Understand Barter in the Commodities Market

We explain what barter is, how this operation works, and its advantages for producers in the commodities market.

November 9, 2023

hEDGEpoint Global Markets

Barter is a common commodity market operation, often utilized by rural producers, grain traders, cooperatives, and traders. Its purpose is to bring benefits to all parties involved in the trade.

With the growth of Brazilian agribusiness, there is an increasing need for agricultural inputs to support crop development. Given that the barter operation aids in securing these resources, it becomes essential to understand it. As a valuable ally for those operating in this sector, we have prepared content that explains:

  • What barter is
  • How it works
  • The advantages for producers
  • How hEDGEpoint contributes to the hedging of barter operations

Continue reading to find all the answers!

What Is Barter in the Commodities Market?

This operation is conducted between rural producers and companies for the acquisition of various inputs, such as fertilizers and fertilizers.

Payment typically occurs through the exchange of agricultural products, with the involvement of a buyer of agricultural commodities. The price is calculated in sacks per hectare, and payment is made with the delivery of this product at harvest. This operation is common in negotiations involving primarily soybeans, but it applies to other crops such as corn, coffee, and cotton.

Barter emerged to simplify and expand how rural producers and input companies can negotiate. There are no specific rules regarding agreements, to make it viable for both parties. In this way, a defined number of bags of commodities is worth a corresponding number of seeds, for example.

Barter: Understanding How the Operation Works

In barter, there are three actors involved, each with complementary interests, making the process convenient for everyone. They are:

  • Producer: needs to purchase inputs for production and set a payment deadline.
  • Supplier: in addition to offering inputs, often plays the role of a producer’s financier.
  • Off-taker: typically, a trading company that buys the producer’s production to sell it for export and in the domestic market.

To understand how barter works, consider that a certain input costs R$ 1,000 in Mato Grosso. The soybean sack price is R$ 100 at the time of the contract with a pre-fixed index. The rural entrepreneur will plan to pay this credit with 10 sacks of soybeans after harvest.

The farmer can lock in the price based on the quotation at the time of the contract or condition payment based on the exchange rate variation. There are various modalities for performing barter. Below, we highlight the two main ones.

  1. Fixed Price

The supplier presents a package with inputs, dosages, and recommended applications for planting a particular variety on a specific area. They also indicate how many sacks should be delivered as payment for this package. Price variations of the commodity on the Commodity Exchange between the contract closing date and the delivery date do not affect the quantity of product to be delivered.

  1. Price to Be Fixed

In this modality, the producer offers a pre-established period to fix certain price components, such as the exchange rate. The exchange of inputs can vary, with the need to deliver more or less product to settle the outstanding debt.

In Brazil, operations are formalized in the Rural Product Note (CPR). The producer must commit to delivering the agreed-upon quantity as payment, recording the procedures in this essential document for the transaction to occur.

What Are the Advantages of Barter for Producers?

Barter is crucial for improving three fundamental pillars of the business: productivity, risk management, and profitability.

Since the negotiation occurs before the harvest, the producer locks in their sale while simultaneously committing to deliver their share at the agreed price. Therefore, they do not need to worry about commodity price fluctuations if they choose the fixed price modality.

Furthermore, the producer gains access to another form of financing. In this regard, they free themselves from expenses that can compromise their financial health and affect production costs.

By having prior knowledge of the quantity of products agreed upon to cover the costs, the producer also reduces concerns about storage. By establishing the buyer, delivery date, and location before harvesting, they already know that the risks of crop disposal are lower.

Barter also increases competitiveness, offering new trading opportunities. The producer can focus on producing more and better, improving their profitability.

How Does hEDGEpoint Contribute to Barter Operation Hedging?

The barter operation is closely related to hedging, as it reduces risks associated with commodity price volatility. Understanding how it works is crucial for decision-making.

Above all, it is essential to partner with someone who understands all the dynamics of the commodities market. hEDGEpoint combines hedging instruments to contribute to risk management, identifying tools to help your business. With a team that combines data analysis, market intelligence, and insights, we can assist in barter operations.

Speak with a hEDGEpoint professional to learn more!

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