Futures Daily: SHFE Initiated the Targeted Poverty Alleviation Project with Natural Rubber Futures-Based Insurance

Date: May 31^st, 2017

Reported by Que Yanmei, Journalist of Futures Daily

On May 26^th, Shanghai Futures Exchange (“the SHFE”) signed a project cooperation agreement with 23 futures firms on the signing ceremony for the Targeted Poverty Alleviation Project with the Natural Rubber Futures-Based Insurance. This marks the official launching of the Targeted Poverty Alleviation Project with the Natural Rubber Futures-Based Insurance sponsored and supported by the SHFE. Sources say, the SHFE has input RMB39.6 million yuan into this project as support fund, covering 15 poverty-stricken counties in Hainan and Yunnan (14 of 15 being national-level poverty-stricken counties), approximately with 36,000 tons of natural rubber physical output and 26,680 hectares of cultivated area.

On the signing ceremony hosted on that day in Shanghai, Mr. Jiang Yan, the Secretary of Party Committee and Chairman of the Board of Directors of the SHFE, said that the Exchange will resolutely take the financial poverty-aid and the Targeted Poverty Alleviation Project with Natural Rubber Futures-Based Insurance as its missions and political duties in bid to respond to the great call of the central leading body of the Party in poverty alleviation. From the very beginning, the SHFE has clearly put forward that all pilot projects must aim at the needs of the poverty-stricken counties, and fully supported the projects by specially arranging a support fund of RMB39.6 million yuan.

“As for all participating futures firms, we hope that they do not forget initial determination, nor pursuit their self-interests, but live up to our common mission, and that they can shoulder the social responsibility of enterprise and effectively help the broad mass of rubber planting farmers and poverty-stricken counties cast off poverty to get rich soon with their futures professional capability as the instrument,” said Mr. Jiang Yan.

Drastic fluctuation in rubber price posed a challenge to farmers

As for most rubber-producing counties in Yunnan and Hainan, natural rubber is the main source of income for most farmers. However, the natural rubber short supply in recent years has done less to improve the income of rubber planting farmers. Since 2010, the price of natural rubber has dropped year by year, falling from its peak, RMB43,000 yuan per ton, to the rock bottom in 2015, RMB9,000 yuan per ton.

Despite the obvious recovery in natural rubber price since 2016, numerous price influencing factors have still posed a considerable potential risk to the income of natural rubber production, such as season, climatic disasters and plant diseases and insect pests. Meanwhile, the sharp rise in the production cost of natural rubber has also engulfed the income of farmers.

According to relevant statistics, the domestic rubber production cost rose from RMB1,050 yuan per mu in 2011 to RMB1,800 yuan per mu in 2016. Compared with this, the average purchasing price dropped from RMB25,000 per ton to RMB9,000 yuan per ton. “In spite of the hard work of farmers, their income has dropped instead of rising, and in some cases the profit in rubber tapping even has not sufficiently covered the cost,” said an industrial insider who requested anonymity for this article to our journalist.

Our journalist also learned that domestic subsidy policies on rubber farmer households are currently not yet perfect. For instance, when the rubber price falls, the State Reserve may purchase the rubber in time, but such purchase is limited due to highly demanding storage conditions of natural rubber. Furthermore, the rubber planting farmers are loosely organized, lacking in both risk-avoiding awareness and instrument. Under such a context, farmers still abandon rubber tapping from time to time.

Taking a rubber-producing county in Hainan as an example, the annual natural rubber output should have reached 25,000 to 30,000 tons in consideration of a private planting area of 22,011 hectares. However, the actual privately-run natural rubber output only totaled 20,000 tons, with a rubber tapping ratio of about 70%. This means 6,000 to 10,000 tons of natural rubber are left untapped, resulting in a tremendous waste in economic output value as well as continuous decrease in the newly planted area of rubber forest. And the outflowing of labor force has further curbed the growth of local economy.

In view of this, it is an important matter associated with not only the development of China’s rubber industry, but also the livelihood of the people to ensure the profit realization and encourage the productive enthusiasm of numerous scattered farmers by helping them mitigate the risk arising from natural rubber price fluctuation.

Help rubber planting farmers to address their urgent needs with the natural rubber futures-based insurance

SHFE’s natural rubber futures ranks the first place in the world in terms of trading volume, recording a turnover of RMB12 trillion yuan in 2016. With a correlation coefficient of 0.95 with domestic physical price, it is a powerful hedging instrument. However, most of rubber planting farmers do not have professional knowledge about futures. Therefore, the natural rubber futures-based insurance becomes the link between rubber planting farmers and the futures market.

Sources say, the specific operation mode for the natural rubber futures-based insurance project is as follows: the insurance company develops an agricultural product price insurance for natural rubber according to the relevant natural rubber futures price in the futures market, and sells it to rubber planting farmers or agricultural cooperative society. The insurance company then buys in an OTC put option for reinsurance from the futures risk management company in a bid to hedge against the potential risk arising from the natural rubber price decline. And the futures risk management company clones relevant put option at the futures exchange to further transfer risk and eventually form a closed loop that benefit everyone through risk aversion.

It is known that traditional insurance companies disperse risks in accordance with the law of large numbers. However, risk events are usually clustered in the agricultural insurances. Therefore, the insurance companies are most likely to lose money in case of the compensation in agricultural insurance. Compared with the law of large numbers, the natural rubber futures-based insurance realizes the risk transfer through hedge trading in the futures market to safeguard the interests of rubber planting farmers and at the same time shift the risk of insurance companies.

According to the information provided, SHFE started the research on the natural rubber futures-based insurance project as early as 2016. During the research, multiple field visits were conducted in Yunnan and Hainan to study all aspects of the rubber industrial chain and have in-depth exchange of views with local governments, relevant organs, enterprises and farmer representatives. After listening to the needs and proposals from all related parties, the Exchange has drawn upon the expertise from the pilot projects of other exchanges and the industry, and conducted careful studies and repeated trials on the schemes received.

Our journalist learned that the SHFE will set up dedicated subsidiary ledgers for the hedge trading of relevant positions held by the futures firms participating in the pilot project in a bid to ensure the fund is used appropriately and do well in follow-up regulation. After the completion of the pilot project, the Exchange will carry out the assessment and use the actual compensation conditions and project assessment as the KPIs for the appraisal of the Excellent Member of the Year.

According to Mr. Jiang Yan, General Secretary Xi Jinping has repeatedly emphasized that eliminating poverty and achieving common prosperity are the essential demand of socialism, and the mission shouldered by Chinese Communists. Liu Shiyu, the Chairman of the CSRC and the chief of the aid-the-poor leading group, has also clearly put forward that winning the battle against poverty must be our lofty political responsibility.

According to the information provided, the futures-based insurance has been written to the No.1 Central Document for two consecutive years. It represents an innovative model that protects the income of farmers and transfers the risk of insurance companies via financial derivatives. After two years of pilot running, it has been fully affirmed by the central leading body of the Party and all social circles.

After the signing ceremony, relevant responsible person of the SHFE said that the Exchange will proactively respond to the national strategic call in poverty-relief as well as the spirit of the No.1 Central Document, forge ahead steadily with the Targeted Poverty Alleviation Project with the Natural Rubber Futures-Based Insurance and aim for expanding the scope of the pilot project year by year in a bid to help low income families in rubber-producing area cast off poverty and get rich at an early date and realize our original intention of serving the rubber industry and physical economy through the futures market.

Our journalist learned that this Project has got the energetic support from local governments. Relevant local governments said they will give policy support to all the project schemes submitted by futures firms. Multiple governments have established dedicated financial poverty-relief group with special funds to proactively press forward with the smooth operation of this Project and safeguard the stable income of rubber planting farmers.