An Empirical Study On The Impact Of COFCO On DCE Soybean Meal And Soybean Oil Futures Market

The futures market has two main functions:risk avoidance and price discovery. However, in some of the commodity futures markets, there exists certain participant with dominant market power. This certain participant, intentionally or not, affects the market with their behaviors, by which the two main functions of futures market are somehow distorted. The distortion consequently changes other market participants without the market power. In the DCE (Dalian Commodity Exchange) soybean meal and soybean oil futures market, COFCO is a certain dominant participant with huge market power. Its behaviors objectively weigh down the soybean crush margin and make the soybean meal futures price more backwardated.First, the analysis of soybean crush margin reveals that the soybean crush margin is negative on average, which is contradictory to the profitability of soybean crushing factories. This paper introduces COFCO’s behaviors, addition to seasonality influence, to explain the underlying contradiction. It is contended that COFCO’s short position on the DCE soybean meal futures drives down the soybean crush margin in the short term while the negative effect does not sustain after its first strike disappears. However, it is not statistically evident that the COFCO’s short position on the DCE soybean oil futures influences the soybean crush margin since the soybean oil has its substitutes, like palm oil and colza oil, trading on the DCE futures market.Secondly, COFCO’s behaviors are also introduced to explain the DCE soybean meal and soybean oil futures price term structure. It is found that the DCE soybean meal futures price term structure tends to be more backwardated when COFCO increases its short position on the futures contract that expires earlier or decrease his short position on the futures contract that expires later. However, COFCO’s behaviors still do not notably influence the DCE soybean oil futures price term structure because of the existence of palm oil and colza oil trading on the DCE futures market.Finally, this paper utilizes the Stackelberg model to analyze how the soybean crushing factories without market power should react to the negative influence on the market brought out by COFCO’s behaviors. COFCO is not influenced by the negative market characteristics (i.e. the backwardation) made by itself because it has advantage in registering the DCE warehouse receipt of soybean meal. The model argues that soybean crushing factories without similar advantage, in order to maximize their utility, should decrease their hedging position in futures market if the backwardation is consistent and predictable.