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

Ferreira, George Lucas Máximo; Tonin, Julyerme Matheus; Alves, Alexandre Florindo

doi:10.1590/1806-9479.2021.250643

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Article • Rev. Econ. Sociol. Rural 60 (spe) • 2022 • https://doi.org/10.1590/1806-9479.2021.250643 linkcopy

Impacts of El Niño southern oscillation on hedge strategies for Brazilian corn and soybean futures contracts¹

El Niño Oscilação Sul, razão de preços soja-milho e estratégia de hedge

Authorship SCIMAGO INSTITUTIONS RANKINGS

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.

Keywords:
soybean; corn; effectiveness; optimal hedge ratio; cross hedge

Sea surface temperature (SST) anomalies	Nino 3.4 Index	Classification
$S S T \geq 0.5 ° C$	$\{\begin{matrix} i f N i n o 3.4 \geq 0.5 ° C = 1 \\ o t h e r w i s e = 0 \end{matrix}$	El Niño (EN)
$S S T \leq - 0.5 ° C$	$\{\begin{matrix} i f N i n o 3.4 \leq - 0.5 ° C = 1; \\ o t h e r w i s e = 0 \end{matrix}$	La Niña (LN)
$- 0.5 ° C \leq S S T \leq 0.5 ° C$	$\{\begin{matrix} i f - 0.5 ° C \leq N i n o 3.4 \leq 0.5 ° C = 1; \\ o t h e r w i s e = 0 v \end{matrix}$	Neutral state (N)
Climate Interaction Operator	$\{\begin{matrix} E N = 1; \\ N e u t r a l = 0; \\ L N = 2 \end{matrix}$	ENSO

Panel A1) DF-GLS Unit Root test for the corn market
Statistics			$C O R N_{p f}$			$C O R N_{c s v e l}$			$C O R N_{m g a}$	$C O R N_{t m}$			$C O R N_{s o r r}$				$C O R N_{B 3}$				$C O R N_{C M E}$
Level
$τ_{τ}$			-1.846			-0.826			-0.756	-0.321			-0.346				0.230				0.105
Lags			2			1			1	2			2				1				1
			1st Difference
$τ_{μ}$			-8.179			-6.964			-6.851	-6.619			-5.529				-6468				-6.272
Lags			1			1			1	9			1				2				1
Panel A2) DF-GLS Unit Root test for the soybean market
Statistics			$S O Y B E A N_{p f}$			$S O Y B E A N_{c s v e l}$			$S O Y B E A N_{m g a}$	$S O Y B E A N_{t m}$			$S O Y B E A N_{s o r r}$				$S O Y B E A N_{B 3}$				$S O Y B E A N_{C M E}$
Level			Level
$τ_{τ}$			0.587			0.064			0.067	0.537			0.871				1.317				-5.729
Lags			2			2			2	3			3				1				1
1st Difference			1st Difference
$τ_{μ}$			-7.194			-7.193			-7.189	-7.282			-6.717				-6.589				-7.629
Lags			3			2			1	2			2				3				1
Panel B) Johansen’s cointegration test for corn
$C O R N_{B 3}$
Statistics		rank			$C O R N_{p f}$			$C O R N_{c s v e l}$				$C O R N_{m g a}$			$C O R N_{t m}$					$C O R N_{s o r r}$
λ trace		r=0			191.38			162.75				157.70			114.60					69.32
λ trace		r<1			3.16***			4.65***				4.36***			3.95***					4.97***
λ max		r=0			188.21			158.10				153.34			110.64					64.34
λ max		r<1			3.16			4.65				4.36			3.95					4.97
$C O R N_{C M E}$
Statistics		rank			CORNpf			CORNcsvel				CORNmga				CORNtm			CORNsorr
λ trace		r=0			27.84			17.05***				17.35***				16.97***			14.00***
λ trace		r<1			2.85***			3.40				3.35				3.53			3.66
λ max		r=0			24.98			13.65				13.99				13.43			10.34
λ max		r<1			2.85			3.40				3.35				3.53			3.66
$S O Y B E A N_{C M E}$
Statistics		rank			CORNpf			CORNcsvel				CORNmga				CORNtm			CORNsorr
λ trace		r=0			53.92			38.48				36.97				62.92			44.07
λ trace		r<1			2.82***			2.85***				2.78***				2.85***			2.95***
λ max		r=0			51.09			35.63				34.18				60.07			41.11
λ max		r<1			2.82			2.85				2.78				2.85			2.95
Panel C) Johansen’s cointegration test for soybean
$C O R N_{B 3}$
Statistics	rank			$S O Y B E A N_{p f}$			$S O Y B E A N_{c s v e l}$				$S O Y B E A N_{m g a}$			$S O Y B E A N_{t m}$				$S O Y B E A N_{s o r r}$
λ trace	r=0			14.23***			14.89***				14.93***			15.97***				17.44***
λ trace	r<1			2.47			2.52				2.43			2.73				2.53
λ max	r=0			11.75			12.36				12.49			13.23				14.90
λ max	r<1			2.47			2.52				2.43			2.73				2.53
$C O R N_{C M E}$
Statistics	rank			$S O Y B E A N_{p f}$			$S O Y B E A N_{c s v e l}$				$S O Y B E A N_{m g a}$			$S O Y B E A N_{t m}$				$S O Y B E A N_{s o r r}$
λ trace	r=0			22.26***			17.29***				17.46***			19.28***				18.93***
λ trace	r<1			2.92**			2.88				2.78			3,03				3.09
λ max	r=0			19.34			14.40				14.67			16.88				15.84
λ max	r<1			2.92			2.8				2.78			3.03				3.09
$S O Y B E A N_{C M E}$
Statistics	rank			$S O Y B E A N_{p f}$			$S O Y B E A N_{c s v e l}$				$S O Y B E A N_{m g a}$			$S O Y B E A N_{t m}$				$S O Y B E A N_{s o r r}$
λ trace	r=0			53.92			38.48				36.97			62.92				44.07
λ trace	r<1			2.82***			2.85***				2.78***			2.85***				2.95***
λ max	r=0			51.09			35.63				34.18			60.07				41.11
λ max	r<1			2.82			2.85				2.78			2.85				2.95

Variables/Models	$S T C_{p f}$		$S T C_{c s v e l}$		$S T C_{m g a}$		$S T C_{t m}$		$S T C_{s o r r}$
Variables/Models	NC	C	NC	C	NC	C	NC	C	NC	C
Nino34	0.12***	-	0.08**	-	0.10***	-	0.09***	-	0.35***	-
EN	-	0.13***	-	0.07*	-	0.06	-	0.04	-	0.24***
N	-	0.06	-	0.14	-	0.08	-	0.09	-	0.50***
LN	-	0.12***	-	0.15***	-	0.13**	-	0.18***	-	0.51***
PREC	-0.00	-0.00	-0.00	0.00	-0.00	-0.00	-0.00***	-0.00***	-0.00	-0.00
TEMP	-0.00	-0.00	-0.00	-0.00	-0.00	-0.00	-0.03***	-0.03***	0.08***	0.08***
DOLcpa	0.00***	0.11***	0.14***	0.01***	0.12***	0.14***	0.06**	0.07***	-0.00	-0.01
Constant	1.91***	1.92	2.16***	2.17	2.19***	2.15	3.22***	3.16	0.29	0.28
R²-Adj.	0.094	0.093	0.072	0.073	0.074	0.070	0.112	0.116	0.10	0.103

Panel A) Results of effectiveness and OHR using spot prices for corn and future corn prices (B3).
Variables/Models	$C O R N_{B 3}$
	$C O R N_{p f}$				$C O R N_{c s v e l}$						$C O R N_{m g a}$					$C O R N_{t m}$				$C O R N_{s o r r}$
	NC		C		NC			C			NC			C		NC		C		NC		C
Nino34	0.08***		-		0.32***			-			0.33***			-		0.23***		-		0.32***		-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$	-		0.06**		-			0.24***			-			0.25***		-		0.12**		-		0.32**
	-		0.09***		-			0.36***			-			0.38***		-		0.28***		-		0.28***
	-		0.11***		-			0.32***			-			0.33***		-		0.25***		-		0.43***
${CORN}_{i, t - 1}$	0.38***		0.38***		0.15***			0.15***			0.08**			0.08**		-0.04		-0.04		-0.03		-0.03
${CORN}_{i, t - 2}$	0.15***		0.15***		0.01			0.01			-0.00			-0.00		0.12***		0.12***		0.08**		0.08**
${CORN}_{i, t - 3}$	-0.00		-0.00		-0.02			-0.01			0.00			0.01		0.03		0.04		-0.00		-0.00
${CORN}_{B 3, t - 1}$	0.07***		0.07***		0.25***			0.25***			0.28***			0.28***		0.26***		0.26***		0.26***		0.26***
${CORN}_{B 3, t - 2}$	0.09***		0.09***		0.15***			0.15***			0.18***			0.18***		0.20***		0.19***		0.30***		0.30***
Constant	0.00		0.00		0.00			0.00			0.00			0.00		0.00		0.00		0.00		0.00
$e$	0.438		0.438		0.363			0.365			0.326			0.328		0.199		0.202		0.104		0.103
Panel B) Results of effectiveness and optimal hedge ratio using spot prices for corn and future corn prices (CME).
Variables/Models		$C O R N_{C M E}$
		$C O R N_{p f}$				$C O R N_{c s v e l}$						$C O R N_{m g a}$				$C O R N_{t m}$					$C O R N_{s o r r}$
		NC		C		NC			C			NC		C		NC			C		NC		C
Nino34		0.05***		-		0.16***			-			0.18***		-		0.12***			-		0.33***		-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$		-		0.08***		-			0.15***			-		0.18***		-			0.07		-		0.33***
		-		0.04**		-			0.14***			-		0.16***		-			0.14***		-		0.31***
		-		0.04		-			0.28***			-		0.30***		-			0.12*		-		0.41***
${CORN}_{i, t - 1}$		0.44***		0.44***		0.30***			0.31***			0.22***		0.23***		0.05			0.05		0.00		0.00
${CORN}_{i, t - 2}$		0.16***		0.16***		0.02			0.02			0.02		0.02		0.16***			0.16***		0.07**		0.07**
${CORN}_{CME, t - 1}$		0.05***		0.05***		0.13***			0.13***			0.14***		0.14***		0.08**			0.09**		0.11**		0.11**
${CORN}_{CME, t - 2}$		0.05***		0.05***		0.06**			0.06**			0.07**		0.07**		0.06**			0.06**		0.22***		0.22***
constant		0.00		0.00		0.00			-0.00			0.00		0.00		0.00			0.00		0.00		0.00
e		0.374		0.373		0.225			0.227			0.189		0.191		0.074			0.073		0.097		0.095
Panel C) Results of calculations of effectiveness and optimal ratio of cross hedge using the spot prices of corn and soybean futures (CME).
Variables/Models		$S O Y B E A N_{C M E}$
		$C O R N_{p f}$					$C O R N_{c s v e l}$						$C O R N_{m g a}$				$C O R N_{t m}$				$C O R N_{s o r r}$
		NC		C			NC			C			NC		C		NC		C		NC			C
Nino34		0.06***		-			0.18***			-			0.21***		-		0.10		-		0.37***			-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$		-		0.05*			-			0.10*			-		0.13**		-		0.03		-			0.35**
		-		0.05**			-			0.18***			-		0.21***		-		0.13*		-			0.39***
		-		0.09**			-			0.29***			-		0.32***		-		0.15*		-			0.35**
${CORN}_{i, t - 1}$		0.44***		0.44***			0.33***			0.33***			0.25***		0.25***		0.05		0.05		0.02			0.02
${CORN}_{i, t - 2}$		0.15***		0.15***			0.01			0.02			0.02		0.02		0.16***		0.16***		0.09**			0.09**
${SOY}_{CME, t - 1}$		0.06***		0.06***			0.11***			0.11***			0.13***		0.13***		0.10**		0.10**		0.06			0.06
${SOY}_{CME, t - 2}$		0.05***		0.05***			0.04			0.04			0.05		0.05		0.08**		0.08**		0.22***			0.22***
constant		0.00		0.00			0.00			0.00			0.00		0.00		0.00		0.00		0.00			0.00
e		0.371		0.371			0.201			0.204			0.166		0.169		0.067		0.067		0.082			0.081

Panel A: Results of effectiveness and optimal hedge ratio using spot prices of corn and soybean futures (CME).
Variables/Models		$S O Y B E A N_{C M E}$
		$S O Y B E A N_{p f}$					$S O Y B E A N_{c s v e l}$						$S O Y B E A N_{m g a}$						$S O Y B E A N_{t m}$						$S O Y B E A N_{s o r r}$
		NC		C			NC			C			NC			C			NC			C			NC			C
Nino34		0.54***		-			0.56***			-			0.58***			-			0.41***			-			0.61***			-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$		-		0.45***			-			0.50***			-			0.51***			-			0.41***			-			0.54***
		-		0.48***			-			0.57***			-			0.58***			-			0.42***			-			0.62***
		-		0.65***			-			0.65***			-			0.67***			-			0.40***			-			0.69***
${SOY}_{i, t - 1}$		0.00		0.00			-0.06			-0.06*			-0.06**			-0.06**			-0.18***			-0.18***			-0.25***			-0.25***
${SOY}_{i, t - 2}$		0.00		0.00			0.03			0.02			0.04			0.04			0.02			0.02			-0.00			-0.00
${SOY}_{CME, t - 1}$		0.17***		0.17***			0.16***			0.17***			0.16***			0.16***			0.26***			0.26***			0.35***			0.35***
${SOY}_{CME, t - 2}$		0.06**		0.06**			0.03			0.03			0.02			0.02			0.11***			0.11***			0.14***			0.14***
Constant		0.01		0.01			0.03			0.03			0.03			0.03			0.03			0.03			0.04			0.04**
e		0.469		0.477			0.488			0.490			0.503			0.506			0.350			0.348			0.407			0.408
Panel B: Results of hedge effectiveness and optimal hedge ratio using spot prices for soybean and futures corn prices (B3).
Variables/Models	$S O Y B E A N_{B 3}$
	$S O Y B E A N_{p f}$				$S O Y B E A N_{c s v e l}$						$S O Y B E A N_{m g a}$						$S O Y B E A N_{t m}$						$S O Y B E A N_{s o r r}$
	NC		C		NC			C			NC			C			NC			C			NC			C
Nino34	0.21***		-		0.22***			-			0.24***			-			0.16***			-			0.25***			-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$	-		0.19***		-			0.24***			-			0.26***			-			0.19***			-			0.30***
	-		0.18***		-			0.19***			-			0.20***			-			0.15***			-			0.21***
	-		0.30***		-			0.27***			-			0.27***			-			0.16***			-			0.27***
${SOY}_{i, t - 1}$	0.07**		0.08**		-0.03			-0.02			-0.03			-0.03			-0.07**			-0.07**			-0.13***			-0.13***
${SOY}_{i, t - 2}$	0.02		0.02		0.03			0.02			0.03			0.03			0.04			0.04			0.05			0.05
${SOY}_{i, t - 3}$	-0.00		-0.00		0.05			0.05			0.05			0.05			0.07**			0.07			0.09**			0.09**
${SOY}_{B 3, t - 1}$	0.02		0.02		0.05**			0.05**			0.04			0.04			0.08**			0.08**			0.05*			0.06*
${SOY}_{B 3, t - 2}$	0.03		0.03		0.04*			0.04*			0.04*			0.04***			0.03			0.03			0.07**			0.08**
cons	0.00		0.00		0.01*			0.01*			0.01			0.01			0.01			0.01			0.03			0.04
e	0.113		0.115		0.107			0.107			0.112			0.112			0.080			0.078			0.105			0.104
Panel C: Results of effectiveness and optimal hedge ratio of cross hedge using the spot prices of soybean and future corn prices (CME).
Variables/Models	$C O R N_{C M E}$
	SOYBEAN pf					SOYBEANcsvel						SOYBEANmga						SOYBEANtm						SOYBEANsorr
	NC		C			NC			C			NC			C			NC			C			NC			C
Nino34	0.25***		-			0.29***			-			0.30***			-			0.22***			-			0.31***			-
$h^{*} \{\begin{matrix} E N \\ N \\ L N \end{matrix}$	-		0.29***			-			0.34***			-			0.35***			-			0.27***			-			0.40***
	-		0.21***			-			0.26***			-			0.27***			-			0.20***			-			0.28***
	-		0.33***			-			0.32***			-			0.33***			-			0.16**			-			0.31***
${SOY}_{i, t - 1}$	0.05		0.06*			-0.02			-0.02			-0.03			-0.03			-0.08**			-0.08**			-0.12***			-0.12***
${SOY}_{i, t - 2}$	0.01		0.02			0.03			0.03			0.02			0.03			0.04			0.05			0.05			0.05
${CORN}_{CME, t - 1}$	0.10***		0.11***			0.11***			0.11***			0.11***			0.10***			0.11***			0.11***			0.19***			0.18***
${CORN}_{CME, t - 2}$	0.05**		0.05**			0.03			0.03			0.04*			0.04*			0.06**			0.06**			0.04			0.04
constant	0.01**		0.00*			0.02**			0.02**			0.01**			0.01**			0.02			0.02			0.02			0.02
e	0.199		0.203			0.203			0.204			0.212			0.212			0.159			0.160			0.173			0.174

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[1] Fonte: Adapted from Minaki & Montanher (2019)

Impacts of El Niño southern oscillation on hedge strategies for Brazilian corn and soybean futures contracts1

El Niño Oscilação Sul, razão de preços soja-milho e estratégia de hedge

Abstract:

Impacts of El Niño southern oscillation on hedge strategies for Brazilian corn and soybean futures contracts¹