BEIJING 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, fueling its appetite for global investment hub status along the way.
On Friday, Dalian Commodities Exchange, one of four futures centers 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.
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 practicing 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)
(Reporting by Hallie Gu and Josephine Mason; Additional reporting by Dominique Patton in BEIJING and Naveen Thukral in SINGAPORE; Editing by Kenneth Maxwell)