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

Abstract

According to the United Nations Food and Agriculture Organization (FAO), world demand for beef over the next 20 years will increase by around 30%. Countries such as Brazil and India are expected to play a leading role in world meat supply. For this it is necessary to identify the main risks and minimize them, aiming at the financial balance of the producers. Climate and market conditions can greatly affect turnover leading to problems of financial imbalance and delinquency with financial institutions. Proper management and good weather conditions are necessary but not enough for the success of the activity. Cattle breeders and farmers depend fundamentally on the sale price of their animals and harvested products. In general, producers have little or no information at the time of selling their product. Except for large producers who have specialized advice, medium and small producers are subject to market fluctuations. At the same time, they cannot store waiting for better prices due to the lack of a silo and warehouse structure, which has a high installation and maintenance cost. In PIPE Phase 1, we developed the methodology and identified the main variables to anticipate upward and downward trend in animal prices in the State of São Paulo. Once this stage is over, our objective is to expand our area of operation to other producing regions of the country and to other countries. In addition, we will broaden our scope of study to incorporate soybean and corn price formation, the main livestock inputs, and see how these factors influence fluctuations in animal prices. The soybean and corn sectors have their own dynamic and specific operating structures. In this sense, it is justified to include them as objectives to be studied in the project. Importantly, Brazil is the second largest soy producer in the world, with a production of 114.843 million tons in a planted area of 35.822 million hectares and a gross production value of R$ 128 billion. Regarding corn, the country is the third largest producer in the world, with 82 million tons, approximately 16 million hectares and a gross production value of R$ 37.6 billion. That is, these are two strategic inputs and extremely important for livestock. Market research confirmed by AGROMOVE indicates that more than 70% of the chain's agents have difficulty finding the best time to negotiate the animals. The average pasture production cycle in Brazil is 2 years and commodity volatility has shown negative fluctuations of up to 14%, according to AGROMOVE surveys. Therefore, intensive beef cattle raising is a narrow-margin activity where the risk of market oscillation can undermine producer profitability. To this end, the research provided for in this project aims to identify the most relevant information and develop for each selected location an algorithm for decision making. The methodology aims to create algorithms that use such information to simply indicate the likelihood of falling animal prices. Once the algorithms are built, the research will create an automatic data collection model and price direction indicator that can be used in conjunction with other management tools available to producers such as futures markets, options and agricultural insurance. Once the algorithms are built, the methodology is intended to be used across the soybean, corn, wheat and cotton chains. Each has its own peculiarities and problems in trading and managing its risks, which will be considered when adapting the platform to these chains. (AU)