Step 3 · Supply Chain

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Step 3 · Supply Chain

Case Study: A Long Hedge on 5,000 Tonnes of Soybean Meal

A 12,000-head dairy operation needs another 5,000 tonnes of soybean meal before the end of August, based on its annual ration schedule. Spot quotes 2,980 RMB/t in April, but the farm has under 900 tonnes of usable flat-warehouse capacity: buying the whole lot up front means no space to store it and roughly 15M RMB of working capital tied up months early — and soybean meal held through a hot, humid summer for more than a month tends to cake, mould and lose protein. With the market expecting tight third-quarter arrivals and rising prices, the farm opens a long hedge on the Dalian Commodity Exchange, letting gains on the futures leg offset the rising cost of the physical purchase.

Volume
5,000 t
Margin committed
~1.07M RMB
Effective cost increase
+180 RMB/t

Contract and Parameters

Instrument
Soybean meal futures on the Dalian Commodity Exchange (code M)
Contract and size
M2509, 10 t per lot, 500 lots bought (5,000 t)
Why the September contract
January, May and September are the liquid benchmark months; September also expires after the late-August buying window, so no roll near delivery
Margin rate
Modelled at 7% (exchange margin plus the broker’s add-on)
Timeline
Position opened mid-April, closed in late August alongside the physical purchase
Position rule
Futures matched 1:1 to the physical volume, one direction only, no net exposure

How the Two Legs Offset

One lot of 5,000 tonnes, with the physical and futures legs netted on the same sheet.

  1. Mid-April

    Open

    Spot
    2,980 RMB/t
    Futures M2509
    3,060 RMB/t
    Basis
    −80 RMB/t

    Buying 500 lots carries a notional value of 15.30M RMB and ties up about 1.07M RMB in margin at 7%. Against the 14.90M RMB an April stockpile would have cost, capital committed falls by roughly 93% — with no storage cost and no spoilage.

  2. Late August

    Close

    Spot
    3,580 RMB/t (+600)
    Futures M2509
    3,480 RMB/t (+420)
    Basis
    +100 RMB/t

    Buying 5,000 tonnes at 3,580 RMB/t costs 3.00M RMB more than April. Closing the 500 lots returns a 2.10M RMB gain. Netted across both legs, the purchase costs 0.90M RMB more than it would have in April.

  3. Reconciled

    Result

    Effective cost increase
    +180 RMB/t
    Hedge effectiveness
    70%
    Uncovered cost
    0.90M RMB

    The cost increase drops from 600 RMB/t to 180 RMB/t. The 0.90M RMB left uncovered is exactly the 180 RMB/t the basis strengthened, from −80 to +100 — a hedge transfers price risk, but basis risk still has to be managed through spread tracking and contract selection.

Risk Notes

  • Hedging is not speculation: the futures position is sized to the physical volume, runs one direction, and leaves no net exposure.
  • Basis risk cannot be removed: the spot-futures spread moves with the commodity, the region and the contract month, and it sets hedge effectiveness — track it continuously.
  • Keep headroom for margin calls: a 300 RMB/t move against the position would require roughly 1.50M RMB in additional margin. Spot procurement gets cheaper at the same time, so total cost stays controlled.
  • Delivery and close-out: soybean meal futures settle against standard warehouse receipts, but in practice positions are closed before the delivery month and the physical purchase runs through the usual channel.

The prices, basis and rates above are an illustrative model of how a long hedge works. They are not historical quotes and are not investment advice.