Soybean market: how do futures contracts work?

Futures contracts: understand how they work in the soybean market and what role they play in risk management of this commodity.

January 15, 2024

hEDGEpoint Global Markets

The soybean market is one of the most popular in the world. The commodity stands out mainly in Brazilian agribusiness, after all, Brazil is the main producer on the planet.

What not everyone knows is that producers can sell soybeans without even having started planting. In this sense, it’s also possible to buy soybeans to be delivered several months from now. But how does this happen?

One of the instruments that allows this trading is called a futures contract, which is widely used to manage the risks of agricultural and energy commodities. To help you understand how it works in the soybean market, we’ve created this exclusive content.

Read on and check it out!

What are soybean futures contracts?

Simply put soybean futures contracts guarantee today’s price for an agreed sale at a future date.

Let’s take an example to make it clear. Imagine that the price of soybeans is R$120 per 60kg bag at the planting stage. For the farmer, that’s a good price.

Therefore, he prefers not to wait, because he is afraid that the price will drop at harvest time: the forecast is for excellent weather conditions that could affect the supply and demand of the commodity, due to the oversupply in the harvest.

This way, he can protect himself from these price fluctuations by entering a futures contract. To do this, he set the price of soybeans at R$ 120 today, although the sale will only take place in a few months. In other words, the producer can hedge the commodity.

Read also:

  • Hedge: a guide to understanding this tool and managing risk

How does the soybean futures market work?

Soybean futures contracts are traded on the Commodities and Futures Exchange. In Brazil, the best known is the BM&FBoverspa of B3. On the international market, it’s the Chicago Stock Exchange (United States). In both cases, the value is fixed in dollars.

Although B3 is the main Brazilian stock exchange, the most traded contract in the world – including by Brazilian agents – is on the Chicago Stock Exchange. The Chicago soybean futures contract refers to 5,000 bushels.

In other words, about 136 tons or 2,268 60-kg bags). The contract allows for physical delivery to warehouses accredited by the Chicago Mercantile Exchange, although approximately 98% of positions are settled in advance and financially.

The soya traded on the B3 futures contract, is in bulk export form, with the quantity set at 450 bags of 60kg of merchandise in each bag. In the soybean futures market, there is only financial settlement at first. Thus, there is no delivery of the physical product.

In this way, the purchase and sale of the product are negotiated at a future date, and a price set by the parties involved. In general, producers, industries, grain traders, cooperatives, and trading companies carry out the operation.

The prices of soybean futures contracts vary according to the spot market price and the proximity of the contract’s expiration month. For this reason, the higher the value of the indicator on the spot market, the more the futures contract appreciates.

However, the appreciation depends on the expiration date: the closer the date, the lower the appreciation. The expiration date and the last day for trading the contract is always the 2nd business day before the expiration month.

What points should you look out for before trading futures contracts on the soybean market?

There are some essential aspects you need to know about the soybean market. Below, we explain the main ones, check them out!

1.    Commodity production process

Before trading soybean futures contracts, you need to understand how this market works. The first aspect is that it depends on seasonal factors since the commodity follows a specific production cycle.

The production process involves three stages: planting, training, and harvesting. Each stage has an impact on the progress of the crop and can influence the price of the futures contract at the end. During planting, in the event of weather problems or delays, soybean futures prices should rise. In the formation period, the soybeans begin to reproduce.

Prices are therefore influenced by the pace at which the commodity is formed, with the risk of being influenced by external factors that can affect the harvest. During the harvest, if there is a disease in the crop, for example, the quality of the soybeans will suffer, which could lead to a rise in prices. On the other hand, if the harvest is good, the tendency is for the market to be in full supply and, therefore, for prices to fall.

In periods when there is an increase in demand for soybean meal to feed animals or for soybean oil to produce biofuel, product prices can rise rapidly due to greater demand. In turn, the harvest period is usually characterized by an increase in the supply of soybeans, which brings more competition and lower prices.

The trend toward world population growth could also result in increased demand for soybeans in the coming decades. Participants in this market should be alert to the new dynamics that may emerge in emerging countries.

  • Read here: 5 macro trends for the commodities market up to 2030

 2.    Climate, geopolitical conflicts, and the changing dollar

Unstable weather conditions, imminent geopolitical conflicts, and variations in the dollar are all aspects that generate volatility in the soybean market. As a result, prices can be affected in cases of drought or flooding.

The same happens with economic embargoes due to wars and changes in US economic policy. After all, the dollar is the pricing currency for soybean futures contracts.

  • Read here: How does volatility impact the commodities market?

 3.    The importance of market intelligence

Having market intelligence analysts makes all the difference in business. In the case of soybeans, this sector is able to identify issues of planted area, yield prospects, differences between producing regions, and climate.

It also looks at demand and how the oil, poultry, hogs, and biofuel industries demand the grain. The production of regular reports with this information provides technical analysis and updates that contribute significantly to informed decision-making.

Read also:

 Soybean futures contracts: protection from volatility

Futures contracts make it possible to fix the current price of soybeans. This protects producers and other players from price variations in the market.

This instrument is an agricultural derivative that makes it possible to manage risks in a highly competitive market. Through these tools, it is possible to establish a margin between costs and sales prices.

Because settlement is only financial, there is also no need for immediate storage space to store the soybeans. Remember: ideally, soybean market operations with futures contracts should always be carried out with plenty of planning and study.

hEDGEpoint: risk management in the soybean market

The soybean market involving futures contracts requires a deep understanding of how it works. If you work with commodities, you know that volatility can be intense.

Therefore, having a partner who understands all the factors in this market is essential for business. hEDGEpoint offers commodity hedging tools that contribute to this process.

With technology, market intelligence, data analysis, and insights, we enable our clients to assess risks and make assertive decisions.

Contact a hEDGEpoint professional to find out how we can work with you.

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