Corn starch option listing is about to escort the transformation and upgrading of the deep processing industry

In recent years, the domestic corn starch production capacity has continued to increase. Under various pressures such as raw materials, funding, and fierce competition, the difficulty of enterprise operation has increased, and the concentration of production capacity has continued to improve. The integrated operation of the industry is becoming increasingly mature.

Recently, the corn starch options of Dalian Commodity Exchange have been approved for registration by the China Securities Regulatory Commission and will be listed on the stock market on August 23rd. Options have always been hailed as the "pearl on the crown of financial derivatives", but seemingly "aloof" options tools are actually quite "down-to-earth" and can be effectively combined with the production and operation of physical enterprises in fields, workshops, factories, and mines.

Enterprises have high enthusiasm for participating in futures markets

It is understood that corn starch, as the largest starch variety in China, is widely used in industries such as food, paper, chemical, pharmaceutical, etc. Its upstream is corn planting and production, while its downstream is an important raw material.

Zhou Xiaoqiu, Chief Researcher of Agricultural Products at Guotai Junan Futures Research Institute, told reporters that in the corn starch industry, raw materials account for 70% of starch costs, and finished products are facing the impact of low-priced imports. In addition, the industry's operating rate is relatively low, with an average annual operating rate of 55% for enterprises in the main production areas in 2022, highlighting the problem of homogeneous competition in the entire industry.

In the context of fierce industry competition, technological development, enterprise management level, and product quality have all reached a high level. Therefore, fluctuations in raw material costs and product prices have become the main factors affecting the profitability of enterprises. The concept of using futures and derivatives to manage risks has gradually been promoted in the spot industry, and more and more enterprises are actively using corn and corn starch futures to lock in raw material procurement and product sales prices. In 2023, the hedging efficiency of corn starch futures is 88%, and the proportion of corporate clients' holdings is 67%, an increase of 22 percentage points year-on-year.

According to Zhu Yongsheng, Deputy General Manager of Operations Management Department of COFCO Biotechnology Co., Ltd. (hereinafter referred to as COFCO Biotechnology), currently, the company's futures application is relatively mature, and the hedging scale and proportion are relatively large. Whether it is the hedging value of corn raw materials or product starch, as well as the use of soybean oil and soybean meal as substitutes for by-products for hedging, they are constantly being practiced and applied. In practice, hedging by locking in raw material costs through the futures market of the Dalian Commodity Exchange provides protection for long-term sales business of enterprises, or locks in product sales prices to provide guarantee for enterprises to lock in profits. It can be seen that hedging plays an important role in helping enterprises reduce the price risks of product contracts and raw materials, "said Zhu Yongsheng.

Hou Guoli, Deputy General Manager of Heilongjiang Jinxiang Biochemical Co., Ltd., said, "It is common for enterprises to use futures tools for hedging in production and operation. Every year, we purchase corn from upstream in batches for daily production of corn starch and feed, with a large amount of corn starch inventory and periodic corn replenishment needs. On the one hand, in spot sales, we will combine the cost of raw corn and refer to the futures market price to price corn starch on a weekly basis, fully utilizing the futures price discovery function; on the other hand, we will combine cash flow and hedge risks through corn and corn starch futures

It is timely to launch options in the market

In interviews, multiple industry insiders stated that the listing of corn starch options is timely and will complement the underlying futures, providing more accurate and powerful derivative tools for the corn deep processing industry with lower capital costs and more flexible and diverse strategies.

In practice, our company has used the corn option tool of Dashang Exchange to help enterprises control raw material price risks and achieve good results, "Zhu Yongsheng told reporters. By using options to manage the risk of enterprise futures and spot positions, enterprises can solve the different risks faced in their procurement, production, sales and other links, and develop business management towards a more refined direction. Among them, buying options only require a one-time payment of the premium when establishing a position, with a small amount of funds used, and there is no need to replenish funds during market fluctuations. The maximum loss is also limited to the loss of the premium; By selling options and collecting premiums, enterprises can continuously reduce procurement or inventory costs and improve market competitiveness.

In Hou Guoli's view, options, as a new type of risk management tool, have unique advantages. Enterprises can choose different option strategies based on their own risk preferences and risk management needs. At the same time, option trading costs are relatively low, which can reduce the transaction costs and risks of enterprises. Previously, we attempted corn starch off exchange options through the 'Big Commercial Enterprise Wind Plan', which effectively compensated for the losses caused by the decline in corn starch inventory and protected processing profits. We hope that on exchange options can bring new tools with high liquidity and transparent trading environment to enterprises, "Hou Guoli told reporters.

Compared to futures, option tools introduce the concepts of volatility and time value, and have a more diverse range of applications. In terms of operation, Wang Xinru, an option service product expert from Guotai Junan Futures Marketing Management Service Department, stated that when attempting to use options to manage risks in the early stages, it is advisable to first consider establishing a single leg option position to compensate for potential losses in futures or spot trading, in order to lock in prices and avoid risks.

For deep processing enterprises, if they plan to buy corn in the future and are concerned about a significant increase in corn prices, they can buy corn call options to lock in the highest purchase cost. If they are concerned about a significant decrease in the future price of produced corn starch, they can buy corn starch put options to lock in the minimum selling price. If they expect a slight increase or decrease in future product prices, they can reduce spot costs or gain opportunities to increase sales revenue by selling call or put options, "suggested Wang Xinru.

In addition to the single leg strategy, industrial chain enterprises can also achieve the goal of managing market risks, reducing costs, and increasing profits by flexibly choosing option combination strategies. Wang Xinru gave an example that when a company holds spot stock, it can buy put options in one direction to hedge it, and then stack call options on top of it to construct a collar option strategy. This can be seen as a combination of protective put options and option coverage strategies, which can control the returns and risks of the spot and option combination within a certain range.

The industry also has more expectations. In Zhu Yongsheng's view, after the listing of corn starch options, industry chain enterprises can target their own starch exposure risks by combining traditional futures hedging with options to form a "futures+options" combination punch and conduct "dynamic hedging".

I hope that Dalian Commodity Exchange can fully leverage its platform role and provide relevant training on the use of options, so that upstream starch production enterprises, downstream starch consumption enterprises, and midstream trade enterprises can fully understand and utilize options to better serve the industry. As a production and financing base, COFCO Biotechnology will work with Dalian Commodity Exchange to study how to use options to better serve upstream and downstream enterprises in the industry chain, enrich industry pricing models, and promote the widespread application of options in the industry, "said Zhu Yongsheng.

Looking ahead to the future, as corn and corn starch futures and options gradually work together to serve the industry, the quality and functionality of the futures market will continue to improve. Futures and options will become increasingly important tools for the continuous transformation and upgrading of the corn deep processing industry.