How to originate a strategic raw material with profitability and safety?

Barter Trade

The solution to Soybean origination in South America

• It’s a common practice in South American Countries that produce Soybeans for export.

• Primarily, as a financing mechanism for local farmers to obtain the inputs.

• Large Tradings, such as ADM, Bunge, Cargill, Dreyfuss and others, are increasing the use of this tool as an approach to direct access to farmers and their production.

• The best way to secure the raw material origination and dampen the impact of price volatility without invest in production assets and/or land.

Main Players Avoiding Risk of Default

• Soybean Traders, Crushing Industries, Seed Suppliers, F e r t i l i z e r F a c t o r i e s a n d Agrochemical Multinationals are the main players that take the Barter system to reduce the default risk of the Farmers.

• Accounts receivable are usually collateralised with the crop for which the price risk can be hedged on the commoditiy exchanges (CME, Dalian, BM&F).

• The securitization of the accounts receivables can also be used by the Tradings and Farm Input Suppliers as collateral to attract external funding from Banks, lowering their credit need and working capital to the Barter-Trade scheme.

Financial Management

• Chinese Giant Groups like COFCO, through the affiliated companies (NIDERA and NOBLE), are ensuring the soybean supply while reducing their dependence on the Grain Trading Companies.

• China is the most important production platform of some strategic agricultural inputs (Agrochemicals and Fertilizers) in the World.

• Its a logical decision for chinese corporations to take the advantage of the low prices of the inputs to exchange by Grains, in order to reduce the final cost or to improve the profitability of their operations.

Chinese Players are using the Barter Trade

In the context of high prices and global scarcity, the “Battle" for South American Soybean Supply will be won by those with the most direct access to Farmers.

The direct access involves having the key inputs and the financial platform, which Chinese companies have.

• Competitive Portfolio of Inputs

• Domain of different aspects of the Supply Chain (origination, transport, storage, etc), the Financial Flows, the Legal variations and the Risk Environment

• Deep knowledge of the Hedge mechanisms to mitigate the price flutuation and to ensure the profit level

Which are the elements that can ensure for a chinese Crusher or Grain Trading to obtain Soybean for “cheapest” Prices?

• The Trading close the barter transaction with a Reseller/Cooperative or Farming Company in South America.

• The Bank previously approves a credit limit to the Client.

• The Bank grants a credit facility to the Client acquiring the Inputs supplied by the Trading. In exchange, the Client signs a “Futures Delivery Contract” in favor of the Trading by the equivalent amount of Inputs purchased plus the interest rate.

• The Trading signs a Risk Participation Agreement - “RPA" with the Bank, holding an equivalent risk of the gross margin correspondent of the Input Supply transaction. In the case of default by the Client, the Bank would pay x% of the contract value less the gross margin of the operation. ZERO CAPITAL RISK.

• The Client shall endorse or transfer the collaterals in favor of the Bank.

• The collateral value (“Futures Delivery Contract”) endorsed to the Bank shall be sufficient to cover 130% of the Principal plus the interest rates of the deal.

Risk Management in partnership with an International Bank

Risk Management in partnership with an International Bank

• In the harvest period, the soybean must be delivered to the designated warehouses, which will be monitored by SGS, Contról Union or other international surveyor.

• The Stock Cover Ratio must be at least 120% of the Principal Value plus the interests.

• The soybean export transaction must be made by the Trading to acceptable Off-takers such as Chinatex, Cofco, etc. The financial liquidation of the shipments shall be made through the coordination of the partner Bank.

• If all the transaction runs well, the holding margin deposited as the “RPA” will be transferred by the Bank, after the deduction of the banking expenses, to the Trading.

• The Bank will open an account on behalf of the Trading to execute the hedge operations.

• 1 hectare of Soybean produces in average 3 ton (medium technology).

• 1 hectare requires in average USD 450,00 of different Inputs (Seeds, Fertilizers and Agrochemicals), most of them produced in China.

• The average gross margin can reach 20% or USD 90,00/hectare or 240kg of soybean, considering an average yield of 3.000kg per hectare.

• Taking an entire vessel of 60.000 ton, this ratio means a gross profitability of 4.800 ton of soybean or USD 1.795.200,00* or USD 29,92/ton per shipment.

• * Price Basis of USD 10,20/bushel as an example.

A practical example - Barter Trade - Inputs/Soybean Ratio

• Taking the commercial prices of different Inputs, the originator can choose the better options to generate the exchanging by Soybeans.

• Its a matter to plan a consistent strategy, considering all the costs, the complexity of the process and the risks involved.

• Due the high value added of the Agrochemicals, such as the Insecticides and Fungicides, its possible to build a very profitable exchange ratio (superior than 30%).

Barter Trade - Flexibility

• The scarcity of credit in South America, the raise of the interest rates and collateral demands will increase the necessity to build an efficient Barter Trade system at the Soybean sector.

• The Chinese companies shall increment their market-share at the Soybean origination through the exchange by Inputs, taking the advantage of its solid economy and its robust demand for protein as the key fundament.

Barter Trade - Trends

Eduardo Lima Porto - May/2016

"When it is obvious that the goals cannot be reached, don't adjust the goals, adjust the action steps”.

Confucius