Tofu trailblazer: Soymeal leads China charge into commodities derivatives

ZHONGTAI FUTURES

30/03/2017 09:42

* Options foray as China matures in markets 
    * Monthly soymeal futures volume rivals Brent crude 
    * Dalian one of four futures markets in China 
 
    By Hallie Gu and Josephine Mason 
    BEIJING, March 30 (Reuters) - Soymeal, a chief ingredient in 
tofu, is set to provide rich nutrition of another kind: China is 
using the animal feed staple to blaze a trail in commodities 
derivatives, fuelling its appetite for global investment hub 
status along the way. 
    On Friday, Dalian Commodities Exchange, one of four futures 
centres in China, will roll out a soymeal option, the country's 
first exchange-traded product of its kind in commodities. 
    The derivatives are designed to make it easier for the likes 
of traders, pig farmers and the companies who process soybeans 
into oil and feed to hedge price swing risks. Worth $7 billion, 
Dalian's soymeal futures are the country's largest agricultural 
market. 
    Fifteen years in the making, the soymeal options give 
holders the right to buy or sell a product at a particular 
strike price, and will appeal to another group - China's 
cash-rich speculative investors, who have piled into everything 
from eggs to iron ore in the past year, disrupting global 
commodity prices in the process.  
    "We have been trading equity options, now we will give a 
shot at this first commodity option," said Mo Qingping, 
investment director at ESFund Management Co, with more than 2 
billion yuan ($290 million) in assets. One of its main 
shareholders is Shenzhen-listed investment firm GF Securities Co 
 000776.SZ , worth more than $18 billion by market value. 
    As the world's second-largest economy has expanded, and with 
it an appetite for everything from copper to corn, futures 
trading in China has surged in recent years and now rivals the 
United States and Europe in volume terms.  
    Dalian launched soymeal futures almost 20 years ago, but its 
foray into more complex instruments demonstrates the growing 
maturity of its risk management offering as China aims to play a 
bigger role on the global derivatives market. Beijing regulators 
are now considering prising open China's long-closed futures 
markets to foreign investors. 
    In an emailed statement on Thursday, the Dalian exchange 
cautioned it does not expect big volumes immediately, due to the 
complexity of the product.  
    Still, the potential is vast. 
    More than 17.5 million lots of Dalian soymeal futures, 
equivalent to 175 million tonnes of soymeal, have changed hands 
so far this month. That's more than three times the size of U.S. 
annual soymeal output, and on a par with Brent crude oil futures 
turnover, arguably the highest-profile futures contract in the 
world.     
     
    GROWING MATURITY 
    With 85 percent of beans crushed in China brought in from 
abroad, it makes sense for the feed and meat industry to want 
additional protection against price volatility, said JY Chow, 
food and agriculture expert at Mizuho Bank in Singapore. 
    "The global grain and meat market will gain in complexity 
and uncertainty, so it is good that Chinese market becomes more 
sophisticated - moving in parallel with the maturity of the 
industry," he said.  
    Guo Can, who imports soybeans and sells soymeal for a major 
soybean crusher in eastern Shandong province, has been 
practising using the new-fangled hedging product on a simulated 
trading platform.  
    "We aim to get involved, but we will see the trading volume 
first," he said. "If it's quite active, we will buy in."  
    Friday's launch coincides with the release of the U.S. 
government's first estimate for grain acreage for the current 
season, one of the most widely anticipated reports on the 
agricultural calendar - and one which often roils prices. 
    This week, Shandong-based Luzheng Futures  1461.HK , one of 
10 market makers appointed to ensure liquidity, was making final 
checks on its trading systems. 
    Even though he has handled options in other markets for 
almost a decade, Lin Qihong, investment director at the 
brokerage's option market maker division, remained cautious on 
the eve of the Friday launch. 
    "This is China's first commodities option product after all. 
We've got to be a bit careful," he said.    
           
($1 = 6.8875 Chinese yuan renminbi) 
 
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GRAPHIC: China's soymeal futures market    http://reut.rs/2nzuxaN 
  
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 (Reporting by Hallie Gu and Josephine Mason; Additional 
reporting by Dominique Patton in BEIJING and Naveen Thukral in 
SINGAPORE; Editing by Kenneth Maxwell) 
 ((Hallie.Gu@thomsonreuters.com; +86 10 6627 1250; Reuters 
Messaging: hallie.gu.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA SOYMEAL/OPTIONS