In recent times, significant fluctuations in the commodity market have led to severe losses for investors engaging in speculative trading on international markets. For Vietnamese companies, intermediaries such as the derivative products division of large banks recommend that businesses trade strictly to hedge price risks.
Explaining why many Vietnamese coffee companies suffer losses, despite the continuous rise in coffee export prices and the companies’ participation in futures trading, an official from the commodity derivatives department of a large bank mentioned that this is due to the companies’ speculative activities.
For example, a company signs an export contract for 100 tons of coffee for delivery in December, but at the time of signing, they only have 10 tons, leaving them with a deficit of 90 tons. To hedge the risk, the company locks in a futures contract for 90 tons of coffee. During this time, the company tries to buy coffee from farmers to meet the required quantity. However, when the coffee price rises sharply on the futures market, the company sells the futures contract with the expectation of buying back at a lower price. At the same time, they focus on buying from farmers to meet their export commitments. The price of coffee continues to rise above the price the company locked in, farmers run out of stock, and they raise their prices. The company fails to gather enough coffee for export, resulting in penalties for breaching the contract and causing significant losses. In this case, the company’s goal to hedge price risks failed because they speculated on short-term profits.
With the rapid price increases of commodity raw materials, followed by steep declines, many companies engaging in commodity trading on international markets have faced margin call issues, leading to significant losses and causing hesitation among businesses in using derivative trading tools to hedge price risks.
Two key reasons for the losses experienced by Vietnamese companies in commodity trading are: failure to follow the correct trading direction (long vs. short) and mismatched volumes between actual goods and futures contracts. Some companies, relying on their own experience, take risks and succeed, though such cases are few. For most producing companies, the primary goal is to hedge price risks.
According to some banks, the number of clients using derivative products to hedge price risks in items like cotton, metals, and soybeans (animal feed) has increased compared to last year. This has helped many businesses avoid massive losses in exports like textiles and imports such as steel and animal feed when raw material prices fluctuated. A general director of a large textile company mentioned that cotton prices had increased by 500% over the past two years, reaching a record $2.27 per pound in Q1, before dropping 50% and then rising again. The company had signed export contracts early in the year with forward prices set, and by using futures contracts, they were not worried about raw materials, even though they had to pay a fee.
However, the issue of future insurance fees for commodity transactions is causing concern among many businesses. A bank service director compared it to a car owner buying insurance for a car’s bodywork, and at the end of the year, the owner regrets paying the fee when nothing happens, only to wish they had bought the insurance when their car was damaged by a fallen tree. Many businesses find the fees for derivative products high and hesitate to use them or feel that futures trading is unnecessary. As a result, compared to countries like China, South Korea, and Australia, the use of derivative products in Vietnam is much lower.
A recent report from the State Bank of Vietnam also highlighted that the volume of foreign exchange trading between customers and banks has increased by an average of 20-30% annually, but spot transactions account for 90-95%, while currency options make up only 5-10%. Currency options should be a tool of interest to businesses due to their inherent advantages, especially in the context of exchange rate fluctuations.