Do We Need More Futures Contracts in Commodity Markets?

By Fabio Mattos

In the last couple of months, there has been news about a new futures contract for soybeans. The Financial Times and Reuters, among others, reported that the CME Group, the world’s largest futures exchange, is considering launching a futures contract based on Brazilian soybeans. The discussion seems to have started after trade issues between the United States and China resulted in a 25 percentage-point tariff on U.S. soybeans exported to China.

As Chinese buyers try to avoid the tariff by purchasing grain from other suppliers, notably Brazil, a new price dynamics between U.S. and Brazilian soybeans could be emerging. This raises the question of whether there would still be enough price correlation between the two countries for Brazilian producers and merchandisers to use the Chicago futures contract to hedge their soybean transactions. If the soybean price in Brazil is really becoming less correlated with the soybean price in the U.S., the local basis in Brazil will be less predictable and hence the hedging with Chicago futures contracts will become relatively less effective.

Source: unl.edu