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Chicago exchange adds South American contract

The Chicago Board of Trade's new South American futures contract had a respectable showing for its first day of trading May 20. Soybeans for July delivery traded at $6.41 on opening day, compared to $6.32 for the U.S. contract for July delivery. Several hundred contracts were traded.

“It did fairly well for a first day trading,” said Alan Brugler, Brugler Marketing and Management. “Certainly it wasn't as thin as other first day trading I've seen. But you want to see it build from here. As a speculator, I wouldn't touch it right now. There is not enough liquidity there yet.”

The South American soybean future is the exchange's first agricultural contract with international physical delivery points. The new contract was created to meet the risk management needs of producers and consumers worldwide of soybeans grown in Brazil, Argentina and Paraguay.

CBOT Chairman Charles P. Carey said, “the exchange was pleased with the launch.”

Brazil and Argentina supply more than 50 percent of the world's soybeans and export to Europe and Asia. The contract is expected to provide increased trading opportunities for market participants around the world.

Brugler noted that there is a soybean exchange in Brazil currently. “But there are some difficulties if the South American farmers use the U.S. contract to hedge with, which many of the larger farmers do.

“The two main problems are the currency translation and the basis risk. The price at the Port of Paranagua doesn't track exactly with prices in Chicago, which is deliverable along the Illinois River. So the CBOT is trying to address those problems by having a contract deliverable at the Port of Santos or Paranagua.”

When asked what impact the South American contract may have on the U.S. soybean market, Brugler noted, “The first question is whether there is a buy-in into the contract? When the South American producers start to use it is key. If there is no volume, no liquidity, it's no good to anybody.

“The second question is if they start hedging the CBOT South American contract, do they quit hedging in the U.S. contract? That could potentially change the volume and open interest during certain times of the year, particularly when their new crop comes out of the field.”

From a producer standpoint, there could be some opportunities to capitalize on price differences between the U.S. and South American contracts, according to Brugler. “You would look at the difference, then adjust for the freight and other differentials. If that spread gets out of line, you buy the Brazil, sell the U.S. or sell the Brazil, buy the U.S. In my conversations with pit traders, there's already a nickname for one of these spreads. They call it a “BUS spread” for Brazil-U.S. spread.”

For the time being, the South American soybean contract “is more of a background factor for the U.S. marketer,” according to Brugler. “If it starts to get a lot of volume and liquidity, it has more potential as a hedging vehicle or a spread trading vehicle. But it's going to be more of a commercial contract, rather that something a lot of individual producers are going to be using.

“The exception to that would be producers who have farms in Brazil. It makes it very convenient for them to hedge using the U.S. market and not have to worry about a lot of government restrictions on moving money internationally.”

If the contract gains enough volume and liquidity to attract the funds, “that's another angle,” Brugler said. “To have a successful contract, you have to have speculative participation. They won't do it until they see they can get in and out without taking a major loss.”

Regular trading hours for CBOT South American soybean futures in the open auction market are from 9:30 a.m. to 1:15 p.m., Central Time, Monday through Friday. On the CBOT's electronic platform, trading hours are from 7:31 p.m. to 6:00 a.m., Central Time, Sunday through Thursday.

The CBOT South American soybean futures contract will be physically settled, with delivery points located in the ports of Paranagua and Santos, Brazil.


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