Hedging FX Exposure in Mexican Corn Imports
The United States is the world’s largest producer of corn. Corn futures were launched by the Chicago Board of Trade (CBOT) in 1877 and have served as the global benchmark for most of the near-150 years since. Mexico, itself the 8th biggest corn producing country in the latest full marketing year, has historically been the primary export destination for U.S. corn, overtaken by China in 2021 and 2022. Corn futures are an important tool to hedge corn trade flows. Importers face additional foreign exchange (FX) risk.
Mexican imports of U.S. corn in the latest marketing year were estimated to be 16.5 million metric tons, while domestic production totaled 28.1 million metric tons. Imports of corn account for around one-third of Mexican supply, when stocks are taken into account and thus the changing value of the Mexican peso (currency code MXN) against the U.S. dollar can have a substantial effect on Mexico’s corn market. With imported corn predominantly used for animal feed, FX market fluctuations can be felt in the livestock industry as well.
To see an example of this, we can look at corn prices, both in U.S. dollars and Mexican pesos over the period from January 2022 to March 2024.
During 2022 the relationship between the Mexican peso and the U.S. dollar had been reasonably stable, typically in a range between MXN 19 and MXN 20 per dollar. After that the peso steadily strengthened, and in March 2024 the rate of exchange was below MXN 17 per dollar.
As can be seen from the chart, this development in the FX market has had an impact on Mexican corn importers. Whilst corn prices in the U.S. have been falling towards the end of the period, in terms of Mexican pesos, the price for imports has fallen even faster.
This highlights the uncertainty that FX market prices can have for importers. Favorable movements in FX rates may well be followed by less favorable ones and vice versa. For importers of corn into Mexico, a reversal of the recent trend could create an adverse impact for importers.
CME Group offers futures and options contracts on the Mexican peso, which can be used to manage this FX exposure. These contracts are physically delivered at maturity, meaning that if held all the way to maturity, US dollars are exchanged for Mexican pesos to fulfil the contractual obligation. Each futures contract is in the amount of MXN 500,000. Using prices in March 2024, this equates to a contact value of around US$29,700, which can be compared to the dollar value of a Corn futures contract at the same time of around US$22,000.
Below are examples to show how the Mexican Peso futures and options contracts at CME Group can be used to hedge the FX component of Mexican corn import transaction.
Scenario
In early May, a Mexican corn importer has an order to buy 1,500 metric tons of U.S. corn to be delivered in one month’s time. The agreed terms are for payment in U.S. dollars at a rate equal to the Corn July futures price on the delivery day, plus five cents per bushel.
For the importer, this creates a one-month period of uncertainty regarding the cost that will actually be paid for the corn. This has two components: the price of corn and USD/MXN foreign exchange rate. Both these components of the risk can be hedged with futures.
Hedging with FX futures
The exposure to the CBOT Corn price can be hedged with CBOT Corn futures. With each futures contract representing 5,000 bushels of corn, buying 12 futures for the July delivery will effectively hedge this position with respect to the price of corn. This futures position can be closed out on the day the trading company takes delivery of the order.
The current price of the CBOT Corn futures July contract is 440 cents per bushel. Buying futures at this price will hedge the exposure to corn price fluctuations. With a price of 440 cents per bushel established through the use of the Corn futures hedge, the trading company can be confident the cost of the imports will be 445 cents per bushel, i.e., including the agreed price premium.
The FX component of the transaction can be hedged using the CME Group Mexican Peso futures contract. To determine the hedge transaction required, the trading company needs to determine whether to buy or sell futures, and the quantity to be transacted.
The CME Group Mexican Peso futures contract has a contract size of MXN 500,000, and prices are quoted in terms of the number of U.S. dollars per peso. Buying a CME Group Mexican Peso futures contract is equivalent to buying Mexican pesos in exchange for U.S. dollars. Selling the contract is equivalent to selling Mexican pesos in exchange for U.S. dollars.
To purchase the corn, the Mexican trading company will wish to convert pesos into U.S. dollars in order to make the payment, and therefore, will be buying U.S. dollars and selling Mexican pesos. This requirement can be hedged by selling Mexican Peso futures contracts. These futures should be sold to implement the hedge and subsequently purchased to close out the position once the FX hedge is no longer required. The expiration of the Mexican Peso futures contract occurs in the middle of the named expiry month. For example, the June futures contract expires in mid-June. This would make it the appropriate futures contract month hedge for this transaction, which has an intended completion date in early June.
The number of FX futures needed to hedge the transaction can be calculated by considering the currency exposure. With the corn futures hedge, the trading company will expect to pay US$186,015 to purchase the corn.
