China's first transgenic soy futures debut weakly

[LatelineNews: 2004-12-23] SHANGHAI - China's maiden contract for genetically modified soybeans <0#DSB:> staged a limp debut on Wednesday, but it offers crushers in the world's top soy importer a much-needed hedging instrument in the long term.

The contract ended the day on the Dalian Commodity Exchange barely above its starting quote. Trade was heaviest in the May contract, which closed up just 2 yuan at 2,602 yuan ($314.4), with 100,100 lots traded.

"They say it will become the trading contract for imports," You Long, the deputy general manager of Chinese trading giant COFCO, told Reuters.

"But in the short term, we see it more as a domestic contract, allowing people to arbitrage between grades of beans."

The GMO contract is known as the No. 2 contract, to distinguish it from trade in non-GMO soybeans.

Most of China's 18 million tonnes of soybean imports in the first eleven months of 2004 included transgenic beans.

But the existing Dalian No. 1 soybean contract <0#DSA:> specifically excludes genetically modified soy -- thereby limiting importers' ability to hedge through that contract.

Only three Chinese grain companies are allowed to trade Chicago futures, leaving other local crushers exposed to global price fluctuations.

At the end of trade on Wednesday, there was a 10-30 yuan spread between the No. 1 and No. 2 contracts. Traders in both contracts could potentially profit if the difference exceeds the difference in spot prices for different grades of beans.

"We think it went very well," exchange spokesman Wu Jian said. "Volume was about what we expected. From now on, the market will decide the true price."

TRADE ISSUES

The No. 2 contract could become the major soybean contract in Dalian, exchange spokesman Wang Weiyun said last week.

Nonetheless, on Wednesday a total 130,474 lots traded through the No. 2 contract, versus 284,228 lots for the non-GMO contract.

Traders will remain cautious as they wait to see whether China's quarantine authorities will allow free soybean imports for delivery against the futures contract.

Currently, only crushers and approved importers can take physical delivery against the No. 2 contract.

Crushers need additional permits from the CIQ to trade beans on the exchange. Local quarantine bureaus need to approve the transport of the beans from Liaoning Province, where the Dalian exchange is located.

Last summer, the CIQ blocked Brazil and Argentine soy shipments after it found contaminated beans in some cargoes.

The halt in imports coincided with a collapse of margins for Chinese crushers -- leading some traders to charge that China was using the contamination issue to protect domestic firms.

In November, the Dalian Exchange pushed back the original launch date for the GMO contract. An official said at the time that the exchange was still working out details with quarantine authorities.

"They must have a tacit agreement from the quarantine authority not to stop trade, otherwise it can't work," said Phillip Laney, China country director for the American Soybean Association.

The No. 2 soybean contract is the fourth commodities contract to be launched in China this year.

Dalian began trading corn futures in September, the Shanghai Futures Exchange launched a fuel oil contract in August, and cotton futures began trading in Zhengzhou in June.

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