The corn-for-soybean fixing deal is essentially a fixing deal in which the price of corn is determined by a percentage of the price of soybeans, rather than by a reference market for the grain. This type of business is useful for those who plant corn on rented fields to be paid in quintals of soybeans, when the price of corn becomes too expensive relative to the price of soybeans in light of historical prices, or for those who are looking for fixed corn deals and are not available.
The corn-for-soybean fixing deal is essentially a fixing deal in which the price of corn is determined by a percentage of the price of soybeans, rather than by a reference market for the grain. This type of business is useful for those who plant corn on rented fields to be paid in quintals of soybeans, when the price of corn becomes too expensive relative to the price of soybeans in light of historical prices, or for those who are looking for fixed corn deals and are not available.
The corn-for-soybean fixing deal is essentially a fixing deal in which the price of corn is determined by a percentage of the price of soybeans, rather than by a reference market for the grain. This type of business is useful for those who plant corn on rented fields to be paid in quintals of soybeans, when the price of corn becomes too expensive relative to the price of soybeans in light of historical prices, or for those who are looking for fixed corn deals and are not available.
It is therefore a strategy that does not leave a firm price: The resulting value can be better or worse than the current value, depending on what happens to prices.
However, the price of corn becomes dependent on soybeans:
- In many cases it is the unit on which rents are closed.
- Is more volatile than corn
- It is carried forward to November
- It has a greater number of hedging tools.
It is therefore a strategy that does not leave a firm price: The resulting value can be better or worse than the current value, depending on what happens to prices.
- In many cases it is the unit on which rents are closed.
- Is more volatile than corn
- It is carried forward to November
- It has a greater number of hedging tools.
July corn to be fixed for 56% of soya. Fixing until July by forward market and from then until the end of the year by slate.
July corn to be fixed for 56% of soya. Fixing until July by forward market and from then until the end of the year by slate.
This is the date on which the corn will be delivered. It is usually March/April for early and July for late, but business can be done in any month that has negotiation.
Fixing percentage
This is the percentage of the soybean price that will be taken to make the fixing. Example: if the fixation rate is 54% and soybeans are worth USD$ 280/tt, the resulting value of the fixation is 54% * USD$ 280/tt = USD$ 151.2/tt. This value is calculated by dividing the corn price by the soybean price, but is normally discounted slightly more for structuring costs.
Fixing time
Normally these deals are arranged prior to delivery of the commodity, so it is fixed by the soybean forward market until delivery of the corn. Then there may be a longer fixation period in which the percentage will be applied to the available price of soybeans.
This is the date on which the corn will be delivered. It is usually March/April for early and July for late, but business can be done in any month that has negotiation.
Fixing percentage
This is the percentage of the soybean price that will be taken to make the fixing. Example: if the fixation rate is 54% and soybeans are worth USD$ 280/tt, the resulting value of the fixation is 54% * USD$ 280/tt = USD$ 151.2/tt. This value is calculated by dividing the corn price by the soybean price, but is normally discounted slightly more for structuring costs.
Fixing time
Normally these deals are arranged prior to delivery of the commodity, so it is fixed by the soybean forward market until delivery of the corn. Then there may be a longer fixation period in which the percentage will be applied to the available price of soybeans.
The price ratio is calculated by dividing the price of corn by the price of soybeans on the day of the transaction (although a certain value is usually deducted for transaction costs in setting up and monitoring the transaction).
In order to evaluate a proposal, the historical average of the relationship must be taken into account. To do this, the prices of recent years are consulted, adjusting the values to the current export duty scheme (it may happen that the duties that were in force at another time have been higher or lower, which influences the relationship). In this way, if the ratio is above the historical average, it is a good time to take it, and vice versa
The price ratio is calculated by dividing the price of corn by the price of soybeans on the day of the transaction (although a certain value is usually deducted for transaction costs in setting up and monitoring the transaction).
In order to evaluate a proposal, the historical average of the relationship must be taken into account. To do this, the prices of recent years are consulted, adjusting the values to the current export duty scheme (it may happen that the duties that were in force at another time have been higher or lower, which influences the relationship). In this way, if the ratio is above the historical average, it is a good time to take it, and vice versa
The price ratio is calculated by dividing the price of corn by the price of soybeans on the day of the transaction (although a certain value is usually deducted for transaction costs in setting up and monitoring the transaction).
In order to evaluate a proposal, the historical average of the relationship must be taken into account. To do this, the prices of recent years are consulted, adjusting the values to the current export duty scheme (it may happen that the duties that were in force at another time have been higher or lower, which influences the relationship). In this way, if the ratio is above the historical average, it is a good time to take it, and vice versa
In this case, there is a price risk as the income is linked to the value of corn and the rental costs are linked to the value of soybeans. If soybeans rise sharply and corn does not rise in the same proportion, more corn will have to be sold to cover the rent payment. By fixing a ratio of corn to soybeans, what we are doing is fixing the amount of tonnes of corn we will need to pay the agreed rents in soybeans. Let’s suppose we rent 1,000 ha paying 10 quintals of soybean per hectare, so we will have to deliver 100 tt of soybean at harvest for rent. But in that field we plant corn. In the following table we show assumed values for corn and soya and calculate how many kilos of corn we should deliver to pay the rent:
As you can see the amount of corn to be delivered to cover the rent is variable. It depends not only on the price of corn, but also on the price of soya. In the table we use slight variations, but they could be larger. Suppose now that we were to make a corn contract to be fixed for soybeans at 56%, to calculate the tonnes to be sold to cover the rental cost we would have to take as the corn price the result of the fixing. The fixation now corresponds to 56% of the value of soya, so when soya goes up, so does the resulting value of corn. As can be seen in the table, the amount of maize to be delivered for rent will now always be the same. This is because both the value of the maize and the value of the rent now depend on the price of soybean
In this case, there is a price risk as the income is linked to the value of corn and the rental costs are linked to the value of soybeans. If soybeans rise sharply and corn does not rise in the same proportion, more corn will have to be sold to cover the rent payment. By fixing a ratio of corn to soybeans, what we are doing is fixing the amount of tonnes of corn we will need to pay the agreed rents in soybeans. Let’s suppose we rent 1,000 ha paying 10 quintals of soybean per hectare, so we will have to deliver 100 tt of soybean at harvest for rent. But in that field we plant corn. In the following table we show assumed values for corn and soya and calculate how many kilos of corn we should deliver to pay the rent:
As you can see the amount of corn to be delivered to cover the rent is variable. It depends not only on the price of corn, but also on the price of soya. In the table we use slight variations, but they could be larger. Suppose now that we were to make a corn contract to be fixed for soybeans at 56%, to calculate the tonnes to be sold to cover the rental cost we would have to take as the corn price the result of the fixing. The fixation now corresponds to 56% of the value of soya, so when soya goes up, so does the resulting value of corn. As can be seen in the table, the amount of maize to be delivered for rent will now always be the same. This is because both the value of the maize and the value of the rent now depend on the price of soybean
10 qq soja / 56% maíz/soja = 17,86 qq de maíz por ha
10 qq soja / 56% maíz/soja = 17,86 qq de maíz por ha
Seek a differential value for corn by detecting that the current ratio is higher than normal.
Corn and soybean prices have communicating vessels. Firstly, they compete for area, so if one becomes very expensive in relation to the other, for example corn, producers will devote more area to it, the supply of corn will increase and then its price will tend to fall. That additional area will come out of less soybean area, whose production will fall. This would increase the price of soybeans in the future. Moreover, to a certain extent they are substitutes, as corn and soybean flour are used in animal feed. By analysing historical price data, the average level of the relationship between these two can be detected. It is important to adjust past quotations to the changes in export duties in recent years. Thus we arrive at the average ratio of the last few years:
- 58% in the case of April corn / May soybeans.
- 54% in the case of July corn / July soybeans.
If the July/July ratio is at 57% then it is logical to expect it to go down. Therefore taking the corn business to be fixed for soybeans, a profit will be made. It is important to note that this will generate a price premium for corn with respect to its future evolution, however, this is not restricted to a minimum value and does not fix the price of corn. If for example we take the ratio of corn to soybeans at 60% in March, with soybeans at 250 and corn at 150, the ratio could go down to 55%, but with falling markets. Example with a soybean at 230 and corn at 127. If the 60% ratio is set, corn will be charged at 138. This can be useful for stockpiles or cooperatives, whose profit arises from commissions and the differential between the buying and selling price, rather than from the price level taken by the prices.
Seek a differential value for corn by detecting that the current ratio is higher than normal.
Corn and soybean prices have communicating vessels. Firstly, they compete for area, so if one becomes very expensive in relation to the other, for example corn, producers will devote more area to it, the supply of corn will increase and then its price will tend to fall. That additional area will come out of less soybean area, whose production will fall. This would increase the price of soybeans in the future. Moreover, to a certain extent they are substitutes, as corn and soybean flour are used in animal feed. By analysing historical price data, the average level of the relationship between these two can be detected. It is important to adjust past quotations to the changes in export duties in recent years. Thus we arrive at the average ratio of the last few years:
- 58% in the case of April corn / May soybeans.
- 54% in the case of July corn / July soybeans.
If the July/July ratio is at 57% then it is logical to expect it to go down. Therefore taking the corn business to be fixed for soybeans, a profit will be made. It is important to note that this will generate a price premium for corn with respect to its future evolution, however, this is not restricted to a minimum value and does not fix the price of corn. If for example we take the ratio of corn to soybeans at 60% in March, with soybeans at 250 and corn at 150, the ratio could go down to 55%, but with falling markets. Example with a soybean at 230 and corn at 127. If the 60% ratio is set, corn will be charged at 138. This can be useful for stockpiles or cooperatives, whose profit arises from commissions and the differential between the buying and selling price, rather than from the price level taken by the prices.
Advantages
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- Allows to “transform” corn into soybeans, which is useful when renting fields where payment is in quintals of soybeans per hectare.
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- Allows fixing for a more volatile product.
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- It can generate a price premium for corn.
- It allows fixing for a grain that has more hedging tools.
Disadvantages
-
- It does not set prices or establish a minimum value.
- If the soybean market were to suffer a sharp decline, it could impact corn prices.
- If export duties are increased on soya and not on corn, or if duties are lowered for corn and not for soya, you will end up losing out.
Advantages
- Allows to “transform” corn into soybeans, which is useful when renting fields where payment is in quintals of soybeans per hectare.
- Allows fixing for a more volatile product.
- It can generate a price premium for corn.
- It allows fixing for a grain that has more hedging tools.
Disadvantages
- It does not set prices or establish a minimum value.
- If the soybean market were to suffer a sharp decline, it could impact corn prices.
- If export duties are increased on soya and not on corn, or if duties are lowered for corn and not for soya, you will end up losing out.