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Corn futures, regional pricing and risk management

High liquidity in the Brazilian corn futures market

Corn prices are mainly formed by domestic supply and demand, and, in many cases, by regional conditions. This aspect leads, as recently observed, to gaps between domestic and international values in the short-term – although prices are cointegrated in the long-run. This is partly related to the fact that corn trades among countries are equivalent to slightly more than 15% of the production – as for soybean and byproducts, as a comparison, this number is roughly two-thirds of the global production.

 

In 2008, the stock exchange (current B3) released the Cash Settled Corn Futures, using Campinas (SP) as a basis – this region involves 162 municipalities. The cash settlement occurs by the arithmetic average of the last three days of the ESALQ/BM&FBovespa corn price Index.

 

B3 has also listed the Corn Price Basis Futures Contract for Cascavel (PR), Rio Verde (GO) and Triângulo Mineiro (MG). However, there is no liquidity for these contracts.

 

In general, there is interest to trade in future markets when prices are oscillating significantly in the spot market. In Brazil, corn quotes hit record levels in the first semester of 2021, encouraging trades of future and option contracts.

 

According to data from B3, in the first semester of 2021, 1.63 million corn contracts were traded, being 87.1% future contracts and 12.9% option contracts. Thus, trades involved almost 44 million corn tons, a record for a semester – includes contracts up to 2022. Between July/20 and June/21, 2.83 million contracts were traded (76.4 million tons), being 86.1% future contracts.

 

Increases in corn supply and productivity

The good liquidity for corn futures is also related to the supply chain as a whole, since the production. Over the last 15 years, a series of new aspects favored productivity gains and supply increase, ranking Brazil among largest exporters in the world. One of these aspects is the commercial use of genetically modified varieties, the consequent genetic improvement, adjustments in planting periods and more efficient use of fertilizers and pesticides.

 

In the 2006/07 season, Brazil produced 51.4 million corn tons, upping to 102.6 million tons in 2019/20. In the current crop (2020/21), production is estimated at 93.4 million tons. From 2006/07 to 2020/21, the supply has increased at 5.06% per year, because the average productivity and the area rose at 2.60% and 2.39% per year, respectively. Between 2006/07 and 2020/21, the domestic consumption changed from 42.8 million tons to 72.1 million tons, increasing the surplus.

 

In 2006/07, the first season accounted for 71.2% of the total supply. For 2020/21, the second crop is estimated to represent three-quarters of the national supply. In the period, the first season production decreased at 3.08% per year, due to the decrease of 6.19% per year for the area; however, the productivity rose at 3.31% per year.

 

In the second crop, in turn, the supply moved up at 12.61% per year. This scenario is related to the adjustment in periods and production systems, leading the crop to register area increases at 9.3% per year in the second season – productivity also increased, at 3.03% per year.

 

The corn seed production and the future market

In this scenario, it is worth mentioning that there are corn seed producing companies in Brazil, which close partnerships with producers to reproduce and/or multiply their technologies. After the processing, the seeds are available to producers for commercial planting.

 

These companies have partnerships with producers especially in regions where there is irrigation, which allows the sowing in periods when the volume of rainfall is low, reducing the risk of losses.

 

In general, in the producing process, companies are responsible for making the technology available, eliminating the male rows and the detasseling, and for the harvest and the processing, along with some pesticides. Producers, in turn, are responsible for other activities and fertilizing.

 

The main aspect is the payment to producers. Companies tend to offer payments that involve a volume of production that seems like the commercial crop, with minimum and maximum volumes. There are additional payments, depending on the relation between producer and company.

 

Cepea surveys with corn seed producers indicate that these players have the opportunity to set values referring to a future contract at B3 during the crop, applying a discount according to the price formation in the reference region. When producers decide to set the price, the company that will pay tends to hedge with operation at B3.

 

Information from producers indicates that the discount offered by these companies is equivalent between regions in São Paulo and in Minas Gerais, increasing partially in Goiás and in the west of Bahia. As expected, the most significant discounts are applied in the Mato Grosso regions.

 

Information about corn seed production shows how the market effectively considers prices at B3 for the price formation in different regions in Brazil, increasing the liquidity of futures contracts. On the other hand, as this type of company has been spreading in several locations across the country, along with the use of biotechnology, the productivity of the Brazilian corn has been improving.

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