The beef cattle price volatility is one of the main risks of this activity. To manage this risk, forward and futures contracts can be used by beef cattle farmers. However, the use of these contracts is quite restricted. The reasons are based on the characteristics of farmers and their business. Forward Contracts can be used to negotiate customized terms and the producers commit to pay a specific price previously agreed for a quantity of commodities in future trade, and future contracts are more standardized which allow producers to withdrawn from his position in the operation. This type of operation relies on trade market associated with animal products prices and it can be regulated by two means: daily settlement and warranty.
Rural production is surrounded by many aspects that can affect beef caltte production. Among them are climate that is an uncertain factor and market that can affect beef cattle prices due to is volatility. With regard to climate losses there is a tool often used: insurances. So, in order to avoid consequences of price volatility there were created futures contracts and forward contracts.
In 2010 a study in São Paulo, Brazil, concluded that in an universe of 86 beef cattle producers, 31 of them (36%) appealed futures and forward contracts and most of them are younger and more schooled than the farmers that didn't appeal for this type of financial tool.
Risk management is a key factor to sucess of a farm. Know how to control it, proves to be a good way of having competitive farms in the market and this type of contracts help farmers to maintain a certain level of incomes safety which make this tools either important on economic planning of beef cattle farms.
What are the major bottlenecks? Many beef cattle producers in rural areas do not have access to Internet and in their routine they don't follow and most of them don't even understand trade markets. These two aspects are determinant to create mistrust in this type of financial tools, making harder the implementation of this process.
Key factor of success: Regulation mechanims that ensure cover of losses or allow the producers to change the terms in real time are the key success factors.
What are the major risks? Futures contracts are customized so if anything fails in production the difficulty of cover losses its bigger. In conclusion risk is bigger in this type of contracts.
Relevant for the implementation of this innovative practice are:
1. Find an organization that mediates this contracts;
2. Train farmers to understand this process and how to consult trade market
Farms that have higher levels of profit and less debts are the main users of this type of contracts. Such tool is important to help beef cattle producers deal better with risk management and plan a bussiness without the uncertainty caused by beef cattle price volatility and climate dependence.
Author: Magda Fontes - FMV