# Presentation: 502555

## Agricultural Products Price Risk Management in China 

*Pei GUO*
*Guangtong Xu*
*2008.05 **· **Dallas*

**Rural Finance Seminar - Challenges and Opportunities in the U.S. and China**

## Outline

- 1. Introduction
- 2. Evolving PRM System in China
- 3. Futures Market in China
- 4. Future Direction and Challenges

## 1. Intro: Commodity Price Risk

- Risk resulting from the possibility that the price of a physical commodity may be volatile
- The derivatives like commodity futures and options, forward contracts and commodity swaps can be used to cope with it
- Commodity price risk management instruments have been used in financial markets of developed countries, while seldom been used in developing countries
*Relatively **New; *
*Lack of understanding and awareness**; *
*Inadequate infrastructure *
*Constraints on the scale of the participants, etc.*
- China is trying to adopt some of the above instruments

## 1. Intro: Background

- International and domestic commodity price volatility and its correlation
- International commodity price fluctuations continue to increase
- Crude oil, coal and other resource products
- Rice, pork and other agricultural products prices
- Increased volatility of commodity prices in China
- Market-oriented reform lead to an effective price dynamics
- Opening up to the outside world
- Increased Correlation and Co-movement
- The commodity trade between China and the world
- The elimination of WTO non-tariff measures
- International impacts

## 1. Intro: Background (Cont’d)

- Institutional and the terms-of-trade changes are resulting in the rapidly rising importance of the price risk of agricultural products
- China's overall supply of agricultural products comes forth the short-term, structural and regional surplus, and some agricultural prices have been close to or higher than the international market price levels
- The development of agricultural vertical integration not only expanded the scale of agricultural suppliers, but also increased their commitments to price risks

## 1. Intro: Background (Cont’d)

- Price risk management is changing from macro-policy control to the utilization of market instruments
- The full-fledged financial derivatives markets in developed countries can reduce the cost of running the economy, as well as enhance the ability to mitigate the economic shocks
- Traditional means: Protective Price policy to cope with the market risks
- Emerging Trends: market-oriented reforms, insurance industry development and futures market development

## 2. The Evolving Price Risk Management System in China

- Government level
-       - Releasing Price Information: NDRC, MOA
-       - Other policy tools
*Grain **price protection*
*Direct subsidies to grain **producers*
*The grain risk fund**s*
- Farmers level
-       - Contract Farming
-       - Agricultural Cooperatives
-       - Diversification
- Derivatives Market
-       - futures market

## 3. Futures Market in China: A Brief History

- 1990: *Introduction of futures in Zhengzhou Grain Wholesale Market marked the official birth of futures market in China*
- 1994: *50 commodity exchanges, 2500 brokerages and 35 futures contracts*
- 1995-1998: *many exchanges and brokerages were prohibited to do futures trade due to their illegal acts*
- 1999: *Some regulations on futures trade*
- 1999:  *3 Commodity Exchanges: Dalian (DCE), Shanghai (SHFE) and Zhengzhou (CZCE)*
- 2000: *China Futures Association*
- 2006: *China financial futures exchange (CFFEX)*
- 2007: *“Regulations on Management of Futures Transaction”*

## 3. Futures Market in China: Today

- By the end of 2007, China has four futures exchanges – three Commodity Futures Exchanges and one Financial Futures Exchange, with a total of  167 futures brokerage companies
- 2007, Dalian, Shanghai and Zhengzhou, ranked 17th,24th and 27th respectively in terms of the Futures Trading Volume (including options) in the global 54 futures exchanges

***Source: Xingqiang Liu, “Constructing and developing the futures market in China”, 2008***

## 3. Futures Market in China: Products

- At the moment, 19 varieties
- Dalian (7): Maize, soybeans 1, soybean 2, soybean meal, soybean oil, polyethylene, palm oil
- Shanghai (6): Copper, aluminum, natural rubber, fuel oil, zinc, gold
- Zhengzhou (6):  Canola oil, wheat, cotton, sugar, PTA, mung bean

## 3. China's Futures Market: Products

- System for the Commodity Futures for Agricultural Products
- Food crops (maize, wheat, etc.)
- Cash crops (sugar, etc.)
- Oil crops (soybeans, soybean oil, canola oil)

##  3. China's Futures Market: Transaction Statistics

- Turnover
- 3.95 trillion yuan (2002);
- 41 trillion yuan (2007), 1.6 times of the GDP, and will continue to grow
- Volume
- 139 million hands (2002);
- 728 million hands (2007)
- one of the fastest growing and most vigorous futures markets in the world
- enjoying a 50% plus annual growth rate in futures transactions in recent years, far exceeding the average growth rate (20%) of the international market

- Futures Market Transactions in China 1993-2007

**Source: China Futures Almanac, 2007**

## Distribution of Futures Transaction 2006

|  | Turnover
(10^9) | % | Volume
(10^4) | % |
| --- | --- | --- | --- | --- |
| Agricultural Products | 139539.91 | 66.43 | 38505.59 | 85.66 |
| Metal Products | 61834.54 | 29.44 | 3864.98 | 8.60 |
| Energy and Chemical products  | 8688.92 | 4.14 | 2580.25 | 5.74 |
| Total | 210063.37 | 100.00 | 44950.82 | 100.00 |

**Source: China Futures Almanac, 2007**

## Distribution of Agri-products Transaction 2006

| Items | Turnover | %  | Volume | %  |
| --- | --- | --- | --- | --- |
| Cotton First | 30794717.04 | 2.21 | 4169082 | 1.08 |
| Sugar | 235047660.55 | 16.84 | 58684132 | 15.24 |
| Wheat | 50672045.31 | 3.63 | 29352476 | 7.62 |
| Hard Wheat  | 84082.69 | 0.01 | 56104 | 0.01 |
| Rubber | 557268977.66 | 39.94 | 52094122 | 13.53 |
| Yellow Soybean #1 | 48736392.34 | 3.49 | 17794122 | 4.62 |
| Yellow Soybean #2 | 9924323.77 | 0.71 | 3850452 | 1.00 |
| Maize | 2033667060.70 | 14.60 | 135290072 | 35.14 |
| Soybean Meal  | 147197460.64 | 10.55 | 63099338 | 16.39 |
| Soybean Oil  | 112006375.53 | 8.03 | 20666012 | 5.37 |
| Total | 1395399096.23 | 100.00 | 385055912 | 100.00 |

**Source: China Futures Almanac, 2007**

## 4. Future Development and Challenges: I

- Constructing a *D**emand-oriented* Agricultural Risk Management System
- Constructing an *Integrated* Agricultural Risk Management System
- Constructing a *Market**-**based* Agricultural Risk Management System

## 4. Future Development and Challenges: II

- Innovative Product Design
- Increase the varieties of futures products
- 300+ varieties of commodity futures and 1000+ varieties of financial futures in the global futures markets
- Prices Insurance
- Application of Financial Derivatives
- Introduction of QFII System
- The first joint-venture futures brokerage companies (Dutch Bank Futures) established

## 4. Future Development and Challenges: III

- Ensure a Healthy Market: How to reduce speculation behavior to improve the performance of risk management functions of futures market
- Bringing in New Participants: How to improve the small-scale producers' capacity in using the futures markets to cope with the market/price risk, perhaps through the cooperatives?
- Education issues: Price risk management research and extension

## Thank You!

**Pei GUO**
**College of Economics and Management**
**China Agricultural University**
**Beijing 100094, PR China**
**E-mail:  guopei307@gmail.com**