A new South American soybean contract would challenge world-dominating futures traded in Chicago markets
SAO PAULO, Brazil (Reuters) — Brazilian farmers are seeking support to develop a soybean futures contract that would ease deals between Brazil, the world’s largest soybean exporter, and top importer China, at a time of heightened trade tensions between the United States and China.
A growing chorus of growers, analysts, bankers and even a U.S. Department of Agriculture economist said it would make sense to establish such a contract to hedge growing risks as Brazil and U.S. soybean prices diverge.
Brazilian soybean port premiums soared to a record spread of around US$2 above Chicago prices following a decision by Beijing to slap a 25 percent tariff on U.S. soybeans in July in retaliation for duties imposed by President Donald Trump.
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A new contract could provide an alternative to the Chicago Board of Trade that dominates the global market for soybean pricing. CBOT’s parent company, CME Group Inc., did not immediately respond to a request for comment.
Bartolomeu Braz, president of Brazilian grain growers association Aprosoja, said domestic soybean farmers would like to see a new contract traded out of either Brazil or Argentina, the world’s third-largest soybean producer.
He discussed the idea with the Argentine ambassador in Brasília last year, and recently addressed the issue before a crowd of Chinese traders at a meeting of the FPA, the powerful agribusiness farm lobby of Brazil’s Congress.
“The next steps involve seeking technical and legal advice to advance the process,” he said in an interview.
Creating such a contract at Brazil’s B3 SA exchange is not complicated and would only require definition of standards relative to price, quality and quantity, said Frederico Favacho, an agribusiness lawyer representing Brazilian grain processing and exporting groups.
If the trade war continues and China wants to secure new-crop South American soybeans in January and February, the premium placed on the Brazilian soybeans “would be up for negotiation and that premium would be difficult or impossible to hedge via the CBOT,” said Dan Basse, an economist and president of Chicago-based consultancy AgResource.
The United States, the world’s second largest soybean exporter, last year sold about $12 billion worth of soybeans to the Chinese while Brazil’s sales to that country were just above $20 billion, according to government data.
China has been virtually out of the U.S. market since tariffs were announced.
It makes “economic sense” to seek a different location to trade Brazilian soy, Warren Preston, deputy chief economist at the USDA, said in an interview on the sidelines of a conference in Sao Paulo.
With trade disruptions, currency fluctuations and transportation differentials adding to risk for producers and buyers, Preston said it has become “more difficult for people who use a CME contract to try to hedge their purchases and sales.”
In July, S&P Global Platts started publishing three daily domestic soybean price assessments named SOYBEX CFR China, SOYBEX FOB Santos and SOYBEX FOB Paranagua.
While Chinese diplomatic and industry sources say a South American soybean contract should be explored, they have stopped short of full-throated support.
Qu Yuhui, minister-councillor at the Chinese embassy in Brazil, said the concept of a Brazil-China direct futures contract merits discussion.
“Both sides should work in the direction of any idea, such as having the two sides signing futures contract, that allows Brazil’s soy market and farmers to know how much Chinese demand there will be next year and lets Chinese buyers know what price they can get from Brazil,” he said in an interview last month.
A top Chinese grain firm executive said the idea would be “disruptive,” borrowing the Silicon Valley term for positive change.
“Innovation is welcome as the market is undergoing structural changes and margins are tight,” said the executive, who requested anonymity because he was not authorized to speak to media.
