1. What is it?
It is possible to trade soy bean futures at BM&F. The object for that contract is the bulk soy for export, with the following specs: 14% of humidity, 1% of impurities, 30% of broken beans, 8% of unripe grains, 8% of damaged beans (up to 4% of burned, up to 6% fusty, geminated, irregular and defective), where burnt grains shall not exceed 1%, and 18.5% oil contentand.
Trading happens in dollar per sack. Each sack contains 60kg, free of sales tax. The minimal lot (1 contract) corresponds to 450 sacks of 60kg each, or 27 tonnes each. Physical deliveries are possible, but for such the buyer must meet BM&F rules, by filling a document that seals his intention of physically exercise the commodity (AILE). The sacks must meet all requirements proposed by BM&F. Physical executions also imply into transport, freight and other costs. However, if the investor is not looking for a proper delivery, notes will be financially liquidated by the maturity date (most cases).
Soy futures market was firstly created to guarantee a fair price for sacks, either to sellers or buyers, offering some protection for dealers within this market. Futures trading assures fair pricing for soy beans in an specific period in the future. Thus, producers can get better prices for their products, covering costs and making profits. On the other corner, buyers can find soy beans at a relatively predictable pricing, making more precise forecasts on their input needs.
As Brazil stands as the world’s second largest soy producer and exporter, food companies, like Brasil Foods for instance, compete with several other companies globally. Because of that, anticipating input costs is crucial to determine purchases and cash flow. Some chicken and pork producers also depend on soy beans to feed their herds, and can suffer with huge losses when soy prices soar. The dollar also affects directly all soy producers – when the dollar is high, exporting is a better option, otherwise selling locally sounds more advantageous. For all companies in the food supply chain, using this commodity tends to be crucial. However, even individuals can earn from investing in soy, by speculating on futures to make profits.
Soy futures market change according to the scenario in the physical market, and also as the maturity date comes. Pricing changes also reflect weather conditions, like rain intensitity, as well as terrain conditions, given that both factors can affect quality and volume of the crop. Also, the harvest period influences prices – the closer we are from that, the lower tend to be the prices.
Soy bean futures trading code is found as follows:
1. Futures code for soy – “SFI”.
2. The letter corresponds to the expiry month, as follows:
3. Expiry year.
Exemplo: to deal with a soy contract expiring by November 2014, we have the following code:
SFI X 14
Soy futures have the following characteristics:
|Object||Soybeans in bulk, export, with base oil content of 18.5% and limit moisture of 14.0%|
|Trading unit||450 sacks of 60 Kg (equal to 27 tonnes)|
|Minimal Quotation Change||US$ 0.01 per sack and 60 Kg|
|Maximum Quotation Change||5.0% over adjusted prices for the day before the trading date|
|Standard Lot||1 contract (equal to 450 sacks of 60kg or 27 tonnes)|
|Position Limits||1,800 contracts or 25% of the open positions per month of expiration|
|Trading Timetable||9am –3pm (Regular Trading) 3h15pm – 6pm (After Market)|
|Last trading day||9th work day for the monthbefore the expiration date|
It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of SFI futures. The financial settlement of day trades is automatically performed on the first business day following the date of closing of the business.
The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.
For SFI contracts, the daily adjustment happens the day after the deal, or D+1. However, on the expiry date only, updates are made in the same day, or D+0.
It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.
The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.
For SFI contracts, the guaranty margin is aproximately 4.32% of the total invested amount.
Costs from trading SFI futures are:
Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, costs reach 0.30% for regular operations and 0.07% for the day trade, based on the theoretical redeem value.
Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:
Emoluments: The fees charged by the BMF values related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. On SFI futures contracts, the fees are charged according to the following table:
|Number of contracts||Range value|
Liquidation charge: this charge regards to the liquidation of the contracts by the maturity, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For soy bean contract it reaches US$ 0.35 per contract.
Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.
Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded.
For SFI contract, charges reach 0.0028% per contract and day.
Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.
The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.
Currently, registration charges for SFI futures are estimated as follows:
|Number of contracts||Range value|
Soy futures can just be set for expiring in particular months, which are March (H), April (J), May (K), June (M), July (N), August (Q), September (U) e November (X).
By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held.
Soy ‘Roll Over’ – SR1
Roll over operations on soy – SR1 – comprise the strategy of dealing with two different expiration dates of soy futures at the same time.
However, for SR1 deals, instead of generating new positions in a new contract, it will be automatically transformed in two different operations: the first will have the expiry date set up as being the SFI’s original date (short leg), and the second fixed for expiration in the SR1’s set up date (long leg). Thus, the SR1 will not have open positions at the end of the day, being distributed on their business maturities of Soybean Futures Contract.
3. Profitability and risks
Making profits from investing in SFI futures is something that depends directly on price changes at the soy beans on spot Market and future market. Such change can be motivated by a serie of factors, peaks of demand or supply for a period, or the other way round. If the investor buys a SFI contract and prices drop, he loses money, which equally happens when he sells a contract and prices go up thereafter.
SFI futures are widely used as hedging tool, for protecting prices from floats that can be affecting both producers, herd creators, processors and companies that demand these kind of raw materials. SFIs can be also used as a tool for speculating, which can affect all the supply chain.
Taxes over SFI futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.
For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.
All costs and fees paid for investing can be deduced from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the subsequential months, as long as the operations are similar.
The payment of taxes is the responsibility of the investor himself, except when the tax is direct at source and must be calculated and paid monthly on the last business day of the month subsequent to the determination. The calculation is performed over the term of the contract and not monthly.
Let’s suppose a poultry farmer wants to hedge prices for buying 20,000 sacks of soy beans, to feed their herd for two months. The farmer wants to protect himself against any price hikes, once if soy prices increase too much, he will need to lift budget for buying sacks. To find the contract size he needs to buy, let’s make the following calculation:
= Number of sacks / Contract size
= 20.000 / 450 = 44,44 ou 44 sacks
So, for hedging his position he needs to buy 44 contracts, then consider the following figures:
|Price per sack||US$ 25,00|
As days go by, we have the following results (daily settlement):
|Date||Adjusted price||Daily Settlement|
|D+60 (maturity)||US$ 27,10||18.400,00|
D+0: in the first day, 44 contracts are purchased for US$ 25.00 a sack.
D+1: soy futures prices drop to US$ 24.76. This way, the daily settlement is found by the difference between the current and the previous quotations (US$ 24.76 – US$ 25.00) times the number and size of contracts (44 * 450 = 19,800). Thus, as prices dropped, we shall have a negative adjustment of US$ 4,800.00.
D+2: we have a positive adjustment of US$ 3,600.00. (US$ 24.94 – US$ 24.76) * (44 * 450) = US$ 3,600.00.
D+3: another positive adjustment, with soy prices increasing. (US$ 25.18 – US$ 24.94) * (44 * 450) = US$ 4,800.00.
D+4: yet another hike makes quotations to level up. (US$ 25.70 – US$ 25.18) * (44 * 450) = US$ 10,400.00.
D+5: a positive adjustment. (US$ 26.18 – US$ 25.70) * (44 * 450) = US$ 9,600.00.
Adjustments will happen through the maturity date. Just then we can find whether the investor made profits or losses from the assets. If soy prices reach US$ 27.10 by the expiry date, then we have:
1. Sacks are purchased by spot prices or US$ 27.10 per sack, which leads to expenses of US$ 542,000.00 (20,000 sacks * US$ 27.10).
2. Soy futures made profits of US$ 42,000.00 (sum of all positive and negative daily settlements).
3. If we deduct profits on the operation (US$ 42,000.00) from the total farmer’s expenses (US$ 542,000,00), that makes total costs to reach US$ 500,000.00. That turns it just as though each sack was bought for US$ 25.00 rather than US$ 27.10 (spot prices).
4. To find BRL gains, one must multiply PTAX exchange rates for the operation’s results. For a PTAX of 2.25, profits in BRL reach BRL94,500.00.
The example above, we can conclude that, regardless of whether the price of soybeans rises or falls, the participants protect themselves from risks associated with price fluctuations, ensuring its profits in advance and ensuring greater stability to its activities, as well as a better estimation of the flow cash.
*Taxes and transaction costs have been disconsidered.
- The top advantage for soy futures is the possibility of hedging and protecting companies against price changes, which gives producers and food companies more safety to planning and reinforcing their cash flow.
Possibility of speculation on price variation Soy. If investors think the price will fall, he can sell futures contracts Soy, without investing money (only the initial margin) with your profit or loss on a daily basis in everyday settings, as variation in the price of a sack of Soy.
- Daily changes;
- Guarantee margins;
- Income taxes;
- Expiry dates, soon, you can not carry forever the position, having to “roll over” to the next maturity if you want to continue positioned;
- High risk.