The basic characteristics of hedging are defined in two textbooks. One is to operate at the same time, buying and selling the same amount of futures. I think this explanation is to carve a boat for a sword. First of all, hedging is definitely not the same amount. If you hedge the same amount, you may also face bankruptcy. Second, the time efficiency of futures market and spot market is different. Opportunities in the futures market are fleeting, and if the futures market is leveled after the spot market is processed, it may lose a lot. What's the problem? That is, when the audit department audits our spot, it will turn over your financial books. Where is the future position? Why not do 1: 1 hedging? This is a ridiculous question, and our enterprise has had countless disputes on this issue. Including last week's group meeting, there are similar controversies. This is the explanation of the so-called experts and scholars carving boats for swords. This explanation has caused great obstacles to our enterprise. What is hedging? Hedging is not a one-to-one correspondence. If it's one-on-one, it's a dead man's hedge and a mummy's hedge. This is my understanding of the definition of hedging.
Second, why do we talk about hedging is very necessary. In practice, enterprises have upgraded the means and tools of hedging operation to enterprise business model. We all know the concept of business model. Business model is the path for enterprises to realize returns, or the fundamental method for sustainable development. If we talk about it from this perspective, we will understand the concept of the importance of hedging to enterprises. If you hedge, your business model is incomplete. When you do B2B business model, commodity trading, simple processing and hedging are indispensable and important parts of the whole business model. Therefore, we say that hedging constitutes an indispensable part of the business model of modern enterprises. Second, hedging is the core for credit enterprises, especially B2B enterprises to implement competitive strategies. B2B is a business model of buying low and selling high, including soybean processing. In fact, the core of this non-technical treatment is to buy low and sell high. If large enterprises want to form their own competitive advantages, they must implement systematic low cost. The reason why multinational grain and oil companies can last forever is that they have their own fleet, a large number of processing plants and marketing networks, they control grain sources, they even have pricing power in trade, their professional level of hedging, and their ability to grasp the price trend of bulk grain and oil is super strong. It is precisely because of a series of advantages that it has low-cost advantages in every value chain and industrial chain. No matter from planting, storage and transportation of agricultural products to exchange rate and downstream product sales, every link is closely related to price fluctuation, including exchange rate changes. In other words, if you can't use futures risk management tools in every link, your position will be exposed and you will face great risks. In the most important link of low-cost value, futures hedging is needed to control risks.
Third, hedging ability is the key element of the core competitiveness of modern enterprises. For example, COFCO summarized the core competitiveness of bulk grain and oil into three elements: First, resource control. Second, refined management. Our hedging ability based on research and development. Personally, after the system management rises to a certain degree, the core link of enterprise profit space is hedging. How to use R&D to purchase goods at a lower price than competitors in the futures market and sell them at a higher price in the futures market, so as to obtain good returns and protect our costs? Therefore, we believe that hedging ability is an important indicator to measure core competitiveness. Do you have an excellent R&D team, an excellent hedging operation team and a strict risk control system? These are the most important aspects of the core competitiveness of modern large-scale grain and oil enterprises. Hedging has risen to the perspective of enterprise business model and core competitiveness. We won't talk about the types of hedging.
Here we are more concerned about the key elements of hedging success or failure. First of all, let's talk about our experience in hedging. Many of our marketers' misunderstanding of hedging has killed many enterprises and customers. There are also problems in our enterprise. For example, some large enterprises are now making the same problem in trading that deviates from their main varieties. Explain that this problem is an eternal problem. Do not touch metal when you go to the futures market. Your grain depot needs neither copper stalks nor aluminum ingots. This risk is too great for you, and the ignorant call it risk. After finishing copper for a period of time, he has been unable to take care of himself and went bankrupt. Many enterprises make grain and oil, and he makes cotton. If you produce corn, you have to produce cotton. In our enterprise, no matter how much money you earn, it will not be included in your operating efficiency. In the Cao incident, in addition to his misjudgment of the trend, in addition to his over-the-counter trading, in addition to his deliberate fraud against gambling opponents, there is also a biggest problem, that is, he dumped a lot of positions. Excessive trading is a destructive thing. What proportion of hedging is the core part of hedging. Third, the problem of disconnection between futures and spot. Hedging and spot hedging do not cooperate, and they are independent, which is of no value to enterprise risk management. Can you make appropriate speculation besides hedging? It's possible. We also have a formed management method for this kind of transaction. Fourth, without good R&D support and hedging experience, the hedging effect is greatly reduced, and even hedging fails. The bear market came, he was naked, the bull market came, and he was wearing a skirt for three or nine days. Not only did you not hedge, but you also put yourself in. When the whole commodity market crashed on July 8, 2008, many spot enterprises were very hot-headed and suffered a lot. They didn't hedge in time, and copper fell from 1.6 million to 5800 yuan. Many companies have summed up this lesson that must be hedged, how much soybean oil I buy and how many empty orders I throw in futures. The price rose rapidly, and we rebounded in the first round, from 5000 yuan to 8000 yuan. We didn't make a profit in the process of rising, not only failed to achieve the purpose of hedging, but caused a loss. This is a major problem in hedging strategy. We believe that hedging needs several elements to reasonably evaluate the spot price difference. For example, in a bear market, the profit per ton is 30 yuan, but a bull market is coming. If you still evaluate according to this profit, you will be miserable. The bull market is coming, and every link in the value chain of a certain variety will have good profits. The profit difference between bear market and bull market is 500 yuan. In a bull market, our overall profit may be 1 000 yuan, and the profit rate of each link can be greatly improved. For example, making a ton of corn now earns 1 1,000 yuan, 1, 500 yuan. If 30 yuan gets involved, you're in big trouble. Under different circumstances, it is very important for us to make a good evaluation of spot price difference. Second, the accurate prediction of the conversion of cattle and bears. Any big bear market or crash is an important opportunity and opportunity for this industry to reshuffle and defeat competitors for industry mergers and acquisitions. We also saw that many companies went bankrupt when the bear market came, because there was no hedging method. Third, the accurate grasp of fluctuation rhythm and seasonal law. Whether it is a bull market or a bear market, it is impossible to keep rising or falling. We saw that cotton fell in 14 trading days 14 yuan. Sugar dropped from 75 million to 6300 yuan. If we can't grasp the seasonal law, hedging will be devastated. Each variety has seasonal characteristics of production and consumption, which is necessary for a major researcher or operator engaged in hedging.
Fourthly, I have been engaged in risk management for two years, and the promotion and attempt of an important operation model is also a summary of my work experience. This can be shared with you, and some of our frameworks and systems can be reported to you. There are several types of enterprise risks: systematic risk, credit risk and financial risk. I am now the general manager of the risk operation department of COFCO, and there are two risks under the jurisdiction of our department. First, operational risks. Second, customer credit risk. Operational risk refers to the price risk of an enterprise's net exposure position. Hedging is an integral part of your business model. What is opening a position? Open position is equal to the number of spot purchases plus multiple orders in the futures market MINUS the spot selling contract, and then MINUS the empty orders in the futures market. The price risk faced by open positions is operational risk. This regards the futures market as a channel for purchasing and selling, and we have an accurate definition of the management mode. Secondly, the connotation of operational risk control management is divided into three links. First, internal information flow management. As a grain and oil enterprise, can you accurately count the quantity and quality of your daily purchases, the location of your goods distribution, the quantity, price and payment status of your daily sales? First of all, the premise of all risk management operations is the accurate statistics of operational data. Without accurate statistical data, operational risk control is a dead letter. If an enterprise risk management doesn't have a very efficient ERP management platform, it can't calculate your exposure if it can get the data of purchasing and sales in time, including the positions in the futures market. Second, we count all the commodity information of this variety every day, such as the net income ratio of this variety, and we judge its trend through a lot of data collection every day. Third, risk assessment and management. For example, there are now 500,000 tons of corn. What are the risks of bull market? What are the risks of bull market? This constitutes a complete risk management closed loop. The third team is our company's hedging staff, who constantly buy and sell our futures market to adjust the inventory. This requires a complete risk control system.
We have specific management processes and systems. 1, strictly authorized management. We have a large trading company with an annual import of vegetable oil 1 10,000, and we have authorized different teams to hedge. The main content of authorization, one is variety, wheat can only be used as wheat, and varieties other than wheat are basically not authorized. Can the wheat department do something else? Those related to wheat can be authorized accordingly. When the price difference reaches a certain relationship, there is a substitution relationship, especially corn. I authorized more than 654.38 million lots of wheat and 654.38 million lots of corn. The rest has nothing to do with you. I won't give it to you at all. If there is, it will immediately give a warning and force the liquidation. We often look at four ABCD companies, for example, doing 500 tons of trade, and the static inventory in the factory may be 200-300, which is 50% of the inventory. 50% inventory only allows 10% gambling market exposure, which is authorized in proportion. Why are you doing this? It's actually quite simple. Such a large-scale enterprise pursues sustained and stable income, not profiteering. The pursuit of profiteering is followed by sudden losses. No one is spared, and these enterprises have experienced countless commodity collapses. Second, the issue of hedging ratio. If the hedging ratio is improper, it will be devastated. Including large multinational companies, wheat rose by 300 cents, soybeans rose to 1650 cents, and corn rose to 800 cents. Many companies finally cut their positions because of excessive hedging and cash flow interruption. Without the huge cash flow support of large enterprises, it may have been finished long ago. Therefore, the proportion of hedging in the futures market is the core link to reflect the level of hedging. According to my personal experience, the hedging ratio we use in bull market and bear market should be between 30% and 90%. SASAC requires Dalian commodity hedging not to exceed 90%. This ratio reflects your level. The proportion of each company is different, and the management level of each company is different. Authorization principle of stop loss limit. If it reaches 30%-50% of the budgeted operating profit, we will operate the risk control department to give early warning to the Division. How do we measure this thing? For example, if you have 500,000 tons of corn, and this corn is placed in Changchun 654.38+10,000 tons, Dalian 200,000 tons and Pearl River Delta 200,000 tons, I can dynamically settle your inventory with the local transaction price every day. Control your own profits and losses every day. Add the daily market profit and loss of futures, and I can calculate your daily profit and loss. To what extent is the refined management of large multinational grain and oil enterprises? At a certain point, he can balance operational data and financial data between spot and futures every day. We all know that financial data often lags behind operational data. Large multinational grain and oil enterprises have been able to balance daily financial data and financial data. By authorizing the opening of the warehouse, we set up a special department or even a special person to monitor it every day. Third, track and evaluate the special risks of major positions. For example, in June, there was a company with a hedging ratio of 80%. I said your ratio must be wrong. He is optimistic about the future. I said that your present ratio must be wrong. I said that the proportion should not exceed 50% at this time, but he has the right to operate independently, and I can't directly intervene. I wrote a special evaluation report for his position. His hedging position is too large, and everyone knows that soybeans have risen sharply, from 900 to 1380 USD. That is, through the special evaluation report and joint meeting system, the exposure risk status of subsidiaries is tracked, evaluated and corrected. Fourth, institutionalized transaction management. I hedged him at the group level, and he was free, so I bought it when he was free. In this way of hedging, he bears his risks and we bear our risks, but at the group level, we must never lose the assets of the whole enterprise because of one company. The above are some management methods and means currently adopted.