Mr. Yoshiaki Watanabe, the President of Niigata Agro-Food University
At the seventh Agricultural Market Study Group held by Agricultural Policy Research Committee Inc., Mr. Yoshiaki Watanabe (photo), the President of Niigata Agro-Food University, appealed for necessity of rice futures. After He served as the administrative vice-minister of Ministry of Agriculture, Forestry and Fisheries (MAFF), he became the president of Tokyo Grain Exchange, and when the rice futures transaction was listed on the exchange in August 2011, he emphasized the potential and importance of futures trading, saying “It can play a very valuable role in terms of providing a fair price indicator and establishing a place for hedging”. In this lecture also, he started with the origin of rice futures and concluded “We need futures market for rice” correcting misconceptions about futures trading that persist in Japan. In this article, we will post the discussion notes“Rice futures－common sense and insane sense” summarized by him on which he based his lecture and we would like to share usefulness of futures trading on this article.
Although I haven’t heard much lately, around 2011, when rice was approved for trial listing, Agricultural organizations were claiming things like the title.
As for this issue, we would like to look back at history. In the background to Shogun Yoshimune’s approval of the rice futures market, he attempted to increase the price of rice, that was a samurais’ salary, by increasing buying mood as a low price measure. The aim was to resolve the low price of rice and high prices of the other goods.
① Futures trading and forward trading are often confused. If you want rice with specific specifications, it would be best to link spot trading and futures trading, and forward trading and futures trading. That is it should be done by contracting for forward transactions to secure the spot, and then, hedge subsequent price risk with futures contracts to insure with money.
② Although bid contracts for Government stockpiled rice and “Multi-year contracts for seeded rice between producers and wholesalers” encouraged as rice policy are typical forward transactions, in terms of price, if hedging is done in futures market, rice production management will become more stable and expand.
A fair and open spot market where many people gather is naturally necessary. In addition, there are some deficiencies in delivery of goods, payment, insurance, finance, management, etc. in the spot market as shown below, therefore, these issues should be resolved in cooperation with the futures market.
① As for spot markets, because there are no restrictions on the establishment, the financing by founders and operators, and their credibility are not questioned, price, delivery, and settlement risks are high and complaints are occurring in so-called free markets, etc. so far.
② Contracts in futures trading are concluded through the involvement of exchanges and clearing institutions legally, and exchanges and clearing institutions are required to be established under the Commodity Derivatives Act.
③ The most important thing is that spot markets have no hedging function. So, a close relationship between spot and futures markets is required.
In connection with this, in Europe and the U.S. , “Hedge accounting treatment” is permitted and products connected to the futures market can be recorded at the futures buying and selling price regarding accounting asset value. Someday, this will happen in Japan as well.
① Although this was largely influenced by Toshiyuki Kajiyama’s novel “Red diamond” in 1962, that means red bean, this is a loss due to speculation and completely irrelevant to producers who own actual products. Speculators and hedgers should not be equated.
② Even if we look at modern history of futures trading, HOKUREN Federation of Agricultural Cooperatives－an agricultural organization in Hokkaido－that is the largest red bean supplier in Japan, had been involved as a main player in the red bean futures market and had made full use of the hedging function for a long time.
① Producers in each region are competing with each other and it is absolutely necessary for them to establish and operate spot market, and then, the need in recognizing the whereabouts of the rice they produced is high.
However, after harvesting, even if they were asked if the price was acceptable, the rice has already been shipped. They have no choice but to decide on the price by groping or following.
② Before harvesting or before sowing, if fair, open and reasonable prices are shown, they can do business calculations. Isn’t the problem the continuity and sustainability of producers’management ?
③ Not only over-the-counter transactions and spot market ,if future prices，and supply and demand information are shown by combining them with the futures market, the futures market will definitely come in handy. Looking at past history of prices plummet during harvest and prices soar during off-season periods, every country has a background of the expansion of “Request for futures market development”.
④ As for who takes the risk ?, in current consignment sales, price risk is the responsibility of producers and shippers. In purchase and sale, price risk is burden by Japan Agricultural Cooperatives or shipping companies.
① Spot market is of course necessary, but spot trading alone can’t show what will happen in the future and is unable to decide what to do with the next crop. Spot market alone will raise suspicions, so it alone won’t be enough as a basis for price. By providing clues for thinking about the direction of one’s own management considering futures market information and “Planting intention survey” based on that information, supply and demand adjustment will progress smoothly.
② Producers know the spot price and they know the forward brand rice, supply and demand, and the future price in the futures trading, so hedging is effective and they can perform future business calculations.
③ If three markets, spot, forwards and futures markets, work together while fulfilling their respective functions, development direction of the rice industry including overseas demand will become clearer.
Futures market is like a thermometer for humans. Even if we artificially set an upper or lower limits when we have fever, the fever won’t go down. On the contrary, if treatment is delayed, it may become irreversible. Futures market price discovery and supply and demand guidance functions must not be watered down. (NIKKEI newspaper gist dated December 28, 2022)
Therefore, Japanese rice can aim overseas. However, as it stands now, there is strong fear that the initiative in the world market will be taken away by Japonica rice futures market in Dalian, China that are increasing trading volume explosively. Using futures market is essential for trade transactions. We should protect farmland and ensure food self-sufficiency by exporting rice.
（Futures Tribune・issued December 8, 2023 ・no.3257）
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