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Dalian Commodity Exchange Corn Options To Be Listed On January 28

The China Securities Regulatory Commission (CSRC) held a press conference on January 4 to announce its approval of Dalian Commodity Exchange (DCE) carrying out corn options trading as of January 28, 2019. It marks the further enrichment of the Chinese agricultural product options after soybean meal and white sugar.

Stable market operation, increasingly improved contract rules, widespread participation of investors and increasingly strengthened functions have been seen for the corn futures since its listing in 2004. Currently, all large trading enterprises in the corn industry chain, 50% of the national top 30 feeding enterprises (groups) and 75% of the corn starch processing enterprises have made use of corn futures to avoid spot price risks. In March 2016, China adjusted the temporary reserve policy to “marketized purchase” plus “subsidiary” and gradually transformed to the market-set price mechanism. With the continuous adjustments to corn-related agricultural policies in China, corn market price has encountered greater fluctuation; relevant participants and agriculture-related enterprises have had increasing risk-avoiding demand on corn price and refined management risk. Therefore, the market is in urgent need of new risk management instrument, more flexible risk management methods and diversified trading strategies. Judging from international experience, options products will help to enrich trading participant’s risk management methods, reduce the overall operation risk of the market and optimize investors structure.

Market participants generally believed that the listing of corn options will help the market to develop customized risk management products for middle stream and downstream enterprises, hedge against price fluctuation risk, promote corporate development, enhance the risk management level of industry clients, especially the downstream corn deep-processing enterprises, and facilitate the optimization, transformation and upgrading of the corn industry.

Besides, corn is an important grain product in China and of strong relevance with the development of the Chinese agricultural industry. In 2018, China’s total corn output was about 250 million ton. For a long time, the Chinese government has protected farmers’ enthusiasm in grain planting and guaranteed grain security through such policies as minimum price protection and temporary reserve, but the country has borne greater financial burden. As the reserve policy is gradually stepping down from the stage of history, Chine needs to explore an agriculture-supporting road that can guarantee farmers’ income but not influence the market pricing mechanism.

Focusing on serving the real economy and the requirements put forward in the No. 1 Central Document, the futures market has kept exploring new agricultural risk management ways in recent years and made such rewarding attempts as over-the-counter options and “insurance + futures” in terms of serving “agriculture, rural areas and rural residents” and providing rural residents with risk-avoiding service. After the listing of corn options, the mode of supporting agricultural development via futures and options can engage in risk management directly by floor options, thus greatly reducing the operation cost and business cost and promoting the wider scope of application of over-the-counter options and “insurance + futures”.

“Hedging agricultural products’ price risks via floor options has been a successful practice in the overseas markets. The government can offer subsidies to rural residents through premium and similar premiums, which will not affect the price forming mechanism of the corn market but can reduce the fiscal subsidies burden. In a word, it is of great significance for the marketized reform on the agriculture in China.” said Pang Chong, Assistant to General Manager of the Grain Department of Zhejiang Materials Industry Chemical Group.

Smooth market operation and moderate liquidity have been seen in soybean meal option since its listing on DCE on March 2017 and both its rules system and technical system have been fully tested by the market and become increasingly mature, which have laid a solid foundation for the listing of other options. At present, DCE has made full and in-depth research on corn options and completed the corn options contract, parameter design and the upgrading and optimization of its technical system. Next, DCE will steadily promote various preparatory work for the listing of corn options according to the market opinions and suggestions on corn options contract and guarantee the successful launching of corn options.

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