U.S. Department of Agriculture Agricultural Outlook Forum 2005

U.S. Department of Agriculture

Agricultural Outlook Forum 2005

February 25, 2005

ZHENGZHOU COTTON FUTURES: A CHINESE SUCCESS STORY

Ed Jernigan, CEO Globecot, Inc.

BUSINESS INTELLIGENCE FOR AN INTERWOVEN WORLD

ZHENGZHOU Cotton Futures:A Chinese Success Story

Presented by:

Ed Jernigan, CEO

Globecot, Inc.


China & Futures: A Natural Interest

The first futures trading began in Asia -- Rice in Japan


China & Futures: The Beginning• October 1990: first grain wholesale spot market

opens• September 1991: aluminum futures begin trading

on Shenzhen• 1992: first futures brokerage firm opens• 1993: Zhengzhou commodity exchange transfers

business to futures• 1994: government approves 11 futures contracts

on a trail basis


China & Futures: The Beginning

• April 1994: government bans futures in steel, sugar, coal

• September 1994: government bans futures in rice and rapeseed

• 1998: 14 futures exchanges consolidated into 3:– Shanghai Futures Exchange– Zhengzhou Commodity Exchange– Dalian Commodity Exchange


China & Futures: The Beginning

• Today’s futures trade occurs on those 3 exchanges

• June 1, 2004: Cotton Futures opened on Zhengzhou commodity exchange


Zhengzhou Commodity Exchange: Background

• Established 1990, evolved from Zhengzhou grain wholesale market.

• 1993: Launched futures: wheat, corn, soybeans, green beans, sesame

• 1993-1999: green beans most active contract.• 1999: wheat took over top position.


Zhengzhou Commodity Exchange: Background

• 2003: 2nd wheat contract added• 2000: Computer trading introduced• 2003: daily volume in wheat futures

reached a record 887,446 contracts• 2003: open interest in wheat reached

716,316 contracts


Zhengzhou Commodity Exchange: Today

• Non-profit organization

• 218 member firms

• Electronic trading


ZCE: Cotton Futures – A Success from Opening Day

• Most successful new cotton futures contract ever introduced.

• Enjoyed liquidity from opening day.• By November 1, open interest reached over

70,000 contracts.• Daily volume averages over 50,000 contracts.


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

6/1/20

046/1

5/200

46/2

9/200

47/1

3/200

47/2

7/200

48/1

0/200

48/2

4/200

49/7

/2004

9/21/2

004

10/5/

2004

10/19

/2004

11/2/

2004

11/16

/2004

11/30

/2004

12/14

/2004

12/28

/2004

Num

ber

of C

ontr

acts

ZCE Open InterestJune 1, 2004 – December 31, 2004


50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

12/1

/200

4

12/8

/200

4

12/1

5/20

04

12/2

2/20

04

12/2

9/20

04

1/5/

2005

1/12

/200

5

1/19

/200

5

1/26

/200

5

2/2/

2005

2/9/

2005

2/16

/200

5

Num

ber

of C

ontr

acts

ZCE Open InterestDecember 1, 2005 – February 18, 2005


ZCE Cotton Futures: What’s Behind the Success

• Base quality mirrors domestic cotton use and production.

• Strong physical delivery mechanism.• Active movement in underlying cash commodity.• Strong regulatory procedure.• Widespread familiarity of futures and their use.



• Base quality mirrors domestic cotton use and production:– Over 80-percent of all Chinese cotton produced

is M 1-3/32” or better quality– Over 75-percent of all domestic cotton

consumption is M 1-3/32” or better quality



• Base quality: T328, equivalent to U.S. Grade M 1-3/32.”

• Other features: deliverable quality range, mike 3.5 to 4.9.

• Quality T129 to T429 tenderable, with premium and discount.



• Strong physical delivery mechanism:– All cotton is re-graded by FIB when placed in a

certified warehouse.– All cotton is again classed by FIB when delivery takes

place.• Created strong integrity in the quality of cotton

received by buyer, no dumping by seller.• ZCE futures trade at a premium to general

physical prices for that reason.



• Strong physical delivery mechanism

– All delivery in 20 ton lots.

– 13 approved delivery warehouses in East China.


-500

0

500

1,000

1,500

2,000

2,500

6/1/20

046/1

5/200

46/2

9/200

47/1

3/200

47/2

7/200

48/1

0/200

48/2

4/200

49/7

/2004

9/21/2

004

10/5/

2004

10/19

/2004

11/2/

2004

ZCE Cotton FuturesNovember/December 2004 Spread


-300-250-200-150-100

-500

50100150200

9/9/

2004

9/23

/200

4

10/7

/200

4

10/2

1/20

04

11/4

/200

4

11/1

8/20

04

12/2

/200

4

12/1

6/20

04

12/3

0/20

04

1/13

/200

5

1/27

/200

5

2/10

/200

5

ZCE Cotton FuturesMarch/April 2005 Spread



• Active movement in underlying cash commodity.

• China physical price movement is now a free market:– Significant volatility.– Prices less influenced by government than in

the United States.



• Strong regulation procedure:– Delivery integrity.– Position limits.– Daily price limits.– Strict margin rules.



• Widespread familiarity of futures and their uses.– Domestic futures volume has soared since introduced.– Volume in many of the grain contracts exceeds CBOT.– Poor performance of domestic equity and bond market

make futures attractive alternative.


ZCE March 2005 Contract

10,000

11,000

12,000

13,000

14,000

15,000

16,000

6/1/20

046/15

/2004

6/29/200

47/13

/2004

7/27/200

48/10

/2004

8/24/200

49/7/

2004

9/21/200

410/5

/2004

10/19/2

00411/2

/2004

11/16/2

00411/3

0/2004

12/14/2

00412/2

8/2004

1/11/200

51/25

/2005

2/8/20

052/22

/2005

Yua

n pe

r T

on


Today: ZCE Cotton Futures Are A Big Success

• Daily volume average two to three times that of NYBOT.

• Reflects domestic cotton price movement in China.

• Open interest is averaging above NYBOT after less than one year.

U.S. Department of Agriculture Agricultural Outlook Forum 2005

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