressure from tight storage capacity and insufficient coverage of delivery areas.
Prior to the reform of the corn temporary storage policy, Dashang had already prepared for the situation and proposed for the first time a solution to implement group delivery. The so-called group delivery refers to a model in which a large group is used as a lever to establish a group warehouse, and group credit is used as an endorsement to set up sub warehouses of the group warehouse. The risks arising from the handling of delivery business in the sub warehouses are borne by the group warehouse. In 2016, Dalian Commodity Exchange expanded its corn delivery area from Liaoning to four provinces including Heilongjiang, Jilin, Liaoning, and Inner Mongolia. In 2017, it officially launched its group delivery business and began collecting and establishing group warehouses and sub warehouses.
In the view of Liu Yong, General Manager of Heilongjiang Yuanfa Grain Logistics Co., Ltd., under the group's delivery system, the coverage of corn futures delivery areas in provinces and regions continues to expand, which facilitates the delivery of physical goods nearby, reduces delivery costs, and improves delivery efficiency. This not only provides convenience for enterprises to use corn futures to manage price risks, but also helps stabilize production area prices, protect farmers' interests, and play a positive role in promoting local economic growth, improving social resource allocation efficiency, and promoting the transformation and upgrading of the corn industry.
Heilongjiang Yuanfa Grain Logistics Co., Ltd. was approved in 2019 to become a delivery warehouse sub warehouse of Dashang Corn Group. The picture shows a corner of the factory area. Photo by Zhang Yuancheng, a reporter from China Rural Power Grid, Farmers' Daily
How many hurdles do I need to overcome to use futures tools effectively?
After 20 years of wind and rain, from corn futures to corn starch futures, the futures varieties on the corn industry chain are gradually improving, which is of great significance for improving the transparency and efficiency of the corn market and ensuring the stability and smoothness of China's corn industry chain and supply chain.
However, during the interview, the reporter also found that from planting farmers, feed production enterprises, to corn deep processing enterprises, there are still several hurdles to overcome in order to make good use of futures tools. If one has little knowledge about the futures market before, the first hurdle to overcome in participating in it is the "psychological barrier".
To let farmers do it, let them see first. Kong Xianglin told reporters that although "insurance+futures" has been implemented for many years, there are still some farmers who have not fully recognized the effectiveness of "insurance+futures" due to their knowledge level, risk awareness, and ability to accept new things. So it is still very important for the government to take the lead in promoting publicity. Only by making farmers truly see the role of "insurance+futures" can we gradually achieve farmers' independent and active participation.
In the process of promoting 'insurance+futures', we will fully conduct preliminary research, conduct in-depth investigations in towns and villages to understand the participation willingness of planting farmers, understand the effectiveness of project implementation and the recognition of farmers, and then carry out targeted publicity. Kong Xianglin said that the publicity and explanation should be easy to understand, close to the habits and context of farmers, and explained to them in their language, transforming them from' high-end 'to' home style '.
In contrast, companies that have undergone market baptism are often more proactive in seeking hedging tools. Recalling the decision to enter the futures market, the relevant person in charge of Haida Group still has a deep memory. At that time, Xu Yingzhuo, who was in charge of procurement work at Haida Group, was very nervous when he proposed to the company founder Xue Hua to try using futures tools to avoid risks. He even suggested to try it out of his own pocket first, and if he lost, he would be held accountable. However, in Xue Hua's opinion, since it is so important, the company should do it, and if it loses, it will be the company's responsibility. It is precisely with this pioneering spirit that Haida Group has entered the futures market.
After breaking through the 'psychological barrier', the 'thinking barrier' becomes the second hurdle that we will face next. What is the 'thinking barrier'? The ability to flexibly switch between spot thinking and futures thinking in futures trading.
A staff member in charge of futures trading at a corn processing company told reporters that some companies have a mindset of spot trading in futures trading, blindly seeking the lowest price point without fully realizing the importance of pre locking prices for stabilizing profits or ensuring procurement and sales volume. The futures market has the function of price discovery, therefore, it should not simply correspond the spot price with the futures market, but should pay attention to its development trend. Capturing these trends is not an easy task, as it requires business personnel to have the ability to predict the future market. It takes multiple practices and explorations to gradually grasp its patterns
From breaking through the "psychological barrier" to crossing the "thinking barrier", the process of embracing the futures market by industry entities not only reflects a change in personal cognitive trajectory, but also promotes the continuous upgrading of business concepts.
With the gradual deepening of understanding of the futures market, Shengtai Pharmaceutical established a futures operation strategy with processing profit management as the main line in 2017. The core of management for processing enterprises lies in purchasing raw materials at lower costs and selling products at higher prices, thereby achieving processing profits. We can choose the most suitable procurement and sales plan from raw materials, products, and related futures varieties, which not only increases trading methods but also provides more trading time points, enabling enterprises to manage processing production work more flexibly, "said Zhao Song.
It should be pointed out that for farmers located at the planting end, there is a more practical issue to face when participating in "insurance+futures": whether the premium can be afford.
During the interview, the reporter found that in the process of promoting "insurance+futures" in rural areas, in addition to publicity and promotion, it is also necessary to overcome the "premium barrier". Compared to traditional agricultural cost insurance, futures price insurance has high coverage but also comes with high premiums. According to industry insiders, the premium source in the "insurance+futures" model is currently a multi-party sharing model, mainly relying on futures exchanges, government finances at all levels, farmers, and futures companies. Carrying out purely commercial "insurance+futures" and allowing farmers to fully self pay premiums will affect their enthusiasm.
It is worth noting that in July 2021, Heilongjiang launched a pilot program for full cost insurance for three major grain crops and corn income insurance. Policy based agricultural insurance gradually shifted from covering partial costs of agricultural production to covering total costs and income. Despite the significant increase in insurance premiums after the implementation of the pilot program, the corresponding amount of financial subsidies has also increased significantly.
On the basis of years of pilot projects, in 2024, CITIC Futures and Ping An Property and Casualty Insurance jointly launched a government subsidized corn income insurance of 336500 acres in Bin County, Harbin City. Wang Yanhong, a staff member of CITIC Futures who has been promoting the "Insurance+Futures" project in Heilongjiang Province for many years, introduced to reporters the situation of multi-party sharing of insurance premiums in the project: "The central, provincial, and county governments provide financial subsidies for insurance premiums at 45%, 25%, and 10% respectively. Farmers only need to pay the remaining 20% to participate in the 'Insurance+Futures' project. On average, one mu of land only costs 17 yuan, which can guarantee an income of 1074 yuan per mu of land. The enthusiasm of farmers to participate in insurance has greatly increased
The use of the 'insurance+futures' model for government subsidized income insurance not only transfers risk losses at the price end through the futures market, providing reinsurance for insurance companies, but also improves the efficiency of the use of government funds. In Wang Yanhong's opinion, the influence of' insurance+futures' accumulated in the hearts of local farmers is very rare, and some valuable experiences that can be promoted and replicated after exploration and practice in various regions are also valuable. Therefore, promoting 'insurance+futures' projects should be tailored and gradual, in order to contribute to the sustainability of the projects.
It is worth noting that the China Futures Industry Association released the "Insurance+Futures" Business Rules for Futures Companies (Trial) "in December 2024, which means that the first industry self-discipline regulatory document has been officially released. When it comes to sustainability, the China Futures Industry Association clearly stated in the drafting instructions that the national conditions of large countries and small farmers determine the inevitability of the long-term existence of "insurance+futures". The combination of insurance and futures carries a special national mission and responsibility to serve agriculture. Although the underlying essence belongs to derivative trading business, it should not be regarded as a purely financial trading business and should have special institutional arrangements.
