Hedging: an essential strategy to protect farmers from volatility
Learn how hedging instruments help to cope with price fluctuations in agricultural operations.
One of the pillars of the global economy is the agricultural market. However, agribusiness producers and companies face challenges that go beyond cultivation, involving risk management and market fluctuations. One of the greatest difficulties lies in the unpredictability of commodity prices (such as soy, sugar and corn).
This volatility is influenced by factors such as:
- Climate change
- Geopolitics
- Global supply and demand
- Stock vs. storage
- Exchange rate fluctuations
- Health crises
In recent years, hedging instruments have been fundamental to the growth of agribusiness in Brazil, contributing to the strategy of producers, cooperatives and large buyers to protect themselves from price volatility.
In this article, we show you how hedging works in the agricultural sector, what its main advantages are and how it contributes to predictability and financial security in the commodities market.
Read also:
- How does volatility impact the commodities market?
What is a hedge and why is it essential in the agricultural market?
In simple terms, hedge means protection. This financial strategy emerged in the 19th century in the United States with the aim of reducing the impact of sudden fluctuations in commodity prices.
Imagine a farmer who, when it comes time to sell his harvest, is faced with prices that are much lower than expected. Or an industry that sees the cost of raw materials skyrocket, compromising its profit margins.
Hedging helps mitigate risks like these, bringing more predictability and security to the sector. It is an essential tool for the financial sustainability of agribusiness, allowing producers and companies to better manage market volatility.
Read also:
- Hedge: a guide to understanding this tool and managing risk
Hedging tools most used in agribusiness
Understanding and using hedging instruments is vital and separates those who struggle from those who thrive in an increasingly challenging agricultural environment. Check out the most commonly used ones:
1. Futures market
Futures contracts are highly standardized agreements regulated on stock exchanges such as B3 (the Brazilian Stock Exchange) and the Chicago Mercantile Exchange (CME). In this type of contract, producers and investors negotiate the purchase or sale of commodities for a future date, at a previously established price.
For example, a soybean producer signs a futures contract to sell his crop at R$160 per sack, due in three months. If the price drops to R$140 on the agreed date, he will still sell at the fixed price.
Read also:
- Futures contracts: how do they work in the grain and oilseed market?
2. Forward Market (NDF – Non-Deliverable Forward)
Unlike the futures market, forward contracts are negotiated directly between the parties (without stock exchange intermediation). The price and settlement date are agreed in advance, without the need for daily adjustments. However, there is a greater risk of default, as the contract depends exclusively on the counterparty.
Imagine that a corn producer signs a forward contract to sell his crop at R$80 per bag, with delivery scheduled for six months from now. In this way, he is able to establish a reference price for his production, which contributes to more predictable financial planning.
Read also:
- What are forward contracts and futures contracts? Understand the differences
3. Options Market
Options are financial instruments that give rural producers the right (but not the obligation) to buy or sell a commodity at a future date. In this way, they pay or receive a premium for this right.
The amount of the premium depends on factors such as the maturity date (longer, higher premium) and the volatility of the physical market (more volatile, higher premiums). There are two main types of option:
- Call option (CALL): grants the right to purchase a commodity at a fixed price in the future.
- Put option (PUT): guarantees the right to sell at a previously fixed price, protecting against sharp falls.
For example, a producer buys a put option to guarantee a minimum price for his corn crop at R$90 per bag. If the market collapses, he can exercise the option; otherwise, he can opt for new agreements depending on the volatility of the moment.
Read also:
- What are the differences between calls and puts on the commodities market?
The role of hedging in financial risk management
As we have seen so far, hedging plays a fundamental role in protecting against financial risks. Its main benefits include:
- Risk mitigation and financial stability: contributes to greater stability and predictability in revenues, even in a volatile market.
- Easier access to credit: banks and cooperatives often offer better conditions for producers who use hedges, as this reduces uncertainty about their future income.
- Greater competitiveness on the market: producers who better control their costs and revenues are able to negotiate more advantageously.
Hedgepoint HUB: your ally in financial management!
To delve deeper and learn how to hedge your production, Hedgepoint HUB offers fundamental and specialized courses, such as Hedging the Grain and Oilseed Market, Hedging the Coffee Market and Commodity Futures Contracts.
Whether you’re a large or small producer, understanding these tools is an essential step towards more efficient financial management. Sign up for HUB courses and start protecting your operations against price fluctuations!
Read also:
- Hedge courses available at Hedgepoint HUB
——————————————————————————————————————