Last updated: December 23, 2010 11:20 am

Mexico hedges against corn inflation

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Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries.

Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up.

Food accounts for up to half of all household spending in emerging countries, compared to just 10-15 per cent in Europe and the US.

The move by Mexico, disclosed by its economic minister, came as the quoted price of corn in Chicago hit a two-year high on the back of a smaller than expected harvest in the US, which accounts for more than half of the world’s exports.

Bruno Ferrari told local media on Wednesday that the government had bought futures contracts to fix the cost of corn. “The prices are guaranteed,” he said. “The supply is also guaranteed . . . until the third quarter of the next year.” A government official confirmed his comments.

The Ministry of Agriculture later said in a statement it had bought call options – contracts that give the holder the right to buy at a predetermined price and date – for 4.2m tonnes corn at the Chicago Mercantile Exchange. The ministry said it bought the calls on behalf of domestic processors, such as tortilla makers.

The ministry said it had bought protection against volatile prices in the past, but this is the first time that Mexico has publicly revealed its hedging activities in agriculture.

Mexican tortilla makers threatened last week to raise prices by 50 per cent to offset the impact of higher corn and natural gas costs. That has prompted fears of a repeat of the tortilla riots of 2007, when protesters demonstrated against rising food prices.

Richard Feltes, grain analyst at brokerage RJ O’Brien, said it was the first time he could recall a country had disclosed it was buying futures.

“There had been rumours in the past about other countries, including China, but it has been never confirmed,” he said.

Traders expect corn and other agricultural commodities to surge higher in early 2011 due to low inventories and concerns about the size of the crop in Latin America. Brazil and Argentina, which produce the bulk of the southern hemisphere’s exportable surplus of food, have had little rain.

Corn prices rose on Wednesday to $6.09¾ a bushel, up 46 per cent from January and the highest level since mid-2008. The US Department of Agriculture has warned the country’s corn stocks will fall to their lowest in 15 years by the middle of next year.

“There is a better than 50-50 chance that the corn market will take out the all-time high of $7.65 a bushel set in June 2008,” Mr Feltes said.

Luke Chandler, agricultural commodities analyst at Rabobank, said tightening food supplies could prompt “a return to widespread government intervention” in agricultural markets next year, in a repeat of the 2007-08 food crisis.

So far this year Russia, Ukraine and India have imposed export restrictions on food commodities. China has announced retail price controls.

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