Effectiveness of United States Corn Futures Contracts as Hedging Instruments for Mexican Corn Producers

Mexico pledged 550 million pesos ($41 million USD) in 2012 to fund a price risk management program for agricultural producers (Stargardter, 2012). The program utilizes risk management tools based in the United States, primarily options on futures contracts. In some cases, the subsidy levels for option premiums were as high as 100%, but the program has scaled these back to an 85% subsidy or less. The purpose of this project is to determine the effectiveness of United States corn futures contracts as hedging instruments for Mexican corn producers. Local cash prices for multiple locations across Mexico are reported by La Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación. These prices are available weekly from January 1998 to present. Futures prices for corn are from the CME Group. To determine the effectiveness of the CME Group corn futures contract as a price risk tool for Mexican corn producers linear regression models are estimated where the local cash price is the dependent variable and the futures price is the independent variable. The results of the model offer insight on the basis and optimal hedge ratio for Mexican producers, and we can comment that using futures contracts of yellow corn negotiated at the CME Group as a price risk management tool is effective if we consider white corn national data, since our regression model proves with a ninety five percent of confidence level that prices in Mexico are explain eighty three point five percent by prices at the CME group. However, basis given by the government appear to be insufficient according to our analysis.