IndustryFutures market safeguards the corn industry chain
Corn grains go through various processes and enter people's lives in various ways. At present, China has established a corn deep processing industry chain from "grain head" to "food tail". According to statistics, the total consumption value of corn in China in 2023 is 738.4 billion yuan, and the output value of the corn processing industry is 1393.6 billion yuan, including feed, starch, alcohol, and various by-products. To stabilize the job of Chinese people, such a huge industrial chain cannot be separated from the effective use of risk management tools.
Starting from the "grain head", establish a chain of feed breeding risk avoidance tools
In 2004, with the advancement of a new round of grain reform, the marketization process of corn accelerated. In that year, Da Shang resumed listing corn futures. Thus, the story of the futures market serving the corn related industry unfolds.
One end of the corn industry chain connects thousands of farmers. In order to enable farmers with relatively weak financial strength and risk tolerance to truly share the development achievements of the futures market, Dalian Commodity Exchange has promoted the first domestic "insurance+futures" to land on corn varieties, opening a new chapter in the precise cooperation between China's futures and insurance industries to serve agriculture, rural areas, and farmers. According to statistics, since 2015, Dalian Commodity Exchange has supported 195 corn "insurance+futures" projects, covering 18 provinces (regions) including Heilongjiang, Jilin, Liaoning, Inner Mongolia, Henan, Hebei, etc., involving a spot volume of 11.25 million tons, helping 114000 farmers avoid risks, and achieving claims of 598 million yuan. In addition, several futures companies have spontaneously launched a batch of commercial projects, which help farmers hold their wallets more steadily and become fuller.
Wang Dajiang, a farmer from Baihe Berry Planting Professional Cooperative in Huachuan County, Heilongjiang Province, is a beneficiary of the "Insurance+Futures" project. Wang Dajiang still remembers that in 2019, Huachuan County was affected by typhoons and continuous rainy weather, resulting in severe waterlogging, which led to a significant reduction or even extinction of corn production in the county. Moreover, the market was not good that year, and corn prices continued to decline since the beginning of summer. It was precisely because they participated in the "insurance+futures" project that their family successfully withstood the losses of that year and ultimately earned over 20000 yuan.
In fact, the 2019 corn income insurance project resulted in a total compensation of 87.87 million yuan for the entire county of Huachuan, with a compensation rate of 375%. On average, one acre (15 mu) of land was compensated with 4025 yuan, effectively ensuring the income of corn growers and solving the funding problem for farmers to farm next year. It is this compensation that has deeply rooted the "insurance+futures" project in Huachuan County. Nowadays, Huachuan County has implemented the "insurance+futures" project for 9 consecutive years. Many local farmers actively consult about the development of "insurance+futures" every year and participate in the "insurance+futures" project to ensure a stable farming experience.
At the other end of the corn industry chain are downstream large, medium, and small industrial enterprises. Since its listing, corn futures have played a stable role in the market, achieving a dual increase in quantity and quality. The annual average daily trading volume and open interest have increased from 85700 lots (unilateral, the same below) and 111200 lots at the beginning of the listing, to 583400 lots and 1.388 million lots in the first half of 2024, an increase of 5.81 times and 11.48 times respectively. The current correlation of corn harvest in 2023 has reached 0.99, with a hedging efficiency of 0.94, providing effective tools for enterprises to discover prices and manage risks.
In the corn industry chain, the feed farming industry accounts for nearly 70% of the total consumption of corn, and the majority of China's annual over 100 million tons of corn flow into the feed farming industry. Guangdong Haida Group Co., Ltd. (hereinafter referred to as Haida Group) launched hedging trading shortly after the resumption of corn futures listing. Recalling the situation at that time, the relevant person in charge of Haida Group told reporters: "With the continuous expansion of production scale, the impact of feed costs on the company's efficiency has become increasingly evident. Our investigation found that the annual fluctuation rate of grain prices is 20% to 30%, while Haida Group's net profit margin is only 3% to 4%. The feed industry already has meager profits, and we cannot afford such grain price fluctuations, so we believed from the beginning that we must use futures tools to avoid risks." To this day, corn futures have always been an important reference for determining procurement prices and an important tool for controlling procurement costs in Haida Group's daily operations. Due to its consistent adherence to standardized hedging, Haida Group rarely suffers significant losses due to market price fluctuations. According to statistics, currently 100% of large-scale corn trading enterprises and 85% of the top 20 feed breeding enterprises in China use corn futures to avoid price fluctuations in spot operations.
Of course, to help the feed industry prevent market risks, a richer toolbox is needed. The Dalian Commodity Exchange listed egg futures in 2013, pig futures in 2021, and soybean meal futures in 2000, forming a complete chain of feed breeding hedging tools together with corn futures.
Finally 'eating the tail', forming a complete tool supply for the corn industry chain
In addition to the feed industry, the deep processing industry is also an important component of the corn industry chain. Although the corn deep processing industry is relatively small in scale, it has a wide range of downstream products, involving multiple fields such as food, medicine, chemicals, and papermaking. With the increasingly fierce market competition in the corn deep processing industry, product prices have shown significant fluctuations, and the industry's call for the launch of product side risk management tools is growing. Corn starch futures were launched in 2014 against this backdrop.
The listing of corn starch futures provides downstream deep processing enterprises with a new tool to cope with price fluctuation risks. Enterprises can not only use it for price management, but also combine corn futures and corn starch futures to lock in processing profits from both the procurement and sales ends, and choose a basis trading mode that meets the needs of the enterprise, "said Wang Na, Director of Agricultural Products Research at Everbright Futures.
Zhao Song, Assistant General Manager of Weifang Shengtai Pharmaceutical Co., Ltd. (hereinafter referred to as Shengtai Pharmaceutical), stated that using corn and corn starch futures can not only manage price volatility risks, but also provide long-term management of processing profits through basis and spread trading. The core of profit management for corn starch processing includes three parts: first, the basis of corn; second, the basis of starch; and third, the cross variety price difference between corn and starch. The listing of corn starch futures has supplemented the tools for managing processing profits, "he said.
Shandong Shouguang Juneng Golden Corn Development Co., Ltd. has been using corn starch futures to optimize sales plans and reduce risks caused by price fluctuations. The assistant general manager of the company, Fan Wenliang, stated that the company's orders are divided into spot orders and forward orders. In the event of a significant decrease in forward orders, the futures and spot prices will be compared, and when the futures price is appropriate, starch sales profits will be locked in advance by selling futures.
In mid to late April this year, the contract price of corn futures in May was about 80 yuan/ton higher than spot orders and about 100 yuan/ton higher than forward orders. The demand in the corn market was very low, and the supply was very sufficient, with a further downward trend in prices. The corn starch market also faced the same situation. After fully accounting for the cost of corn and the storage cost of corn starch, we decided to sell 2000-3000 lots of corn starch for hedging. Later, based on the actual situation of corn consumption and corn starch orders, we finally reserved 1500 lots for delivery, which locked in order profits, eased the pressure of corn starch prices continuing to decline, and created benefits for the company, "said Fan Wenliang.
Corn starch futures not only directly help starch production enterprises hedge the risk of product price fluctuations, but also better meet the procurement needs of downstream starch demand enterprises.
According to the reporter's understanding, Shandong Zhonggu Starch Sugar Co., Ltd. (hereinafter referred to as Zhonggu Starch Sugar), a subsidiary of Starlight Sugar Industry, will sign contracts in the form of basis quotations for downstream customers with professional teams. Xu Shukang, Deputy General Manager of Starlight Sugar Industry, told reporters that since 2015, Zhonggu Starch Sugar has been sold in the forward market using a basis point price model, where both parties agree on a basis and combine it with the main futures contract price to determine the final buying and selling price. This makes it easier for both parties to flexibly determine the contract price according to their own needs. The company has established a comprehensive basis trading model and has engaged in long-term cooperation with customers based on basis trading, such as developing a quarterly or longer sales plan
Shengtai Pharmaceutical is also promoting a forward basis pricing model based on corn starch futures prices in the process of selling malt syrup. Zhao Song said that in the past, breweries used to order malt syrup at spot prices. In fact, breweries have strong channel sales capabilities and usually do pre-sales during holidays, hoping to lock in long-term raw material costs. Based on customer needs, Shengtai Pharmaceutical has been quoting and trading breweries in the form of "corn starch futures+basis" since 2018, based on the price relationship between corn starch and malt syrup, to meet customers' long-term procurement needs.
This pricing method has been effective and has been recognized by customers. Currently, the malt syrup market has widely accepted this pricing method. Corn starch futures not only help us manage forward profits, but also drive the improvement of downstream enterprises and even the entire supply chain profit management level, "said Zhao Song.
In order to further meet the personalized and refined risk management needs of the corn industry chain, Dashang Exchange has successively listed corn options and corn starch options in 2019 and 2024, and launched off exchange businesses such as corn variety basis trading and standard warehouse receipts on off exchange platforms. Li Yi, Executive Vice Chairman of the China Starch Industry Association, believes that as a more refined risk management tool, corn starch options can work together with underlying futures to better safeguard the stable operation of corn industry chain enterprises.
Zhucheng Xingmao Corn Development Co., Ltd. (hereinafter referred to as Zhucheng Xingmao), as a large enterprise with an annual processing capacity of over 5 million tons of corn, attaches great importance to the use of corn starch futures and options. In the view of Jiang Lei, the head of Zhucheng Xingmao Futures, conducting forward quotes and basis trading based on futures prices can help companies and downstream customers better manage inventory, orders, and profits. Option tools provide companies with more strategic choices for hedging. For example, in October 2024, the raw material side faced pressure from the upcoming launch of new corn, with prices fluctuating and falling. At the same time, the factory inventory level was high and processing profits were low. Zhucheng Xingmao expected that the product side prices would still be weak. Therefore, by selling CS2501 related virtual call options to hedge the risk of price decline and increase sales revenue. We also use options to provide more flexible and diverse quotation methods to upstream and downstream customers, actively promoting the development of rights based trade, thereby improving the overall risk management level of the industrial chain and upgrading the business model, "said Jiang Lei.
The person in charge of Yihai Kerry's related business stated that after years of exploration and summary, the company has become proficient in using corn starch futures for forward quoting, sales, and hedging. In the future, it will also try to use corn starch options in different scenarios to build more diversified strategies to meet the needs of refined risk management. Overall, there is still a lot of room for improvement in the acceptance of futures and options tools in the corn deep processing industry. We also hope that downstream customers can use them more, on the one hand, to jointly expand and strengthen the corn starch futures market, and on the other hand, to promote the sustained and stable development of the entire industry chain, "said the person in charge.
In Zhao Song's opinion, the supply of some personalized products in the corn deep processing industry is still far from meeting demand, such as the increasing demand from downstream customers for modified starch with different specifications and characteristics. To stand out, deep processing enterprises cannot blindly increase their R&D investment and better meet the personalized needs of customers. Futures and options tools are undoubtedly good helpers, as they can significantly enhance a company's ability to control price risks and maintain operational stability, enabling it to invest more energy and financial resources in research and development and improve its competitiveness, "said Zhao Song.
Looking back, Da Shang Suo has weathered the wind and rain all the way, always closely adhering to the industry and service industry, and bearing fruitful results. Standing at a new starting point and looking to the future, the relevant business leaders of Dashang Exchange stated that they will continuously improve the cultivation and service level of the industrial chain and supply chain, and contribute to the high-quality development of the corn industry, national food security, and the construction of an agricultural powerhouse through futures trading.
