September 30, 2019 / 2:33 PM / 3 months ago

UPDATE 1-Brazil grain grower Terra Santa using derivatives to reap trade war gains

(Adds details from interview with Terra Santa chief executive)

By Roberto Samora and Ana Mano

SAO PAULO, Sept 30 (Reuters) - Listed Brazilian grain grower Terra Santa Agro has stepped up use of complex derivatives to defend positions and potentially profit from commodity price volatility amid a global trade war, Chief Executive Officer José Teodoro Junior said.

Terra Santa is using “collar options” and “accumulator” contracts whereas last year the use of soy and cotton futures was a more prevalent form of hedging, Teodoro told Reuters.

This way, the company can avert the risk of “a mismatch” related to futures prices and the so-called basis premium risk, he said.

One of the largest grain growers in Brazil with annual sales of about $192 million, Terra Santa has sold more than 50% of new-crop soybeans through complex derivatives.

“In a scenario of greater uncertainty, we adjusted the strategy and did some zero cost collar and some zero cost accumulators,” Teodoro said in an interview.

In mid-September, November soy futures peaked at $9 per bushel, but on Friday closed below $8.83, as trade war concerns linger.

Before unwinding a number of “accumulator” positions this season, Terra Santa was able to close “many sales” at levels of $9.70-$9.80, Teodoro said.

In the case of cotton, which accounts for about half of the company’s revenue, Terra Santa has already pre-sold about 70% of the 2019/20 crop. Of that, 20% was traded at around 70 cents while the remainder through derivative instruments setting floor and ceiling price ranges of 60-63 cents/68-72 cents and of 60-62 cents/66-69 cents.

ICE December cotton contract closed at 59.20 cents on Friday.

Keeping high bets on cotton, the company plans to expand plantings by 11.4% to almost 40,000 hectares this season, as Brazil joins China, India and the U.S. among the world’s four largest producers.

“Brazil’s cotton output has been growing a lot. This shows the slowest marginal cost of expansion is in Brazil,” Teodoro said.

The company plans to plant cotton in January, right after collecting the soy from the fields, to take advantage of abundant rains, he said.

Terra Santa will have planted an estimated 10,000 to 12,000 hectares of soy by month’s end, compared to about 14,000 hectares in September 2018, as scarce rains slightly delayed plantings of the oilseeds this year. ($1 = 4.1523 reais) (Reporting by Ana Mano and Roberto Samora; editing by David Evans and Grant McCool)

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