CME Looks to Brazil as Trade War Shifts Global Soybean Flows

(Bloomberg) -- The world’s largest derivatives exchange is looking to Brazil as President Donald Trump’s trade war shifts global soybean flows.

CME Group Inc. is working on developing potential risk management tools for the Brazilian market, Chief Executive Officer Terry Duffy said in an interview Thursday at the Association of Futures Markets annual conference in Chicago. Brazil has become “very prominent” in agriculture, especially soybeans, he said, while American exports are suffering due to the trade dispute with China.

CME Looks to Brazil as Trade War Shifts Global Soybean Flows

Brazil overtook the U.S. as the top exporter of soybeans in the 2012-13 season, with the gap in shipments between the two countries widening further in the past year as the tit-for-tat tariff spat prompted Chinese buyers to turn to Brazilian supplies. That’s boosted the need for new hedging mechanisms as CME futures are for soybeans delivered in the U.S.

“We are working with our product development folks on different risk-management tools based off the Brazilian market, but we are not ready to roll out anything just right now,” he said. “We are concerned about how the beans are being exported out of the U.S. They are still getting to China, but they are just going through a different direction, and not direct, because of the tariffs. We want to make sure pricing doesn’t get skewed.”

Physical or Cash?

CME, owner of the world’s benchmark for corn, wheat and soybean prices, had previously confirmed it was considering starting a Brazilian soybean contract. Duffy declined to comment on which products the bourse was looking at and whether CME would favor physical deliveries as in its Chicago futures or a cash-settled mechanism as in its Black Sea futures.

Agricultural derivatives markets are following the path of energy, with traders increasingly accepting cash-settled futures. The CME itself has started Black Sea wheat and corn contracts based on prices published by S&P Global Platts, while brokers have sought to capitalize on over-the-counter swaps based on such pricing. Earlier this year, Swiss brokers SCB traded its first Thai Rice swap based on the Live Rice Index.

“It all depends on whether you design it as a swap, or if you design it as a pure futures contract,” Duff said. “If you design it as a swap, you will obviously cash settle the product, so that’s the way you would be looking at it.”

‘Clear as Mud’

American farmers are struggling to keep afloat as the trade war leaves last year’s harvest piling up. The U.S. Department of Agriculture, which will update its forecasts Friday, expects record stockpiles at the end of the season. Low prices and the lack of exports are weighing on income, with farmer bankruptcies in Midwest states rising 30 percent in 2018, according to the Federal Reserve Bank of Minneapolis.

The U.S. and China began a pivotal round of trade negotiations on Thursday, with hours to go before the Trump administration ratchets up tariffs.

“I’m concerned about producers of these products and the uncertainty of what their costs are going to be on production and exports,” Duffy said. “I would hope they come to a resolution soon because the American farmer needs to have some clarity.”

“Right now I think it’s as clear as mud what’s going on with the American farmer as far as exports go, and that’s not healthy,” he said.

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