Latin America and the Caribbean Region LCSSD Occasional Paper Series on Food Prices 75649 Agricultural Commodity Exchanges in Latin America and the Caribbean Diego Arias Alfredo Ferreira Lamas Musa Kpaka March 17, 2011 LATIN AMERICA AND THE CARIBBEAN REGION LCSSD Food Papers Series AGRICULTURAL COMMODITY EXCHANGES in LATIN AMERICA and the CARIBBEAN Diego Arias, Senior Agriculture Economist, LCSAR Alfredo Ferreira Lamas, Consultant, LCSAR Musa Kpaka, Summer Intern, LCSAR March 17, 2011 2 The Agricultural work has beenCommodity partlyExchanges financedin by Latin America the and the Trust Fund Caribbean for Environmentally and Socially Sustainable Development (TFESSD) Agricultural Commodity Exchanges in Latin America and the Caribbean 1 March 17, 2011 Dear Colleagues : After falling sharply during the global financial crisis—in the second half of 2008—food and oil prices have resumed their upward trend. International food prices have risen almost to the levels of 2008 and some commodities like maize have reached record highs. Virtually all the commodity that matter for LAC countries are partaking in this strong wave of price increases. Moreover, the rate of price increases has accelerated in the last three to four months, with food price indices reaching roughly the same level as at their previous peak, in 2008. This increase in food prices presents some great challenges for some LAC countries, in particular in the Caribbean, TABLE of CONTENTS but it also presents a great opportunity, as many LAC countries are net food exporters and are a food source for other Regions in the world. It is within this context that we are launching the Sustainable Development Occasional Paper Se- ries on Food Prices . We hope that this will contribute to add to the knowledge and exchange of innovative experiences I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 in food policy and programs in LAC. The Occasional Paper Series on Food Prices is expected to include country-specific as well as regional analytical work related to food, logistics, and agriculture policy, and will seek to learn from the 2007-2008 food price crisis and put II. Current situation of Agricultural Commodity Exchanges in LAC . . . . . . . . . . . . . . . . . . . . . . . 5 forward innovative concepts for improving the efficiency of food markets and for reducing the vulnerability to exoge- nous shocks in the food production and trade in the LAC Region. The series starts with papers on: (i) the impact evalu- III. The Development of Agricultural Commodity Exchanges in LAC . . . . . . . . . . . . . . . . . . . . . . 7 ation of the 2008 food price subsidy on the rice sector of Haiti, (ii) an analysis of the transmission of international food prices to domestic markets in Central America, (iii) an assessment of the conditions for developing agriculture com- modity exchanges in LAC, (iv) a policy guidance for improving logistics and transport efficiency in the context of food IV. Preconditions for Developing a Well-Functioning Agricultural Commodity Exchange . . . . 9 prices, and (v) an analysis on logistics and grains in Argentina. We hope to continue publishing more papers soon to provide additional input to the debate as we take on the challenges and opportunities of the new dynamics in international food markets in the Region and elsewhere. V. Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Sincerely,   Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Laura Tuck Ethel Sennhauser Director Sector Manager Sustainable Development Department Agriculture and Rural Development Aurelio Menendez Jordan Schwartz Sector Manager Lead Economist Transport Sector Sustainable Development Department 2 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 3 I. INTRODUCTION II. CURRENT SITUATION of AGRICULTURAL COMMODITY EXCHANGES in LAC 1. A commodity exchange is a goods and/or financial 2. Today several agricultural commodity exchanges 3. Agricultural commodity exchanges have long existed exchange had 122 million futures and option contracts market where different groups of participants trade com- exist throughout the Latin America and Caribbean (LAC) in the LAC region. In fact, the region is home to one of in 1997 (UNCTAD report, 1998), and in 2008 BM&F was modities and commodity-linked contracts, with the un- Region. They facilitate trade and financial products in the world’s oldest grain cash-commodity exchanges and ranked 12th globally for the number of futures traded derlying objective of transferring exposure to commodity countries whose economies have a relatively large share chambers of commerce, such as Bolsa de Cereales de and/or cleared (Ferreira Lamas, 2008). Today, there are price risks (UNCTAD). A commodity exchange that only of primary and secondary agricultural activities or either Buenos Aires (1856) and “Bolsa de Comercio de Rosa- at least 10 countries in the LAC Region (Figure 1) with at trades goods is known as a physical or “cash/forward� account for auctions on substantial food imports. This rio� (1884), both in Argentina and their affiliated futures least one functioning agricultural commodity exchange. market, while the exchange that trades price deriva- report looks at the current development of agricultural exchanges (MATba and Rofex, respectively). The region Tables 3 and 4 in the Appendix give a detailed status of tives is known as financial or “futures/options� market commodity exchanges in the LAC Region and offers pub- has since seen a steady increase in the establishment of agriculture commodity exchanges in the LAC Region. (see Glossary for detailed definitions). Some agriculture lic policy recommendations that can foster the develop- exchanges, and in the last two decades exchanges have commodity exchanges have both. Agricultural commod- ment of such exchange markets. spread throughout the region. The “Bolsa de Mercador- ity exchanges date as far back as the early 18th century. ias & Futuros� (BM&F) of Brazil stands out as one of the Modern exchanges, notably the Chicago Board of Trade most successful cases in the region. Created in 1985, the (CBOT) was created in 1848, recently merged with the Chicago Mercantile Exchange (CME), is one the oldest and most successful futures exchanges worldwide. 4 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 5 FIGURE 1: SIZE OF COMMODITY EXCHANGES IN THE LAC REGION, 2007-2008 III. THE BAHAMAS MEXICO BELIZE HAITI CUBA HONDURAS JAMAICA DOMINIC REPUBLIC the DEVELOPMENT of AGRICULTURAL GUATEMALA COMMODITY EXCHANGES in LAC NICARAGUA EL SALVADOR TRINIDAD AND TOBAGO COSTA RICA GUYANA VENEZUELA SURINAME PANAMA 4. The development of agricultural commodity exchang- and overall growth in international trade in LAC opened GUYANE COLOMBIA es in the LAC Region, especially in the last two decades, new opportunities and challenges for the development of has been accelerated by number of macro-level factors the agricultural sector in LAC (see Figure 2 for the evolu- ECUADOR such as: (i) trade liberalization; and (ii) market-oriented tion of Agriculture Tariffs and Food Import Values). Bilat- pro-agricultural policies. eral and multilateral trade agreements among countries in the region, as well as internationally, with the US and TRADE LIBERALIZATION: the EU, required setting up organized and secure ways of BRAZIL 5. Liberalization of agricultural trade has led LAC coun- buying and exchanging agricultural goods across borders PERU tries to develop agricultural commodity exchanges. Liber- with reduced transaction cost. An increase in interna- alization of trade, especially in agricultural commodities, tional demand and supply of agriculture commodities BOLIVIA SIZE OF COMMODITY FIGURE 2: EVOLUTION OF AGRICULTURE TARIFFS IN LAC VS. IMPORT VALUE (1989-2009) EXCHANGES FOOD AND BEVERAGE (BEC) TARIFFS VS. IMPORT VALUE LAC (LOW AND MIC) High and very high volumes 40000000 45 Medium/low volumes PARAGUAY 35000000 40 Low volumes CHILE 35 30000000 Very low or non-functioning ARGENTINA 30 25000000 URUGUAY 25 USD More then 1 Commodity 20000000 % Exchanges 20 15000000 15 10000000 10 5000000 5 0 0 89 90 991 992 993 994 995 996 997 998 999 0 0 0 0 01 0 02 0 03 0 04 0 05 0 06 0 07 0 08 19 19 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 Imports Value (USD) Simple Average (Tariff %) Merchandise Trade (% of GDP) Source : Ferriera Lamas (2008) and WDI (2007) Source : WITS and WDI Database 6 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 7 has created the need in many LAC countries to develop FIGURE 3: NOMINAL RATE OF ASSISTANCE agricultural commodity exchanges in order to improve (NRA - UNWEIGHTED) FOR AGRICULTURE the legal/regulatory framework around purchase/sales PRODUCTS IN LAC COUNTRIES contracts, facilitating agriculture credit and trade financ- 30 ing, providing standardize quality control mechanisms, IV. and in some countries, expanding the tax revenue base by facilitating tax payments and registration of trade. 20 MARKET-ORIENTED PRO-AGRICULTURE 10 SECTOR POLICIES: 6. An increase in pro-agriculture public policies has PRECONDITIONS for DEVELOPING a 0 likely had an impact on the development of commodity exchanges in LAC However it is not sure that agriculture 1965- 1970- 1975- 1980- 1985- 1990- 1995- 2000- 1969 1974 1979 1984 1989 1994 1999 2004 WELL-FUNCTIONING AGRICULTURAL support policies have been market-oriented. Since the -10 COMMODITY EXCHANGE mid-1980s the LAC Region has seen a reduction of the anti-agricultural policy bias. The relative support to the -20 agriculture sector, vis-à-vis other sectors, went from being 9. There are pre-conditions that are important for the 11. A large number of traded contracts are crucial for negative to neutral or slightly positive in certain cases as success of agricultural commodity exchanges. Hetero- reduced price volatility. This pre-condition is very pertinent measured by the Nominal Rate of Assistance1 or NRA (see -30 geneity in activity and success levels among agricultural for financial exchanges with agricultural commodity fu- Figure 3). As openness to trade has increased since the Exportables Import-competing Total commodity exchanges in LAC suggests that, besides the tures and options contracts as well as for exchanges with 1980s as well, this is evidence that countries in LAC have macro-level agriculture policy factors (trade and farmer physical or cash/forward contracts. Market liquidity in this been dedicating a relatively higher level of fiscal resourc- Source : Anderson and Valdes, 2008 support), there are other requirements or pre-conditions, context means that the agriculture commodity to be ex- es to the agriculture sector. This increase in pro-agriculture some unique to the specific countries, that determine changed needs to have the ability to be sold and bought public policies has likely had an impact on the develop- mation and possibly being a significant source of encour- the success of agricultural commodity exchanges. These without causing a significant movement in its price and ment and growth of commodity exchanges in the Region; agement for transactions through commodity exchanges. requirements or preconditions are drawn from experi- with minimum loss of value. In other words, there needs however the increase in NRA does not ensure that agricul- ences observed throughout the LAC Region and are not to be a big enough number of contracts being traded ture support policies have been market-oriented. 8. Agricultural commodities exchanges have developed meant to be an exhaustive list. However, they could be for physical commodities (or financial products) so that to different degrees, because, despite the fact that the extrapolated to other Regions. The typology of pre-con- there is competition for buying, selling, and keeping long 7. Public policies that distort prices (not market-oriented) above mentioned macro-level factors are common to ditions is drawn from Euna Shim (2006) and shed light over or short open positions, so that price volatility is reduced inhibit the development of commodity exchanges, so in most LAC countries, the degree of market-orientation of market failures that need to be overcome in order for the due to the law of large numbers. Furthermore, when an order for trade through commodity exchange to grow, agriculture policies from country to country. For instance, exchanges to develop. These preconditions apply for ag- exchange is liquid, it allows market participants to switch the increase in pro-agriculture policies must also be the BM&F of Brazil thrives, whilst the BNA (Bolsa Nacio- riculture commodity exchanges that trade futures/options positions and holdings easily and immediately. A thresh- market-oriented. Indeed, in LAC, some of the new policy nal Agropecuaria) of Colombia went through a slower and all (except one) also applies for cash/forward-only old minimum level of liquidity is often required to attract measures implemented during the past decades in sup- development pace.. Other countries, notably Mexico exchanges. We have identified the pre-condition that’s investors/intermediaries to an exchange. The absolute port to the agriculture sector have been: (i) decoupled and Uruguay, do not have an agricultural commodity not crucial for cash/forward-only exchanges. amount of the threshold depends on the size of the agri- payments to farmers, and (ii) the increase in investments exchanges. Both Mexico and Uruguay, for instance rely on culture commodity and the financial market. in agriculture public goods and services (such as R&D, SPS neighboring exchanges (the USA and Argentina markets MARKET SIZE, MARKET LIQUIDITY AND systems, rural infrastructure, etc.). These policy measures respectively) for price information and hedging, although MINIMUM VOLUME OF CONTRACTS INSTITUTIONAL AND REGULATORY require additional fiscal resources but are non-distortive in physical distance to existing exchanges is not a factor for 10. For agricultural commodity exchanges, market size FRAMEWORK nature, meaning that they do not have a direct effect on the development of new markets (as seen in the sec- and a high minimum volume of trade are crucial for its 12. A set of clear and transparent rules that govern or act farmer’s production decisions. The increase in the NRA of tion below). Although there still is uncertainty about the long-term viability. With a small market size and a small as reference points for market participants and potential the agriculture sector of the region and policy changes precise conditions for a commodity exchange to develop volume of exchanges, there is no guarantee that farm- entrants are essential for all agricultural commodity ex- from price support to direct support (and public goods and grow, the experience from LAC country cases show ers or buyers will match in the market. Often the reduced changes. Lack of transparent rules governing entrants, for support) have reduced the distortion on price formation that there is room for further development and growth of number of agribusinesses (i.e. the situation of monopso- instance, has often stifled competition in some countries. mechanisms in LAC, allowing more transparent price for- agricultural commodity exchanges. nies) makes it impossible for any actor to benefit in trading Regulations about membership procedures and limits, through standard contracts or from making the price of or minimum capital and trade requirements, should be financial or physical products public. negotiated by participants and made public. Further- 1 T  he Nominal Rate of Assistance (NRA) measures the % increase in revenue to farmers as a result of public policies and programs (included payments decoupled from production). more, exchanges may attract both local and interna- 8 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 9 tional capital. Consequently the introduction of futures buyers and sellers of agriculture commodities in cash variety of standard agriculture commodity contracts, fu- FROM A CASH MARKET TO A and options contracts for instance, will require financial exchanges have been the easier access to credit and tures exchanges in LAC will struggle if they offer the same FINANCIAL MARKET regulations that are up to standard with international trade financing by using warehouse receipts and other contracts, in particular for commodities whose prices 19. Agriculture commodity exchanges in LAC have seen laws. Sound financial management will also have to be in instruments. are highly correlated with international markets. In other an evolution from physical trading (cash-forward market) place, since international investors may demand dollar or words, why would an agriculture commodity exchange to trading financial products (options-futures) and attract- euro-based contracts. COMMITTED AGRIBUSINESSES develop, for example in Mexico or Uruguay, if local agri- ing local and international investors. The pre-conditions 16. Agribusinesses are essential for the development of businesses can just trade or hedge through the Chicago for an agriculture commodity exchange to transition from 13. Entry rules and public sector intervention also play a agricultural commodity exchanges, as they are the main Board of Trade (CBOT) or through the Buenos Aires or physical to financial trading are mentioned above, in key role in promoting the development of agriculture com- beneficiaries. Supermarkets, processing and trading Rosario Exchanges respectively? Special efforts have to particular the presence of financial intermediaries and modity exchanges. However, transparency in the regula- plants, food exporters/importers, agricultural input suppli- be made to differentiate contracts to avoid competition market liquidity. For example, a potential reason why tory and institutional framework is not always enough. So ers, and farmers must see the benefit of trading through and to lower basis risk . Basis risk can be driven by differ- 2 Nicaraguan (versus other Central American Countries) even when the rules are clear, they need to encourage the exchange rather than outside the exchange. Some ences in the commodity standards (contracts) and/or has seen a relative fast development of its agriculture access of private sector actors (brokers, intermediaries, of the elements that agribusinesses consider for deciding policy factors such as trade barriers, capital controls and/ commodity exchange (BAGSA), and its recent piloting traders) in order to promote participation and trading whether to support or not trading through the exchange or price control/distortion policies that have an impact in of financial trading, is the fact that Nicaragua has the through the exchange rather than outside the exchange. are (the list is not exhaustive): (i) the tax benefits; (ii) the the price correlation and transmission between markets. second highest agriculture credit/total credit ratio (Trivelli An example of overly-strict entry rules are excessive capi- benefits from having a publicly known reference price; For instance, the Unwashed Arabica Coffee contract of- & Venero 2007), signaling to the presence of financial tal requirements for brokers or capping the number of in- (iii) the benefits from a third party quality control mecha- fered through the BM&F is quite successful, and it is slightly intermediaries actively present in the agriculture sector. termediaries trading through the exchange. On the other nism; (iv) in some cases the quality standards, controls different from its washed counterpart offered on the New hand, an example of promotion of agriculture exchanges and grades agreed to be traded through the exchange; York Board of Trade (NYBOT). Sometimes differentiation 20. Four country cases from LAC are presented below, has been the tax-incentives provided by Governments for and (v) the arbitration mechanism. For example, farmers will mean offering the same contracts at different times or describing the status of their agricultural commodity ex- agribusinesses that traded through the exchange. of maize in Mexico benefit from a Government guaran- contract-months of the year. changes, based on the above pre-conditions and in ad- tee scheme (Programa Ingreso Objetivo) that provides a dition to the macro-level policy factors mentioned above. FINANCIAL INTERMEDIARIES (*) minimum farm income, so price guarantee schemes will These country cases were selected due to their different 14. Financial intermediaries are important to share the make private price hedging instruments associated with situations (see Appendix for the full list of the current situa- credit risk. Financial Intermediaries may include banks, commodity exchanges irrelevant. tion of LAC agriculture commodity exchanges). brokers, traders, etc. (see Glossary for details). Exchanges that trade financial instruments (futures/options) act as STANDARDIZED BUT DIFFERENTIATED clearinghouses clearing and settling contracts between CONTRACTS market participants, reducing the risk of counterparty 17. Most of the agriculture commodities traded through default. By acting as the counterparty to every trade, the exchanges need to have a commonly agreed set of exchange transfers risk from one commercial party to objectively measured standards (grading). The inability another, performing a credit/counterparty risk manage- of standardizing agriculture products through common ment function for the market. All trades going through the and objective grading and quality control measures, exchange are backed financially by the exchange itself can hinder the development of agriculture commodity or by its own or an independent clearinghouse and this is exchanges. Agriculture commodities need to have a set often a key reason for establishing a financial commodity of easily measured standard criteria to assess the quality exchange: when there are enough buyers and sellers in of the product in order to have a reference price as- the market doing multiple transactions with each other, signed to it that represents the product’s quality. However, the cost of trying to manage credit exposure to mul- it should be noted that, besides the case of some highly tiple counterparties, on multiple transactions, becomes developed cash-markets, there is no impediment for buy- very high. Thus, the clearinghouse function ensures that ers and sellers for filing non-standard bilateral contracts the counterparty/credit risk is shared/absorbed by all. with the exchanges, tailored to their respective needs, Therefore, financial intermediaries need to be of a large though subject to the laboratory’s quality controls and/or enough number and have the willingness to use such commodity exchange arbitration by delivery time. clearinghouse. 18. The differentiation of contracts is crucial to avoid 2  asis risk here is defined by the difference in price movements between the international market (i.e. CBOT) and the domestic market that B 15. Financial intermediaries are not crucial for cash/ competition and to lower basis risk. Because international would trade such commodity. If the basis risk is low, agribusinesses would not see the need to develop a local commodity exchange, and would thus use the international market to trade/hedge. In many cases exporters and arbitrageurs would go long buying cash, forward or forward exchanges. However an important incentive for agricultural commodity exchanges already carry a wide futures contracts in one market and, simultaneously or at a later time, would sell or go short in the delivery market. 10 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 11 TABLE 1: CASES OF AGRICULTURAL COMMODITY EXCHANGES IN LAC COUNTRIES Selected LAC Country Cases - Agricultural Commodity Exchanges (2007 - 2008 data) Liquidity Differentiated Committed actors Institution and Financial Market size and Market-oriented products regulations intermediaries volume of trade government policies V. Argentina Very liquid ex- Not affected much Many mills, Regulations up to Introduction of fi- Large market size Privatization in Buenos Aires changes, trading by competi- supermarkets, international stan- nancial derivative and large volumes the 1990, port (BCBA) and up over US$9 tion from other wholesalers, dard, because of in early 2000s of trade. In 2005 concessions, Rosario (BCR) billion in cash/for- exchanges. Main agribusinesses long history with boosted the com- ROFEX traded elimination of are LAC’s largest ward and futures products traded: and exporters. exchanges. modity sector. over 11 million price controls agricultural cash- and options. Soybean wheat, Private ports are Market is contracts. for agri-food, commodity ex- changes. MATba corn, sunflower. crucial for the exchanges in self-regulated. Many exchanges all favored the agricultural CONCLUSIONS and POLICY is the largest grain futures exchange, Rosario and Bahia Blanca. throughout the country, allowing exchanges. Since 2002 taxa- RECOMMENDATIONS followed by Rofex many partici- tion and exports pants. quotas affected formal trade, ag- ricultural produc- tion, and exports (soybeans, corn, 21. The agriculture sector in LAC is heterogeneous and so 23. Promotion of standardized and independent quality wheat, beef, dairy is the level of and preconditions for the development and control services. Some of LAC’s Exchanges use standard products). growth of their agriculture commodity exchanges. The de- contracts for reducing transaction costs. Governments Peru Liquidity was Hard yellow corn Supermarket and Regulations are Few brokers, but Market size There is limited (BPP and BPL US$1 million per was its main wholesalers still stringent and the last commod- was low but the government price velopment of such exchanges faces different challenges can help by promoting the use of lab testing and quality were cash mar- year only in cash/ contract. not fully integrated similar for regula- ity exchange was exchange has not support schemes and opportunities that should be addressed on a case- control services within the exchange. In some cases, such kets) forward contracts. in the system. tion for the stock fully owned by the been able to grow, for agricultural Est.1998, autho- Government re- exchange. stock exchange. mainly due to producers. by-case basis. However, a country-by-country analysis has as in Colombia and El Salvador, the public sector has rization cancelled quirement for high stringent regula- yielded important experiences and lessons learnt in terms mandated for public sector purchasing contracts for food in 1998 capital has limited tions. The of some of the observed pre-conditions needed for these reserves or food aid and other supplies or international the market. markets to develop further. Given that these pre-con- food or fertilizers donations to be traded through the Panama US$150 million Has variety of ag- Exporters and Law mandates The Exchange Market size is Little or no public (BAISA is a cash per year. riculture products: Importers are theExchange, but attracts most of relatively small price intervention ditions either require no public support or for the public commodity exchange to create the initial conditions (and market) Yellow corn, rice, major players it is self-regulated the major banks but it imports policies. sector to provide an enabling environment so that private liquidity) for crowding-in the private agribusiness sector Est.1997 tomato sauce, since the govern- and run efficiently. in the country close to 90% pork, other. ment authorized and has many of raw agrifood financial and agribusinesses can operate through the into trading and using the exchange and its independent the exchange as brokers. products. commodity exchange, the question becomes whether quality control service. a channel to dis- Between 1999 tribute tariff–quota and 2008 the Governments can proactively put in place policies or pro- packages. trade volume grams that can complement the existing pre-conditions 24. Incentives to trading through the exchange. Some Many agro- was worth for developing the agriculture exchange markets in LAC. farmers (especially small-scale farmers), and buyers may industrial firms US$644.2million are shareholders. not necessarily see the benefit of trading through the local 22. Based on the country experiences in the LAC region, agriculture commodity exchanges. In many countries in there are indeed some public policy recommendations LAC, farmers and agribusinesses operate in the “informal� Nicaragua US$514 million in Main products:, Has a variety of Privately owned Has many bro- Started very small No price support that can accompany actions for creating a friendly busi- market. However, some governments have used tax waiv- BAGSA is a cash 2008. rice, live cattle, major players, and self-regu- kers, major banks but expanded very schemes and ness environment for developing agricultural commodity ers or tax reductions for agribusinesses that trade through and forward beef, beans, including, agri- lated. Product and other finan- quickly, filing and government market sorghum, coffee, business services, quality very high, cial service firms clearing up to provide tax incen- exchanges. These complementary measures must be the exchange. This has proven successful in Nicaragua for Est.1993 milk, other dairy agro-industry, as the exchange as participants. US$514.2 million tives to use the a marginal incentive for the private sector, and not the allowing farmers and traders to operate in the formal mar- products, agro- small and large- has many quality worth of contracts exchange. main driver of the establishment or development of the ket and for the Government to expand its tax base and chemicals, etc . scale farmers. test labs. between 2007 and 2008. exchange. Agriculture commodity exchanges that have monitor the development of the agriculture sector. Other CBOT (included Highly liquid Main products Domestic Self regulation Large number One of the largest No market price relied solely on public sector support or trades have not countries, such as Argentina, have used subsidized credit as benchmark, market, with 1.3 traded include and interna- of this market of brokers and exchanges world- intervention been sustainable in LAC. However, several LAC countries lines for those farmers or agribusinesses obtaining cover- is a cash and billion contracts soybeans, soy- tional investors, is seen as an other participants wide in terms of policies, though futures/options traded through bean oil, agribusinesses example in other type: http://www. market size and large government has shown success in the use of complementary public age of options or futures through the local exchange. market) the CME platform, Soybean meal, and producers countries (higher cmegroup.com/ volumes of trade. support schemes policies and programs that accompany short and long 25. Facilitation and Information Management. In countries Est. 1848 for a value of maize, wheat, participate, and standards), and company/mem- through direct US$824 trillion. oats, rice. even foreign Gov- can be found bership/types-of- subsidies to farm- term private sector efforts mentioned in the next few with new and not fully developed commodity exchanges ernments such as at: http://www. membership-cbot. ers and farmer paragraphs. the government can be an important coordinator among Mexico cmegroup.com/ html incentives. major parties, like famers, agribusinesses, agro-processing market-regulation/ index.html 12 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 13 plants, etc. Coordination could involve bringing partici- 27. The above public policy recommendations should fit GLOSSARY pants together to agree on trading rules and frameworks, and be prioritized within a larger agriculture competitive- gathering and sharing information about prices, volumes ness and risk management agenda. Broader reductions and number of contracts provides important statistics in transactions costs for trade in agriculture products TABLE 2: NAMES OF EXCHANGES IN THE LAC for farmers, buyers and traders about market opportuni- (infrastructure, communications, legal frameworks, etc.) ties and trends. Panama and Nicaragua are concrete and policies that increase the basis risk between inter- AGROBOLSA Bolsa de Productos y Servicios S.A., Tegucigalpa, Honduras examples of such market coordination. national (or neighboring) and domestic markets could have larger impacts in the agriculture sector growth and BAGSA Bolsa Agropecuaria de Nicaragua S.A., Managua, Nicaragua 26. Promotion and Education for Improving Agriculture competitiveness. Also, discontinuing public policies and Trading and Risk Management Practices. Potential users programs that discourage the use of agriculture price of the exchange must be willing to use the exchange hedging instruments (such as price controls or minimum BAISA Bolsa Nacional de Productos S.A., Panamá price and the commodity exchange services as the price guarantee schemes) can result in the develop- reference for physical trading. Therefore, a large educa- ment of agriculture commodity exchanges, as it was BCBA Bolsa de Cereales de Buenos Aires, Argentina tion and communications effort is genuinely required to the case in Brazil, and could be the future of domestic start-off such a process and obtain appropriate buy-in markets in Mexico. Finally, public-private partnerships for BCR Bolsa de Comercio de Rosario, Rosario, Argentina and support to establish or to further develop commodity piloting new agriculture trading schemes or futures/op- exchanges. The private agribusiness and financial sector tions contracts for new agriculture commodities could BBM Bolsa Brasileira de Mercadorias, Sao Paulo, Brazil may not be able to undertake such effort by itself, and so help accelerate the development of such exchanges. there’s a clear role of the public sector in promoting such The Argentinean and Brazilian Agriculture Commodity markets. This promotion and education effort could be Exchanges have partnered in the past to develop new BCSP Bolsa de Cereais de Sao Paulo, Sao Paulo, Brazil coupled with research in the area of agricultural trade physical or financial instruments for the agriculture sector to enhance the development and instruments traded by pilot testing contracts. BM&F Bolsa de Mercadorias e Futuros, Sao Paulo, Brazil through the exchange. Argentina and Brazil have been quite successful at pooling private and public sector ef- BNA/BMC Bolsa Mercantil de Colombia S.A., Bogotá [formerly Bolsa Nacional Agropecuaria] forts for educating agribusinesses about the use of new market instruments through the exchange. BOLCOMER Bolsa de Comercio de Costa Rica [formerly Bolsa de Productos –BOLPRO] BOLPRIAVEN Bolsa de Productos e Insumos de Venezuela S.,A., Caracas, Venezuela BOLPROES Bolsa de Productos de El Salvador S.A., San Salvador, El Salvador BPC Bolsa de Productos de Chile S.A., Santiago de Chile BPP/BPL Bolsa de Productos del Perú S.A., later Bolsa de Productos de Lima S.A. MATba Mercado a Término de Buenos Aires S.A., Argentina ROFEX Mercado a Término de Rosario S.A. or Rosario Futures Exchange, Rosario, Argentina 14 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 15 APPENDIX TABLE 3: TYPE AND DESCRIPTION OF CONTRACTS USED IN LAC AGRICULTURAL COMMODITY EXCHANGES ACTORS OF AGRICULTURE COMMODITY EXCHANGES Instruments Description Characteristics Use Note Agriculture Commodity Exchanges often have a diverse group of market actors: Forward An agreement to purchase No initial cash transfer, only To lock-in future price, and Main users include: super- (Used in most exchanges in or sell a specific commodity at maturity. goods delivery and pay- market, agro-processing the LAC) on a specified future date a ment. plants, exports and some- • Producers, consumers, and processors. Most of these actors participate on the exchange through trade houses pre-set price Physical delivery of the com- time government. modity is expected. Supports the development of or brokerage firms. In some markets, such as soft commodities, consumers and processors are much more active Contracts are often tailor- long-term trade relationships Cash exchanges and for- than producers, because market access is not always available for producers, many of whom are in developing made to specific physical Maturity of contracts is and marketing strategies. ward contracts are the most trading and hedging needs. usually a year. High risk present in the region countries. All of these actors use the exchange instruments for the purposes of hedging price risk which is a com- involved. ponent of their physical trading. Futures An agreement to purchase or Initial cash transfer required Hedging price risk Main users include: farm- (Present in Brazil and sell a specific commodity on for margin payments ers, processor, small firm, • Trade houses. Although this activity has been consolidating over the past 10 years, there are a number of interna- Argentina) a specified future date at a Designed to directly deal speculators, and public preset price An initial position can easily with credit risk arising from institutions that invest in tional, multi-commodity trade houses using the exchanges to manage physical and financial exposure of trading and quickly be closed or lock-in price and obtaining agriculture. operations worldwide. Generally trade houses will focus on a category of commodities, such as metals, soft com- Requires clearing house reversed. forward cover or counter party to clear modities, or grains. contract Physical delivery is not Also good for short-term required financing. Contracts are Standardized  rokerage houses. These are financial institutions, also called commission houses, which act as market inter- •B Longer maturity period that mediaries and make profits based on fixed commissions. Most brokerage houses are active on more than one forward contract. exchange. This business is based on relationships with other market participants such as producers, consumers, Options The right to purchase or Initial cash transfer Used for hedging price risk Buying options are common processors, funds and investors. International banks with commodity lending portfolios may also have a com- (Present on in Brazil and sell a futures contract or a (premium) from the buyer among producers/consum- Argentina) specific commodity on or to the seller of an option, Obtaining short-term ers, processing plants and modity brokerage division which is designed to both mitigate the risk of the lending and earn profits from market- before a specified date at a representing the cost of finance. exporters/importers. making activity. present price. the option. Buyer faces the seller’s credit risk unless the Selling options common Requires clearing house or contract is exchange-traded. among agribusinesses,  anaged funds and Institutional Investors. The expansion of market capital seeking opportunities for return on a •M counter party to clear con- wholesalers, etc tract (except for OTCs) Commodity options are diverse portfolio of risk has contributed to a high level of “fund� business in the commodity exchanges. Funds are mostly exercisable into generally run by professional money managers. Institutional investors can be pension and insurance funds, which a futures contract on the consider commodity futures markets as a risk-diversifying alternative to other investments. Both fund managers commodity rather than the physical commodity it self. and institutional investors follow technical trading signals to guide their activity in the market, and do not focus on fundamentals as much as other actors. Since they are often following similar technical signals, they can go in and out of the market at the same time, and in large volumes. Exchange-traded Swaps An agreement to exchange Initial cash transfer and Hedging: to lock-in future Mainly used by exporters (Only in Brazil) specific cash flow at speci- variation margin payments prices for a long period. and agribusinesses associ- fied intervals. Transaction may be required. ated with financial deals. often made directly with a bank or large trading Two sided credit risk Some lager scale farmers Source : Dana, Julie (2008). Maize Price Risk in Uganda and Tanzania. The World Bank. company involved. also may use this contract for long-term price competi- Contracts are tailor-made, Physical delivery not tiveness. to meet specific hedging expected. needs. Longer term of maturity, ranging from six months to 15 years Source : UNCTAD report 1998 16 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 17 TABLE 4. LAC COMMODITY AND FUTURES EXCHANGES - STATUS OCTOBER 2008 TABLE 5: CURRENT STATUS OF THE MAIN AGRICULTURE COMMODITY EXCHANGES IN LAC (2009 -2010) Country Name Activities Country AG. Main Main Imports Main Products 2007 2007/2008 million Exchanges GDP domestic food products Exch. traded # contracts MT # Argentina Bolsa de Cereales de Buenos Aires Boards of Trade & cash-commodity markets, all cereals and oil- Billion productions or USD ($) Active members Bolsa de Comercio de Rosario seeds, advisory services, price dissemination USD Bolsa de Cereales de Bahía Blanca S.A. Rice & other cereals Brazil 101.7 Coffee, Live cattle, Wheat, beans Coffee, Live cattle, BM&F BBM BM&F 193 Bolsa de Comercio de Córdoba Wine & regional products corn, soybeans, corn 3.3 million C. 25,676 Ag. Fin. BBM 240 Bolsa de Comercio de Santa Fe All type of contracts sugar, ethanol, $ 47.7 billion contracts Bolsa de Comercio Confederada S.A. orange juice, cotton Bolsa de Comercio de Mendoza S.A. Futures & Options Exchanges: soybeans, corn, wheat, sunflower, Argentina 50.0 Soybeans, wheat, Soybean wheat, 372,192 51.7 MATBA 83 Bolsa de Comercio de La Plata other, and financials Peso/USD, Euro, Gold, etc. corn, sunflower, corn, sunflower contracts Million MT ROFEX 95 Nueva Bolsa de Comercio de Tucumán S.A. sorghum, cattle, Buenos Aires Wholesale Fruit & Vegetables Market dairy products Mercado a Término de Buenos Aires S.A. [MATba] Greater Buenos Aires slaughter-cattle market Mercado a Término de Rosario S.A. [Rofex] Colombia 3.8 Coffee, bananas, Wheat, yellow and Potato coffee, white $ 4 billion n/a BNA 31 beef, palm oil, cut white corn, other corn, poultry, milk, [2006] Mercado Central de Buenos Aires flowers, eggs, dairy food soya, live cattle, Mercado de Liniers S.A. products palm oil Brazil Bovespa/ BM&F Group: Cash & Futures markets on securities, commodities and financials. Peru 18.5 Potatoes, corn, Wheat, corn, vari- Hard yellow corn $ 1 million n/a BPP 3 Bolsa de Mercaderias y Futuros [BM&F] rice, coffee, pima ous foods Depositary for all rural financial instruments. Clearing & payment cotton Bolsa Brasileira de Mercaderias [BBM] system Venezu- 12.7 White corn, sor- Yellow corn, beef, Sorghum various n/a n/a BOLPRIAVEN 14 BBM also controlling: ela ghum, sugar cane, milk, eggs, other n/a Bolsa de Belo Horizonte [MG]; de Brasilia [DF]; de Campo Grande Cash-commodity exchange serves Greater Sao Paulo City and Re- rice, bananas, foods [MS]; Curitiba [PR]; Fortaleza [CE]; Goiania [GO]; Porto Alegre gion. Private and CONAB’s government purchases, mostly through vegetables, coffee, [RS]; Sao Paulo [SP]; Rio de Janeiro [RJ]; and Bolsa de market mechanisms beef, pork, milk, Mercadorias de Uberlândia [MG] eggs, fish SIBB. Net of regional markets on electronic agrifood auctions. Bolsa de Cereais de Sao Paulo [BCSP] Private and Government food purchases. Chile 11.2 Wine, dairy Wheat, corn, beef Wheat, corn, wine $ 400 million n/a BPC 12 Other 17 municipal markets, electronically linked. products, barley, lumber, fruits, Bolivia Some projects for the creation of a Commodity Exchange in the City Initiatives of Camara Agropecuaria del Oriente and Superintendencia vegetables of Santa Cruz de la Sierra, Cámara Agropecuaria del Oriente [CAO] de Valores, Pensiones y Seguros [SPVS]. 2000-2005. Honduras 4..5 Coffee, citrus, rice, Rice, yellow corn, Rice, white corn, $ 30 .million 131,000 AGROBOLSA 4 Chile Bolsa de Productos de Chile [BPC] Repos on invoices and receivables [factoring] issued by prime agro bananas, palm foods sorghum MT Non-active industrial firms [wine, corn, wheat, live-cattle, others] oil, white corn, Colombia Bolsa Mercantil de Colombia, formerly Bolsa Nacional Agropecuaria Besides some auctions, and Government purchases, it registers shrimp, lobster, de Colombia S.A. [BNA] most of the agricultural, cattle, food, and forestry contracts. beef, tilapia, beans, lumber Costa Rica Bolsa de Comercio de Costa Rica S.A. [BOLCOMER], former Bolsa Real Estate Leasing, trading of non-agricultural instruments de Productos Agropecuarios de Costa Rica S.A. [BOLPRO] El Salva- 4..5 Coffee, sugar, white Beef, dairy prod- Rice, corn, sor- $ 18.7 million n/a BOLPROES 6 dor corn, rice, beans, ucts, yellow corn, ghum, red beans Dominican Bolsa Agroempresarial de la República Dominicana, Inc. [BARD] or Isolated trading sessions, low volume sorghum, shrimp, wheat, various Republic BOLSAGRO tuna, sesame foods Ecuador Corporación Bolsa Nacional de Productos. A Guayaquil former Trading on Rice and Corn exports to Andean countries Nicara- 2.7 Coffee, bananas, Live cattle, beef, $ 514.2 million n/a BAGSA 30 Cocoa Exchange in the 1970’s gua sugar cane, sugar, rice, seeds, El Salvador Bolsa de Productos de El Salvador S.A. [BOLPROES] Basically trading sessions of all kind of purchases from the Govern- cotton, rice, corn, coffee, dairy prod- ment; managing rice and corn agreements sesame, soya, ucts others beans, beef, veal, Guatemala Bolsa de Productos y Mercaderías S.A. [BOLPROMER], formerly Financial services. Inactive since 2002 pork, poultry, dairy Bolsa Agrícola Nacional S.A. [BANSA] products, shrimp, Honduras Bolsa de Productos y Servicios S.A. [AGROBOLSA] Managing Rice and Corn Agreements. lobster, peanuts Nicaragua Bolsa Agropecuaria de Nicaragua S.A. [BAGSA] Managing Rice and Corn Agreements. Main contracts: rice, cattle, Panama 2..3 Financial services. Bananas, rice, Yellow corn, rice, $ 150.7 million 1.37 million MT BAISA 21 beef, beans. More than 10 labs [grains, dairy products, coffee] Inactive since 2002 white corn, coffee, wheat, potatoes, sugar cane, veg- various foods Panama Bolsa Nacional de Productos S.A. [BAISA] Auctions of tax-free imported products, such as corn, rice, pork etables, livestock, meats, dairy. fruits, shrimp Paraguay Bolsa de Valores y Productos de Asunción S.A. [BVPASA] Securities only, although authorized to file or trade agricultural and other commodities Peru Bolsa de Productos del Perú S.A. [BPP] A 99% subsidiary of Bolsa de Valores de Lima S.A. [BVL] Trades in Source : Alfredo Ferreira Lamas: Agrifood Commodity Exchanges And Markets in Latin America and The authorization was cancelled by the CONASEV in 2005 and then Pima cotton, yellow corn, white rice, wheat and by- -products. The Caribbean, 2008. in 2009. Venezuela Bolsa de Productos e Insumos Agropecuarios de Venezuela S.A. Different agricultural commodities and byproducts. Important [BOLPRIAVEN] volume on domestic sorghum. 18 Agricultural Commodity Exchanges in Latin America and the Caribbean Agricultural Commodity Exchanges in Latin America and the Caribbean 19 BIBLIOGRAPHY Euna Shim: Success Factors of Agricultural Futures Markets in Developing Countries and Their Implication on Existing and New Exchanges in Developing Countries, 2006 . Ferreira Lamas, Alfredo: Agrifood Commodity Exchanges and Markets in Latin America and The Caribbean, 2008 . Trivelli, C., & Venero, H. (2007). Banca de Desarrollo para el Agro: experiencias en curso en Latinoamérica. Lima: Instituto de Estudios Peruanos. OECD-FAO Agricultural Outlook Report, June 2010. United Nations Conference on Trade and Development (UNCTAD) report, 1998. 20 Agricultural Commodity Exchanges in Latin America and the Caribbean About the series: The LCSSD Occasional Paper Series is a publication of the Sustainable Development Depart- ment (LCSSD) in the World Bank’s Latin America and the Caribbean Region. The papers in this series are the result of economic and technical research conducted by members of the LCSSD community. The series addresses issues that are relevant to the region’s environmental and social sustainability; water, urban, energy and transport sector development; agriculture, forestry and rural development; as well as cross-cutting topics related to sustainable develop- ment such as climate change; logistics; crime and violence; and spatial economics. 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