Price dynamics of agricultural products

Price dynamics of agricultural products
Price dynamics of agricultural products
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When we come across the products lined up on supermarket shelves, we hardly reflect on the complex journey that each item has taken since its origin in the soil cultivated by farmers. Behind every product is a complex network of flows and activities that influence not only what we pay as consumers, but also what farmers receive for their efforts.

Agricultural producers face a series of challenges that directly impact their ability to produce food efficiently and profitably, one of which is price. Considering that agricultural production (plant or animal) is the basis for food production and the supply of raw materials to many other sectors, it is fully exposed to variations in the supply and demand of these products.

In the case of commodities, which are products of primary origin, not industrialized and traded globally, prices vary constantly, depending on supply in producing countries, demand in main consumers, geopolitical factors (wars, agreements, restrictions and others), impacts on the supply chain (logistics and distribution) and many other factors. A single event is capable of significantly changing prices even more at a time when news spreads quickly.

A very interesting example is orange juice. Since Brazil is the main global producer of the fruit, annually, when the PES (Harvest Estimation Research) event of Fundecitrus (Citriculture Defense Fund) takes place, which is broadcast to 26 countries (2023) simultaneously, publicizing what Brazilian production will be like that year, markets change instantly. In 2023, for example, after the announcement of a harvest slightly higher than what was expected by the market, juice prices on the New York Stock Exchange fell 9.0% until the following day.

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Another very dynamic example is soybeans and corn. Imagine that a bumper harvest in Brazil will increase the global supply of these products, resulting in lower prices. However, if adverse weather events occur throughout the cycle (droughts, excessive rain or frost), supply drops and prices increase immediately. Of course, this does not occur in isolation (just Brazil), the balance is made for all producing/consuming countries and the final calculation guides the behavior of the markets.

In addition to physical supply and demand, agriculture also involves the negotiation of “present” and “future” purchase contracts. “Present” purchase contracts, as the name suggests, involve immediate delivery of the physical product, while “future” purchase contracts involve delivery on a specific date in the future. These mechanisms are used to mitigate the risk of price variations by allowing producers to “lock in” the sales prices of their products, ensuring predictability in their income, at the same time that the purchasing company predicts the volume to be received, as well as such as operating costs.

These contracts can be traded on commodity exchanges, organized and regulated markets. For each commodity, there is an exchange most commonly used to guide prices. Some examples of important products for Brazilian agriculture: for soybeans and corn, the reference is the Chicago Stock Exchange (CBOT); in cotton, the usual one is New York (NYSE); and in sugar, the references are the New York (NYBOT) and London (LSE) stock exchanges.

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In the case of products that are not commodities, such as vegetables and fruits, negotiations take place in distribution centers such as CEAGESP (Companhia de Entrepostos e Armazéns Gerais de São Paulo) or Ceasas (Supply Centers). In this case, the prices charged serve as a reference for farmers in many regions. Another interesting example is the ornamental chain (flowers, foliage and others), where negotiations are carried out via auction for individual lots. It’s worth knowing a little more about Holambra’s Veiling, as a model case in Brazil: veiling.com.br

Succeeding in an agricultural business is not just about producing with quality and efficiency. It is necessary to constantly be aware of the variables that impact the market in which to take advantage of opportunities (upward moments) or predict risk (downturns). More than ever, the professionalization of the production link, through management and planning, is essential. Margins are achieved and results are expanded.

Marcos Fava Neves He is a full professor (part-time) at the Faculty of Administration at USP (Ribeirão Preto – SP) at FGV (São Paulo – SP) and founder of the Harven Agribusiness School (Ribeirão Preto – SP). He is a specialist in Agribusiness Strategic Planning. Check out texts and other materials at harvenschool.com and watch the videos on Youtube (Marcos Fava Neves). Thanks to Vinicius Cambaúva and Rafael Rosalino.

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The article is in Portuguese

Tags: Price dynamics agricultural products

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