Traders upbeat about futures
By Chen Yao (China Business Weekly)
Updated: 2004-10-18 14:21

Given the recent, low-key debut of corn futures on the Dalian Commodity Exchange, China's futures traders are expected to be upbeat about the country's commodity futures market, which analysts say is poised for considerable growth over the next few years.

"Despite the initial falling of corn futures prices over the past three weeks, the market is upbeat about the new trading products, given their growth potential," said Zhou Yitao, secretary-general of the Beijing Futures Association.

During the corn futures' first trading day, on September 22, five of the six corn contracts fell, and the combined transactions totalled 327,500 lots, or 3.95 billion yuan (US$477 million).

Over the next three weeks, prices of corn futures fluctuated and there was "no apparent establishment of trends,"Zhou said.

China's commodity futures market is gaining growth momentum. The market's three main trading products -- fuel oil, cotton and corn -- have been launched this year.

The China Securities Regulatory Commission (CSRC), the industry's watchdog, gave the Shanghai and Zhengzhou commodity exchanges approval, earlier this year, to list fuel oil and cotton futures respectively.

"The impact of corn futures on China's futures market will likely be greater than the other two futures products, given the comparable large trading quantities of corn futures contracts," said Zhang Yan, a senior futures analyst with Sanli Futures Co.

"Corn futures are also very popular trading products globally."

Twelve exchanges in eight countries currently trade corn futures and corn futures derivatives.

The Chicago Board of Trade (CBOT) is the world's largest corn futures market. Trade of corn futures contracts in CBOT accounts for 35 per cent of combined trades of farming products futures.

"Corn futures will become a popular trading product in China, as corn is the second-largest farming product in the country," Zhang said.

China is the world's second-biggest corn consumer. The country produces 120 million tons of corn annually, which accounts for about one-third of the nation's grain output.

The expected harvest of corns in both China and the United States probably contributed significantly to the recent fall of corn futures prices, Zhang said.

China's corn output is expected to reach 123 million tons by year's end, and stockpiles of corn, from previous years, in Northeast China, which is the country's main corn growing region, will enter the market later this year. Corn output is expected to continue growing through 2005.

"Investors ... worry the extra corn, from this year's harvest, will flood the market. Last week's fluctuation of corn futures prices reflected that mood," said He Qiang, a professor with the Securities and Futures Research Centre affiliated with the Central University of Finance and Economics.

"But, in the long run, corn futures will likely be investors' favourite product, given its large quantity and its global popularity."

Speculation that China's currency, the renminbi, will likely appreciate against the US dollar might be another reason prices of corn futures contracts in China's market are "having a difficult time," He said.

A higher yuan will encourage more Chinese enterprises to import corn from the United States or other countries. Such a speculative mood has probably affected domestic corn futures' prices, He added.

China last year imported 16.4 million tons of corn to meet surging domestic need, especially to produce food for farm animals.

Launching corn futures has also created challenges for commodity futures traders, who, to ensure the best trading of the new product, are required to understand all fields associated with the corn farming industry.

"There are more than 20 related business sectors that might eventually affect the prices of corn futures. So we have a lot more research to do, rather than simply trading other futures contracts," Zhang said.

"But the new product has definitely created opportunities for the whole futures trading industry."

Given the large quantity involved with the trading of corn contracts, only large futures traders, with sufficient sources of funding, will profit from the new product, Zhang said.

China's commodity futures trading industry, since 2002, has been heavily regulated. The country's futures traders have considerably improved their management, but are still far from internationally recognized standards.

The maximum daily moving range of the corn contracts was set at 10 per cent on the first trading day. That range has since been lowered to 4 per cent.

The corn contracts will be settled in Dalian and Yingkou, two coastal cities in Northeast China's Liaoning Province.

The United States expects its corn harvest this year will be 8 per cent greater compared with last year.

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