The Balcão Agrícola do Brasil (BAB), a new organized environment for trading soybean and corn derivatives, is expected to start operating in 2024 and will be able to handle contracts equivalent to 24 million tons when it reaches its third full year of operation, projected its director -president, Eric Cardoni, when announcing the venture.
The estimated volume, which represents almost half of the soybean harvest forecast for 2024/25 in Mato Grosso, should increase at BAB, which forecasts business of 4.8 million tons next year.
Recently approved by the Securities and Exchange Commission (CVM), BAB’s main investor is the logistics company Rumo and was designed to allow hedge operations to better reflect Brazilian market prices.
The new instrument to support commodity negotiations comes at a time when the soybean harvest in Brazil, the largest global producer and exporter, has grown more than that of the United States, where the Chicago Stock Exchange is located, a global reference for prices.
This is one of the factors that end up increasing risks for traders in Brazil, as the fundamentals of the local market often differ from what happens in the USA, where the “benchmark” is, noted Cardoni, former director of grains and oilseeds trading at multinational Louis Dreyfus Company, citing pricing challenges.
In the BAB environment, which will allow physical deliveries and bilateral negotiations between buyer and seller, the idea is that participants are free from the so-called “basis risk”, which is the difference (premium or discount) in prices in the local market in relation to to the Chicago Stock Exchange futures contract.
“We needed an instrument that reflected the reality on the ground (in the country). Today, Brazilian agriculture is mature enough to do this,” Cardoni told journalists, commenting on the growing pricing challenges.
Even though soybean and corn negotiations in the physical market aimed at exports must continue to require the negotiator to still “lock in” the differentials compared to Chicago, for those participants who only operate in the domestic market it may be more interesting to use the BAB environment, which offers a price free from “basis risk” when carrying out the hedge.
According to the executive, BAB must minimize financial risks, which can be millions when involving just one load. Thus, using the experience of those who worked in the sector in the USA and have been in Brazil for around 15 years, Cardoni created the project to “tropicalize” the hedge.
“Brazil’s soybean production has grown 400% since 2000, but the hedging instruments remain the same,” he stated.
He highlighted that BAB will have physical delivery points for goods in Rondonópolis (MT) and Rio Verde (GO), and the real will be used, not the dollar, as the currency of transactions, which also reduces the exchange rate risk that traders in this sector face on a daily basis.
To get an idea of the “basis risk”, the financial impact of a variation of 600 cents per bushel in the differentials on the Chicago Stock Exchange could generate a loss of US$14 million for a trading company that negotiated a cargo in volume. enough to fill just one ship, said the executive.
He recalled that such risks occur because, in addition to the difference in the harvest period between Brazil and the United States, factors such as the cost of transportation and storage and the exchange rate can have an impact, not to mention climate problems. Public policies such as biodiesel, which create local demand, also affect differences.
Support from Rumo
BAB received an investment of US$ 1 million from Rumo and another US$ 700 thousand from smaller investors, and due to its business model it considers as “interesting” the exclusive maintenance of the terminals of the Cosan group’s logistics company as delivery points for traded goods. at the counter, according to Cardoni.
Physical delivery “makes the hedge more reliable because soybeans purchased in Mato Grosso will have a derivative that represents the price of soybeans in Mato Grosso. The risk of these two prices mismatching is very low”, stated the executive, adding that the company is already negotiating the expansion to a third delivery point, in the north of Paraná.
He also revealed that the company is in talks to have physical delivery points for soybean meal and soybean oil, when these products eventually start to be traded at BAB — but, in this case, the delivery would be at the factories.
Cardoni also revealed that the authorization of 15 companies to operate at BAB is in the process, most of them trading companies, although this environment is also open to speculators and funds, which generally help provide liquidity to the markets.
READ MORE: Tariff war between US and China could open ground for Brazilian soybeans and corn
Although BAB includes physical deliveries, the counter will allow participants to close their positions or pass on the obligations to buy or sell the product to other agents. Cardoni estimates that it is “reasonable” to imagine that only around 10% of negotiated contracts end up culminating in physical deliveries.
BAB fees will be 1 real per ton negotiated, half of which will be paid by the buyer and the other part by the selling agent.
