Agricultural Commodities Trading Egged On by China’s Futures Frenzy

HONG KONG—The recent fevered commodities trading in China hasn’t been limited to iron ore. Investors have piled into futures for everything from wheat and cotton to eggs and asphalt.

As with industrial metals, analysts reckon much of the interest is coming from speculative investors who have been turned off to China’s stock markets by tighter rules over trading.

“Chinese speculators didn’t want to buy into the equity market with all the curbs, so they jumped into the commodity markets and it seems they’ve done so in massive style,” said Michael Coleman,managing director at RCMA Asset Management Pte.

Rampant speculation means Chinese futures markets often don’t reflect economic or industry fundamentals, while excess liquidity attributable to loose monetary policy is further driving the spike in interest in agricultural futures.

For example, turnover of corn futures traded on the Dalian Commodity Exchange was up by nine times in April from a year earlier, at around US$30 billion in value, according to data from the exchange. That is despite corn prices falling 10% after the Chinese government announced that beginning later this year it would stop setting prices, allowing market forces freer rein to guide prices.

Trading volume for wheat futures on the Zhengzhou Commodity Exchange has also rocketed by around nine times to roughly US$500 million over the same period, even though wheat prices are up just 1.2%.

The increased trading in egg futures in Dalian hasn’t been quite so dramatic, though volumes are still up 19% in April from a year earlier, meaning contracts for around 128.9 billion eggs changed hands in April alone.

To be sure, there are some tailwinds giving support to commodities prices in the coming months. Prices for grains, soybeans and other food commodities have recently risen in some markets, as weather conditions in Central and South America have raised concerns that supplies will tighten over the coming months.

Unlike the surge in investor interest in industrial metals, however, the impact of the rise in agricultural commodity prices “is unlikely to affect global prices” because the sector is much more insulated from international markets, said Tracy Xian Liao, an analyst at Citigroup.

Imports of agricultural products are tightly controlled and pricing regulations remainin place for some foodstuffs, such as rice and wheat.

Still, the rise in speculative trading in agricultural commodities has raised concerns within China. Exchanges there have raised transaction fees in recent days to try to temper the market.

It isn’t the first time China’s agricultural markets have worried regulators.

Various unofficial commodities exchanges have sprung up in China over the last decade offering retail investors the chance to trade on foodstuffs, including kiwifruits grown in Sichuan, dates from Xinjiang and mushrooms in Hubei.

Investors are able to trade online in most of these futures markets. Most require traders to settle trades with cash, instead of making delivery of physical goods an option. Contracts are usually designed to be affordable, with the minimum investment as low as 200 yuan (US$31) per lot.

Trading is often volatile in those markets and insider trading is common, analysts say.

A scandal last year at the Pan Asia Nonferrous Metals Exchange in Yunnan that cost 220,000 retail investors billions of dollars in combined losses drew widespread media attention and prompted a crackdown on unregulated commodities markets.

Leave A Comment