Mexico City, 22 December 2010

Mexico's government is steadily expanding its hedging strategy for grains and other crops to protect farmers from price volatility and is eyeing the possibility of using new kinds of derivatives next year. Mexico started an innovative program several years ago where the government provides a subsidy of between 50 and 100 percent to help producers and the Mexican food industry hedge their exposure to international commodity price movements.

The government is only recently making some public comments on its hedging program, in place since at least 2006, in an effort to calm fears about a potential rise in the price of tortillas, Mexico's main staple food. Tortilla makers say they could be forced to raise prices because of rising corn costs. U.S. corn futures rose for a sixth straight session to touch a 29-month high on Wednesday.

Chicago Board of Trade March corn gained 1.1 percent to $6.09 a bushel, the highest price since July 2008. But Mexico's Agriculture Minister has said more expensive tortillas were not justified because the bulk of next year's crop had been hedged.

The No. 1 crop covered by the program, known as ASERCA, is corn, followed by wheat, but the government also hedges smaller amounts of soy, sorghum, coffee, livestock and other products. Sugar is not yet included.

"Right now the derivative we use is the most conservative with the smallest risk ... futures options in Chicago," ASERCA's director of financial operations Jose Miguel Palacio said in an interview with Reuters. Mexico has bought 315,000 options contracts for different products through October this year and expects to reach 400,000 by the end of 2010, Palacio said. That represents double the number of contracts bought in 2008 as the program rapidly expands.

"We do not use futures markets or trade over-the-counter (OTC), because we are using a federal budget and that is too risky," Palacio said. "But we are interested in OTC markets and we are analyzing the rules we would need to follow to start (trading) next year," he said.

"This is not the first year (Mexico's options buying) has happened but I cannot recall it being announced in the media," said Rich Feltes, vice president of research for RJ O'Brien in Chicago.

MORE CREATIVE HEDGING

Palacio could not say when ASERCA would start trading directly with other counterparties but said ASERCA was talking with several banks -- including Santander, Deutsche Bank, JP Morgan, FC Stone, Rabobank, Morgan Stanley, and Goldman Sachs --about possibilities for trading in OTC markets.

"It's a big pie and everyone wants a piece," Palacio said. ASERCA's budget for 2011 is $842 million (10.37 billion pesos), said Palacio, a significant increase the $80 million (985 million pesos) used in 2006. Mexico hedged 14 million tonnes of corn, wheat, sorghum, hogs, cotton and other products in 2008 and 13 million tonnes in 2009, a 52 percent rise from 2006.

"They have gotten a little more creative in their hedging strategies in recent years," one commodities trader in Chicago said of the Mexican program. The government allows farmers and producers to enter the market during set periods in the fall-winter harvesting season and the summer-spring cycle.

The latest window was opened for corn, wheat and sorghum on Nov. 29 and will close on March 15 next year. The Mexican government has been actively buying Chicago Board of Trade corn and wheat options since early December, according to CBOT options traders.

Mexico produces mainly white corn, used in tortillas, and only a small amount of yellow corn, which is used mainly for animal feed. The country usually imports around 9 million tonnes of yellow corn each year from the United States.

The agriculture ministry sees 2011 corn output reaching 25 million tonnes, up from the 24.2 million expected this year and a big jump from 2009 when the country was hit by a drought.

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