Soy: How you can manage risks in its production and commercialization

Understand the entire soy production chain, and learn how to manage risks in this market.

March 16, 2023

hEDGEpoint Global Markets

Soy is currently the most produced and exported agricultural commodity in Brazil, as well as the one exported most by the country. Indeed, the country is the biggest soy producer and exporter in the world, followed by the United States, Argentina, China, and India.

There are several favorable points for Brazil to stand out. One of them is the hot and humid climate, despite the instability in some regions. In states in the Midwest, where rainfall is more predictable, uncertainty about productivity is lower.

But in states like Rio Grande do Sul, for example, where temperatures vary greatly and rainfall is unpredictable, the climate requires more attention and concern. At the moment, for example, the state is experiencing a drought, and there may be a reduction in expected production.

However, the immensity of the country is another point in favor. The vast Brazilian territory offers a lot of area for planting, and the total is increasing. Spaces that were once pasture and became less suitable for raising animals have become soy fields.

Thus, Brazil has become a global power in the soy market. But the bigger the growth, the more necessary specific knowledge becomes to manage, trade, profit, and mitigate risk.

How does soy production work in Brazil?

Brazilian soy production has very distinct characteristics. One of them is the harvest calendar. Summer soybeans are first planted in September and continue to grow until the end of November. The soybeans develop in the hottest summer period and are harvested in late January and early February, depending on when they were planted.

What’s different in Brazil from other countries is that, along with the soybean harvest, winter corn is also planted. That is, the producer (mainly in the Center-West) doesn’t have to choose between corn and soy.

In the United States and Argentina, however, producers usually opt for what’s more valuable at any given time.

Another point that influences the domestic market is logistics. The main soybean producing states are Mato Grosso, Goiás, Mato Grosso do Sul, Paraná, and Rio Grande do Sul. Not all of them are close to ports and waterways. Due to this, there’s a lot of road transport (by truck) in Brazil, and thus the value of fuel—especially diesel—ends up considerably affecting the final price.

The projected numbers for the 22/23 harvest in Brazil are predicted to be 153 million tons, according to the U.S. Department of Agriculture (USDA). This means an increase of 22.2% compared to the previous cycle. But production numbers don’t necessarily mean good profits for producers.

To augment the chances of better profit margins, it’s necessary to be aware of market risks, and know how to take precautions.

What are the existing risks in the soy market?

Before getting into management, it’s vital to understand what types of risk exist in commodity markets. There are both systemic and non-systemic ones: Systemic means they encompass the entire supply chain, while non-systemic refers to the reality of each in particular and won’t necessarily affect the entire chain.

Non-systemic risks are those considered uncontrollable and normally aren’t directly linked to financial transactions. We can cite the main risks as being climate and operational risks (such as human error and problems with machinery). In short, They mostly involve operations.

And by systemic, we mean those that can lead to a snowball effect. When such a risk affects one part of the chain, it will likely end up affecting the whole chain.

Among systemic risks, we can name two main types: market/price risk, and credit/counterparty risk.

Credit risks include those where one of the parties’ winds up not honoring its obligations established in the contract. This includes issues such as non-compliance with the deadline, non-delivery of the product, and late payment, among others.

For problems of this nature, the best way to take precautions is to seek recommendations, look for good references from who’s buying or selling, survey the history of the contractor or contracted, and check other information that makes the transaction more secure.

Market risk is mainly related to price change. Since they’re internationally defined, there are many factors that influence the price, as it depends on the present situation of the world economy.

How’s the soy price determined?

The price of commodities in general are determined by international supply and demand – even when distribution is on national soil. This is because demand generates competition both between countries that produce and those that consume.

Therefore, the Chicago Stock Exchange, in the USA, is the main reference for the formation of grain prices, as it is there that most of the buying and selling of grains is carried out.

The FOB (Free on Board) price indicates the price of the commodity inside the ship at the port. It is the result of the exchange price plus the export premium, among other costs.

For this reason, market risk is closely related to exchange variation, as it can influence not just one, but several times in the definition of the price of the same commodity – for example, the value when preparing investments for the next harvest, of in the purchase of inputs, import of supplies and, of course, the quotation at the time of sale.

These variations can even end up generating profit when the dollar exchange rate is higher at the time of the sale, compared to the investment period, but for that to happen, luck is needed.

In order not to be at the mercy of chance, risk management is necessary. Today, there are resources on the market to protect against volatility, both price and exchange risk, and prevent surprises, guaranteeing good deals.

How can you protect yourself from the soy market’s volatility?

Developing a good hedging policy can be the key to avoiding unpleasant surprises in your budget. But, for that, it is necessary to understand the derivative tools available in the market in order to choose and apply the best alternatives according to the strategy and desired result.

Therefore, the best option to face these risks is to rely on a partner that has a vast understanding of derivatives and market products, both exchange rate and commodity. Only from a broad view of such a complex context and the global market will it be possible to make the best decisions.

hEDGEpoint combines the knowledge of specialists in the agro market with product risk management to always offer the best experience in futures operations.

We are globally present, always prepared to serve you at any time and in any place. Get in touch with an expert to find out more about how to use this instrument in favor of your business.

Talk to a hEDGEpoint expert.

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