Joint soy production between Brazil and Argentina is greater than that produced by the United States, the largest world producer of the grain. However, international market prices of the commodity are defined by the trading floor of the Chicago Board of Trade.
So as to try to change this scenery, the Brazilian Mercantile & Futures Exchange (BM&F) and the Rosario Futures Exchange (Rofex), from Argentina, announced last week their intention of establishing a futures soy and derivatives market operated between both organizations.
According to specialists if the project works out and is well accepted by investors, it may guarantee that product prices become more related to the local reality and reduce the price oscillation risk to farmers and companies.
“The objectives are to create adequate contracts for the local standards, with better trade conditions for all and to reduce risk due to price oscillation,” stated Noêmio Spinola, director of the BM&F.
Negotiations between both exchanges started in August and it is not yet known when they will be concluded, but Spinola stated that the talks are “proceeding rapidly”.
The United States Department of Agriculture forecasts production of 84.6 million tons of soy in the next harvest.
According to Eugênio Stefanelo, a technician at the National Food Supply Company (Conab) and professor at the Federal University of Paraná (UFPR), Brazil should harvest between 70 and 75 million tons next crop, and Argentina should harvest around 40 million, figures that, added, exceed the US harvest.
“The Union of both exchanges will already create a large market, after all, we have a greater soy offer than does the United States,” stated Stefanelo.
The BM&F and Rofex already have soy contracts on their respective trading floors, but the volume of business is small if compared to the Chicago Board of Trade.
According to Spinola, the BM&F contracts have a yearly turnover of double the Brazilian soy crop. However, the turnover in Chicago is equivalent to 10 times the US production.
According to Stefanelo, the Chicago Board of Trade concentrates an immense quantity of traders, providing “transparency” to quotations there and, consequently, basing international prices on it.
So as to give joint operation between the BM&F and Rofex some influence on the foreign market, it needs great liquidity, i.e., it must attract a great number of investors.
“What is fundamental is the volume of operations, making it impossible for just one person to influence quotations,” stated Stefanelo.
In this sense, specialists in the sector believe that importers from China may play an important part in the evolution of the business.
According to consultant and former senior economist of the BM&F, Antonio Bueno, October 22, the Chinese government authorized local importers to seek “price risk coverage” – or to “hedge,” as the operation is called in the market jargon – on foreign markets.
According to Bueno, China is currently the largest world buyer of soy, and of every three grains exported by Brazil and Argentina, one goes to the Chinese market.
In the next crop, according to Bueno, China should purchase 8 million tons of soy from the United States and 10.5 million tons from Brazil and Argentina.
“The Chinese purchase more from Brazil and Argentina than from the US. They have much interest in the US, but that does not mean that they will only want one source of hedge,” he said.
In this respect, according to Bueno, a contract based on the level of South American production may be developed, answering to Chinese interests, helping attract them to the BM&F and Rofex trading floor.
And this may help attract other investors. “Liquidity attracts liquidity,” he explained.
In the opinion of specialists, the increase in trading volume due to joint operations and to the entry of new investors, together with the creation of clear rules and the establishment of a trustworthy clearance chamber, to guarantee operations, may attract local farmers and companies interested in maintaining the price of their products, reducing the risk of trading floor fluctuation.
“Members of the productive chain do not enter the futures market to win or loose, but to guarantee product prices. And, for this purpose, it is necessary for there to be speculators capable of running risks and winning or losing,” stated Stefanelo.
Apart from that, according to Bueno, it is necessary to execute joint work with Brazilian farmers and companies so as to convince them to operate on the market.
According to him, there is not, among local farmers, a culture of trading on the markets. “Liquidity does not come from night to day,” he explained.
To Stefanelo, a fact that contributes to this is that in Brazil bank accounts in foreign currency are not allowed, except for companies that operate in foreign trade.
This makes it very difficult, for example, for a Brazilian farmer to operate on the Chicago Board of Trade, as contracts there are cleared daily.
After that, the UFPR professor states that the joint trading floor may bring two benefits to Brazilian and Argentine producers. In the first place, comes the possibility of hedge, i.e., guaranteeing product sales price.
This may be done in the following manner, according to Stefanelo: Imagine that 60 kilograms of soy are quoted at US$ 11.65 for contracts maturing in March (BM&F closing on Friday) and the farmer considers this a good price for sale of the crop he will harvest in March. He may sell papers on the market for this price.
When March comes, if this price has fallen to US$ 10.65, for example, the producer will be able to sell his production for US$ 10.65 and, if he left the futures contract open, he will be able, in compensation for the papers, to receive the remaining US$ 1.00 to bring the total up to US$ 11.65, guaranteeing the price he wanted four months before.
The other benefit is that, in theory, price quotes should reflect the South American reality, based on the soy produced in the region, which is different from the North American grain.
As an example, Stefanelo stated that 80% of the soy produced in the USA is genetically modified (GM), therefore the prices in Chicago refer to GM soy. But in Brazil the percentage of GM grain is small.
Buyers from China and Europe state that they prefer to purchase the common product, but they do not want to pay a different price than that stipulated by Chicago.
With a strong future’s market, according to Stefanelo, the markets in Brazil and Argentina could create a specific market for non-GM soy, fixing the product price on the foreign market.
He believes that, if joint operation between the BM&F and Rofex attracts a respectable business volume, it may, in years to come, really start fixing international prices.
“If all these conditions are reached, the South-American market may become even more representative than the Chicago market,” stated Stefanelo.
ANBA ”“ Brazil-Arab News Agency