1. What is it?
It is possible to trade with corn futures at BM&F. These contracts started to be traded by 2008. Their object or the commodity traded is the bulk corn in grains, yellow, with regular aspect and scent, in a good state, with no castor beans or any other undesired seeds, with no living insects, types hard or semi-hard, harvested in the latest crop in Brazil and in perfect conditions for human or herd consumption. Tolerances stand at (a) up to 14% of humidity; (b) max 1% of impurity after sieved in 3mm; (c) max of 6% of sprouts and no mouldy grains; (d) max of 12% of broken or smashed grains.
Trading happens in sacks and BRL. Each sack contains 60 kg of corn, sales tax free. The minimum lot (1 contract) corresponds to 450 sacks of 60 kg each, totalling 27,000 kg. It is possible to require a physical delivery. However, for such the buyer must meet BM&F’s requirements and show a particular document – Aviso de Intenção de Liquidação por Entrega (AILE). Each sack must be in accordance to BM&F’s standards. Besides, physical deliveries can involve transport, stocks, distribution costs, etc. Otherwise, if the buyer doesn’t want to call a physical delivery, all positions can be executed by the expiry dates, which happens in most cases.
The corn is one of the most important raw materials for herds feeding, and also important for human consumption, as well as its derivates, like flour, oil, starch, etc. Regarding the foreign trade, only 10% of the global production is destinated to external markets, which reflects the huge local demand for all producing countries. In Brazil, most of the output comes from central and southern states (90%), with Paraná state responding for 26% of the output, Minas Gerais for 16% and São Paulo for 11%. About the consumption, 64% of the local production is sold for feeding herds, with 36% destinated to feed poultry and 20% to swines. Industrial consumption represents 10% of the total domestic consumption, exports reach 11% of the total tonnage and the human consumption only 3%. The remainder is directed to other sectors.
The corn market was created for guaranteeing good prices for producers and buyers, providing a tool for protection for both sides. This way, futures prices can be hedged from buying or selling positions on this market. By doing that, producers can assure average prices to cover their costs and provide some profits. For buyers, it provides a way of balancing better their purchases and cash flow.
Pricing for corn futures change refleting the physical market conditions, well as the proximity of the maturity of the futures contract. Price floats depending on weather conditions, like raining, the region where it is produced and also the quality and quantity of each crop. In addition, there is also the harvest period, where usually the price of grain falls when it is at harvest time.
Corn futures terminology is found from the following factors:
1. Corn futures trading code is “CCM”.
2. Each letter corresponds to the expiry month as follows:
3. Expiry year.
Example: for dealing with a CCM contract expiring by March 2014, we have the following code:
CCM H 14
Corn futures have the following characteristics:
|Object||Bulk corn grains, scent and normal aspect, hard or semi-hard, yellow,
latest harvest, max 14% humidity
|Trading unit||450 sacks of 60 kg each (totalling 27 tonnes)|
|Minimal Quotation Change||R$ 0,01 per sack and 60 Kg|
|Maximum Quotation Change||5.0% on the price of the previous day’s settlement negotiated maturity.|
|Standard Lot||1 contract (equal to 450 sacks of 60 Kg or 27 tonnes)|
|Position Limits||1,400 contratos or 25% of opened positions per expiring date.|
|Trading Timetable||9am – 3h30pm (Regular trading) – 4h20pm – 6pm (After Market)|
|Last trading day||15th work day for the expiring month|
It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of Corn futures. The financial settlement of day trades is automatically performed on the first business day following the date of closing of the business.
The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.
For CCM contracts, the daily adjustment happens the day after the deal, or D+1. However, on the expiry date only, updates are made in the same day, or D+0.
It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate futures, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.
The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.
For CCM futures, the guaranty margin stands at 5.49% of the total trding amount, approximately.
There are two kinds of operational costs for dealing with corn contracts:
Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, costs reach 0.3% for regular operations and 0.07% for the day trade, based on the theoretical redeem value.
Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:
Emoluments: The fees charged by the BMF values related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. On CCM futures contracts, the fees are charged according to the following table:
|Number of contracts||Range value|
Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For CCMs, the charge reaches BRL0.52 per contract.
Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.
Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded.
For CCM contracts, fees reach 0.0023% perday and contract.
Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.
The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.
Currently, registration charges for CCM futures are estimated as follows:
|Number of contracts||Range value|
Corn futures expiration just happens in some months of the year. Expiring can happen in the following months: January (F), March (H), May (K), July (N), August (Q), September (U) e November (X).
By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held.
Corn ‘Roll Over’ – MR1
Roll over operations on corn – MR1 – comprise the strategy of dealing with two different expiration dates of corn futures at the same time.
Procedures and rules remain the same as regular contracts. However, for MR1 deals, instead of generating new positions in a new contract, it will be automatically transformed in two different operations: the first will have the expiry date set up as being the CCM original date (short leg), and the second fixed for expiration in the MR1’s set up date (long leg). Thus, the MR1 will not have open positions at the end of the day, being distributed on their business future maturities of Corn contract.
3. Profitability and risks
Making profits from investing in CCM futures is something that depends directly on changes at the corn spot prices and futures markets. Such change can be motivated by a serie of factors, peaks of demand or supply for a period, or the other way round. If the investor buys a CCM contract and prices drop, he loses money, which equally happens when he sells a contract and prices go up thereafter.
CCM futures are widely used as hedging tool, for protecting prices from floats that can be affecting both producers, farmers, processors and companies that demand these kind of raw materials. CCMs can be also used as a tool for speculating, where investors can take advantage of the price swings for gains.
Taxes over CCM futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.
For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.
All costs and fees paid for investing can be deduced from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the subsequential months, as long as the operations are similar.
The payment of taxes is the responsibility of the investor himself, except when the tax is direct at source and must be calculated and paid monthly on the last business day of the month subsequent to the determination. The calculation is performed over the term of the contract and not monthly.
Let’s assume a corn producers wants to set a minimal price for selling its output, in order to cover costs of harvest and plantation. Production reaches 7,200 sacks of corn. Then, he wants to hedge businesses against price drops, to prevent any losses. To find the size of the contract he needs to sell, we have the following calculations:
= Number of sacks / Contract size
= 7.200 / 450 = 16 sacks
So he needs to sell 16 contracts to be hedging his position, so let’s consider the following figures:
|Price per sack||R$ 19,00|
As days go by, then we have (daily settlements):
|Date||Daily Updates||Daily Settlements|
|D+60 (Maturity)||R$ 17,80||-2.160,00|
D+0: In the first day, 16 contracts are sold at R$19.00 per sack.
D+1: Corn prices drop to R$18.88. This way, the daily settlement is found by the difference between the current and the previous quotations (R$18.88 – R$19.00) times the number and size of contracts (16 * 450 = 19,800). As prices dropped and the producers is sold, we have a positive adjustment of R$864.00.
D+2: Another positive adjustment of R$1,656.00. (R$18.65 – R$18.88) * (16 * 450) = R$1,656.00.
D+3: A negative adjustment, as prices move up. (R$ 18.70 – R$18.65) * (16 * 450) = – R$360.00.
D+4: Another positive review with slowing prices. (R$18.13 – R$18.70) * (16 * 450) = R$ 4,104.00.
D+5: Yet another positive adjustment. (R$17.50 – R$18.13) * (16 * 450) = R$ 4,536.00.
Adjustments will happen through the maturity date. Just then we can find whether the investor made profits or losses from the assets. If corn prices reach R$17.80, then we have:
1. The producer sells his output (7,200 sacks) of corn for spot prices of R$17.80 per sack, making revenues of R$128,160.00 (7,200 sacks * R$17.80).
2. Profits of R$8,640.00 from futures, after all daily changes accounted (sum of all positives and negatives daily settlements).
3. With revenues from selling the output plus profits made with futures, we can reach a total income of R$ 136,800.00. It’s just like the producer had sold the output for R$19.00 per sack, rather than spot prices of R$17.80.
By the example above, we can deduct that no matter what prices behave, producers can hedge and protect their income by using futures, ensuring their banks in advance and ensuring greater stability to its activities, as well as better forecast your cash flow.
*Taxes and transaction costs have been disconsidered.
- Hedging positions is the top advantage of corn futures, protecting producers and buyers from price changes and providing them a better way of balancing their cash flow.
- Possibility of speculation in the price variation of corn. If investors think the price will fall, he may sell corn futures contracts, without investing money (only the initial margin) with your profit or loss on a daily basis in everyday settings, as variation in the price of a sack of corn.
- Daily updates;
- Guaranty margin;
- Income taxes;
- Expiry dates, so you cannot undefinedly carry up positions, needing to postpone to a new maturity date if necessary;
- High risk as variable income investment.