The Application Of Options In Agricultural Risk Management In China

Agriculture is the foundation of the national economy.How to reduce the agricultural risk to protect the interests of farmers has always been a high priority of the government.There are many problems in China's agriculture development,such as small per capita arable land,poor risk resistance and so on.Agricultural production not only bear the natural risk,but also bear the market risk.As product supply and demand are not balanced,so the product price fluctuations frequently,and famers often suffer from economic losses.So,the Government implemented a series of measures to alleviate this problem,including a minimum protection price,price subsidies,etc.which cause price distortions of products and resource mismatch.At the same time,the above measures are also in conflict with the requirements of the WTO.Therefore,the use of market means to regulate agricultural production and protect farmers' profit becoming more urgent.The characteristics of China's agricultural determine that farmers can not directly use the futures market to avoid price risk.In the past two years,with the big support of the government,enterprises have actively explored options to control risk and achieved remarkable results in cotton,sugar,corn and soybean.2016 Central No.1 document clearly proposed that we should to steadily expand the "insurance + futures" pilot."Insurance + Futures" is uses options to manage agricultural risks.Insurance companies provide price insurance for farmers and then buy OTC options.Futures companies through futures hedge risk,and ultimately transfer of agricultural product price risk.The nature of the options is a "price insurance".It is more convenient to use the options to carry out agricultural product price insurance.Options are kinds of risk management tool that separate rights and obligations.Because of the diversity of risk management strategies and no additional risk of funds,it is widely used in risk management.The unique advantage of the options that the buyer can also enjoy the profit margin while locking the loss makes the options more susceptible to the hedger.The options has been widely used in management agriculture risk in the United States,Mexico,Brazil and other countries.March-April 2017,sugar,and soybean meal options have been open up in china exchanges,which provides a more favorable condition for exploring options to manage agricultural risks.With researching literature,this paper summarizes the experiences of the United States,Canada,Mexico,Brazil and other countries how to carry out agricultural options,combined with the specificsituation of China's agricultural development,through using cases analysis to explore how to use options to management agricultural risk in China.In Guangxi sugar price protection case,famers and sugarcane enterprises at the same time to buy price insurance,regardless of how the market price changes both sides can be compensated by the price insurance.Farmers can even get profit subsidies.The insurance company locks the maximum loss by buying put option.The futures company gains the right and to hedge the risk by copying the options in the futures market.Xinjiang cotton enterprises through the purchase of price insurance to prevent changes in market prices caused by the loss.When the price falls then the insurance to make up for losses,when the price increases then can be sold in accordance with market prices of cotton.This shows that the options can be a good way to avoid the risk of agricultural production and management.This paper points that the disadvantage of OTC lies in the lack of government support,insurance funds,and high hedging costs.This affects the effect of the implementation and promotion of options.This paper puts forward some suggestions to better serve the development of China's agricultural economy,such as actively developing on-site options,government direct subsidies gradually into price insurance,exploring a variety of price insurance model,the establishment of a variety of price insurance policy system,Cultivating professional personnel in options and so on.