A new platform for the management of the trading risks: maximizing gains in the livestock sector

Abstract

In agriculture, the revenue is highly affected by adverse weather events as well as international and domestic prices fluctuations. The same happens with cattle farmers that fundamentally depend on good sales prices for their livestock. The moments after a climatic problem or reductions in prices are essential in the economic performance of the farmer. The product offer in moments of low prices prevent the full recovery and continuity of its good performance in terms of productivity. Furthermore, it may lead to an increase in loan default with the financial agents. In general, the farmers have little or no information at the time of the sale of their product. Apart from large farmers that have specialized professional advice, the small and medium sized farmers are subject to market fluctuations. The time for the sale of the product remains a decision, which is generally incumbent upon the farmer. Beef cattle farming is one of the main markets for Brazilian agribusiness. This sector involves the slaughtering of more than 35 million cattle a year; besides the commercialization of calves, young cattle and cows, which are other links of the chain. The country is also one of the leading meat exporters. To evidence the importance of the cattle market, calves represent 50% of the cost of a farm, young cattle represent 70% of the costs of confinement and cattle represent 80% of the slaughterhouse's costs. According to Cepea (2018), in 2017 only the Livestock sector moved more than 197 billion of reais between inputs, agriculture, services and industry. In other words, it is a strategically important sector for the Brazilian GDP. However, surveys conducted by the market and confirmed by AGROMOVE, indicate that more than 70% of agents in the chain have difficulties in finding the best time to negotiate the animals. The average productive cycle in pastures in Brazil is 2 years and the volatility of the commodity showed negative oscillations of up to 14%, according to AGROMOVE research. It is a tight margins activity, where the risk of a market oscillation can end producer profitability. The research foreseen in this project aims to identify the most relevant information and develop an algorithm for decision making using, for example, the following parameters: market information; meat prices; beef prices; prices of replace products; supply and demand of meat; prices of beef cattle in several regions of Brazil; meat prices on the world market; dollar quotation; inflation; among others. The methodology aims to create algorithms that use such information to indicate in a simple way the probability of falling prices of live cattle. Once the algorithms are constructed, the research will create an automatic data collection model and a price direction indicator that can be used in conjunction with other management tools such as futures markets, options and agricultural insurance. Each one of them has its peculiarities and problems in the commercialization and management of its risks, and that will be considered when adapting the platform for these chains. (AU)