Impacts of El Niño southern oscillation on hedge strategies for Brazilian corn and soybean futures contracts

Abstract

Climate influences the variations in soybean and corn prices; thus, we assessed the relationship between the El Niño Southern Oscillation (ENSO) with soybean-to-corn price ratio to determine potential impacts on price risk management. The commercial areas of Passo Fundo (RS), Cascavel (PR), Maringá (PR), Uberlândia (Triângulo Mineiro), and Sorriso (MT) covered in the study were chosen according to the MAPA edaphoclimatic classification. To estimate the effectiveness and optimal hedge ratio, the static and generalized model by Myers and Thompson (1989), adapted by Lien and Tse (2000), was used to include the cointegration approach in the analysis. The innovation of this study is the inclusion of the climate variable ENSO in this hedging approach. The findings showed that ENSO, especially La Niña, affects soybean-to-corn price ratio and hedge strategies. These results highlight the need to expand the use of futures contracts to reduce the price risk during the occurrence of ENSO events.

Financial Derivatives and Gold: Choosing the Appropriate Risk Hedging Instrument under COVID-19 Crisis

“…By incorporating the ENSO climate component into the optimal hedging ratio model, the impact of climate on hedging and cross-hedging strategies can be verified. Through this analysis, it was found that the adoption of appropriate hedging strategies can mitigate the price risk of the corn spot market [5]. This is supported by the practices of several companies, including Bunge, in the United States.…”

“…The corporation's strategy to mitigate interest rate risk is to secure upcoming rates by choosing suitable interest rate swaps or option contracts based on its fixed-rate and floating-rate debt profile. This approach minimizes interest expense and debt valuation sensitivity to fluctuations in interest rates [6].…”