C O M M O D I T Y R I S K M A N AG E M E N T & T R A D I N G

Special report

Managing risk
in agricultural
commodities
risk.net February 2015

Sponsored by
 managing risk in agricultural commodities

CONTENTS
Biofuels go global
SCB & Associates
With global output at an all-time high, and increasing
demand for clean and secure energy, biofuels
bymandesigns / Shutterstock.com

have become integral to international energy

markets. SCB & Associates offers customers the
market insight and product knowledge to trade
biofuels effectively

Centralising force
Murex

INTRODUCTION As more agricultural organisations explore

ways to develop and enhance their trading and
risk management activities, a flexible, robust,
Agricultural commodities are rarely written about centralised technology platform should be a
in the mainstream financial media, and often only top priority
hit the headlines when an extreme weather event
or natural disaster affects supply and prices. But, Global expansion
despite this relentless focus on bad news, many CME Group
public and private sector organisations exposed to An increasingly diverse set of market participants
agricultural commodities fail to make full use of require agricultural price risk management tools that
modern risk management techniques. Instead, they can not only match current needs but also adapt to
blame suppliers, traders and liquidity providers for future market developments
shortages and price spikes that hit their balance
Peter Petkov, sheets, subsidies or social programmes. Trading talent
publisher, In fact, agricultural commodity risk is just like Commodity Appointments
Energy Risk
any other type of commodity risk, and needs to be After an active year for mergers and acquisitions,
managed properly. Naturally volatile, agricultural competition is fierce among agricultural trading
commodities can be easily spoiled and are also companies looking to attract the best staff
affected by the usual problems, such as shipping
capacity and transport costs. Although such risks can External pressures
be absorbed by firms and governments with large Export Trading Group
balance sheets, they might prove lethal for others if How agricultural commodity risk management
they are not managed appropriately with exchange- strategies have evolved in response to recent market
traded or over-the-counter derivatives. shifts spurred by the latest global financial crisis
This report highlights price risk management
strategies by looking at how leading companies Adapting to change
manage their exposures to agricultural commodities. Cargill Risk Management
It also examines the commodity trading and risk The continued evolution of commodity markets
management and IT systems used in the market – has necessitated the development of new risk
both of which are vital tools for helping firms get management strategies and created demand for a
a handle on their risk – as well as the impact of more diverse pool of trading partners
regulatory change.

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sponsored by

managing risk in agricultural commodities

BIOFUELS GO GLOBAL
With global output at an all-time high, and increasing demand for clean and secure energy,
biofuels have become integral to international energy markets. SCB & Associates explains
how it offers customers the market insight and product knowledge to trade biofuels effectively

Biofuels have come of age as a sizeable from government support schemes.

Ethanol versus gasoline
and integrated part of the world’s With agricultural yields and acreage
energy mix. Mature biofuels support trending higher each year, so-called
1
programmes in the US and Europe ‘discretionary biofuel blending’ looks
that are aimed at cutting carbon likely to become more prevalent 0.5

emissions and increasing energy in future as global oil products

¢ per gallon
independence led global biofuels consumption continues to climb. 0

output to reach more than 1.3 million

barrels per day in 2013. This makes Crossing continents -0.5

biofuels as large a contributor to Understanding the regional policies

global energy supply as mid-ranking and dynamics underpinning trade in
-1

OPEC members Libya or Algeria. physical and listed biofuels products -1.5

Ethanol now delivers around 10% of is key to providing customers with 18 Dec
2013
18 Jan
2014
18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov

the entire US gasoline supply, while the market overview they need to
the European Union (EU) is targeting trade effectively. As well as providing
a 10% share for renewables in road a dedicated regional focus, SCB’s discovery in the world’s largest
transport fuel by 2020. Governments brokerage offices in Europe, the markets for listed biofuel derivatives
in parts of Asia and Latin America US and Singapore give its eclectic and blending obligation tickets.
are stoking double-digit demand customer base broader global visibility Desks covering listed agricultural
growth to achieve the same emissions of the risk management needs and and energy products allow customers
reduction and security of supply goals trading opportunities available to to access the futures instruments
as US and European governments. counterparties operating across needed to hedge market risk alongside
Manufactured largely from regions. SCB’s research arm packages their physical and over-the-counter
agricultural commodities but the firm’s wide-ranging trade- swaps portfolios. And SCB remains
consumed in the traditional fuel generated market data into accessible at the forefront of the development
supply chain, biofuels prices are bespoke analysis and tools to better of new hedging instruments, with
driven by the complicated interplay inform customers’ trading needs. SCB’s Singapore office instrumental
between crude oil and agricultural In 2014, SCB’s teams of physical in establishing CME’s new dollar-
fundamentals. Policy changes brokers in Singapore, Europe and denominated swaps in palm oil and
regarding specific regional biofuel the US helped deliver Malaysian and olein, aimed at international firms
support structures represent another Indonesian palm-based biodiesel exposed to the growing South-east
ever-shifting fundamental. and Argentinian soy-based biodiesel Asian palm oil market.
This mix creates a complicated to destinations in Asia, Europe, the Although a relative newcomer
trading and hedging proposition for the Mideast Gulf, west Africa and the to the world energy stage, the
agricultural and biofuel producers, oil US. Brokers have co-ordinated deals biofuels industry is evolving rapidly.
companies, trading houses and banks for Brazilian ethanol into the huge Commercial technologies to convert
involved in the well-to-wheel biofuels US domestic market, as well as from waste biomass into high-quality,
supply chain. With both producers the US to South-east Asian export environmentally friendly liquid fuels
and consumers spanning the globe destinations. EU biofuels policy, will drive the next step change in
from Latin America to Asia, arbitrage meanwhile, is starting to fold biofuels market structure. SCB will continue
opportunities for achieving supply/ trade into existing emissions trading to provide its customers with the
demand efficiencies are plentiful. schemes. SCB brokers have been at market insight and understanding
Sizeable discounts relative to the forefront of navigating customers needed to succeed in this fast-
conventional fossil fuel prices in 2014 through Europe’s patchwork of markets changing but fascinating environment.
for the corn, palm fruit and oilseeds as they adjust to new mandatory
needed to manufacture most ethanol standards aimed at achieving
and biodiesel lifted oil company international carbon reduction targets. SCB & Associates Limited T: +44 (0)20 7571 0508
demand for cheap biofuels to use SCB’s US and European swaps www.starcb.com E: [email protected]
as a blendstock, without any help desks facilitate execution and price
managing risk in agricultural commodities

CENTRALISING FORCE
As more agricultural organisations explore ways to develop and enhance their trading and
risk management activities, a flexible, robust, centralised technology platform should be a top
priority, says Amine Chbani, head of commodities business development at Murex

Managing fluctuations in commodity with producers. Kraft Foods, for exposure to various types of risk
prices has become central to many instance, signed a long-term supplier within the commodity markets.
agricultural organisations’ business agreement with cocoa and chocolate A starch producer, for example,
activities in recent years. Volatility manufacturer Barry Callebaut in might sell to diverse industries such
can affect a company’s bottom line, 2010, making the Swiss firm a major as human and animal nutrition,
creating uncertainty that can impact global cocoa and industrial chocolate pharmacy/cosmetology and
funding, investment programmes supplier for Kraft. biochemistry. Each open-sell contract
and shareholder income. As a result, Although one of the most common creates a potential exposure to corn,
agribusiness organisations have strategies for managing fluctuations in power, sugar and freight prices, as well
increasingly seen the need to adopt the price of commodities is the use of Amine Chbani as to different currencies and even
a more active approach to managing financial hedging tools, this method interest rates, if financing is involved.
commodity price risk in recent years. of price risk management is not The same producer has also typically
But what strategies are common to without its challenges. Most recently, purchased raw materials on the market
this part of the market? How has post-financial crisis regulations have or through long-term supply contracts
the financial crisis and subsequent impacted supply and demand for these that might vary in terms of volume/
regulatory squeeze affected the products. On the supply side, several quality delivered and type of price paid.
market? And what internal changes major banks, including Deutsche As such, the producer needs to
have – and should – agribusiness Bank, Barclays and JP Morgan, have be able to map the demand forecast
companies put in place to enhance scaled back their commodity market and actuals on the supply side and
exposure visibility and build a robust activities, reducing liquidity in some determine the net volume exposure
price risk management programme? segments of the market. The banks that to price risk for each risk factor and
remain as dealers have seen increased contract time period. The complexity
Changing markets competition from hedge funds and of this challenge only increases when
Agribusiness price risk management commodity houses, which have taking into account the fact starch can
programmes can include a range expanded their commodity trading be produced using a variety of inputs
of strategies. Vertical integration, teams to fill this vacuum. including corn, wheat, potatoes, rice
for instance, allows an agricultural On the demand side, many and tapioca. Additionally, some of
company to expand further up or corporates and agribusiness companies those commodities may not even
down the production chain and are subject to more regulation related trade in a liquid market and so risk
diversify the markets and regions in to trade reporting, counterparty risk managers must use proxies, creating
which it operates. Singapore-based and changing accounting standards, additional basis risk.
commodity house Olam International, which has increased hedging costs. In
for example, purchased Archer Daniels addition to the new rules, agribusiness Legacy IT complexities
Midland’s cocoa processing business companies currently face several As a result, there is a very pressing need
for $1.3 billion in December 2014. other challenges when using financial to extract, transform and aggregate
Olam will now operate throughout tools to hedge against today’s volatile a lot of data to properly monitor
the entire cocoa value chain – commodity prices. an organisation’s real commodities
from production, to processing, to exposure. This is further complicated
marketing, allowing for more effective Lack of visibility by the fact that, after years of mergers
total margin management. The agricultural commodities business and acquisitions activity, some
Other options available to a is a diverse and complex ecosystem agribusiness companies have layered
processor may be to substitute more that requires major expertise to create many legacy IT platforms on top of
expensive commodities for cheaper meaningful financial positions to one another. Many organisations still
alternatives, enter into long-term hedge. And it is not always easy for operate in silos, allowing business units
fixed-price contracts or develop organisations to gain the necessary to develop their own solutions, rather
exclusive long-term partnerships visibility when it comes to their than forming a central technology hub.
 sponsored by

differentiated by physical and logistics

characteristics, such as quality, location
and international commercial terms;
and the ability to manage several
commodities and other asset classes,
including foreign exchange and interest
rates, on the same platform.
But organisations should only invest
in a new platform if it is part of a real
transformation programme. While
some organisations have the necessary
Aodaodaodaod/Shutterstock.com

in-house expertise to build their own

systems, or to extend their enterprise
resource planning or treasury systems,
many turn to off-the-shelf trading and
risk management solutions. Hedging
strategies typically involve the use of
standard products and, as standard
These layers can affect visibility local operating centres through technology solutions exist to support
when trying to manage exposure transparent price transfer policies. these activities, why reinvent the wheel
to key commodity markets. In an A centralised trading desk receives and develop something that already
attempt to address this problem, input from each location into a master exists in the market?
some organisations have invested in trading and risk management system Although linear derivatives
a reporting layer connected to a risk that provides a global view of the and vanilla options are typically
warehouse to achieve better company- organisation’s overall commodities the most popular products in this
wide technological integration. The exposure. This allows risk managers to sector, agribusiness players are
integration layer gathers data from work out a cost-effective company-wide also increasingly making use of
myriad internal systems, stores it in a hedging strategy. more complex products such as
massive risk warehouse and then uses The benefit of having this global accumulators. These more tailored
built-in business intelligence tools view is that the organisation’s entire products provide a way to build a
to make sense of the information. position can be taken by a central desk position over time at enhanced price
However, such a strategy can be a that interacts with the market and levels – sometimes at zero initial cost
productivity trap. It often involves a lot executes the transaction. This should but with more risk. Over a period of
of manual effort and hidden costs, and save time, money and resources. In six or nine months, for example, the
it may not even provide the necessary certain situations, it also allows the product accumulates cash or positions
reporting frequency to guarantee organisation to profit from natural in futures, depending on changing
optimal reactivity to market events. hedges when netting different positions market prices. This type of product
in terms of currencies or in certain provides a lot of flexibility in terms
Creating a central hub commodity markets. of building a position and creating a
An additional complicating factor cost-effective hedge, but it should be
for many agribusiness organisations Robust technology platform carefully monitored using a robust
trying to manage commodity price Organisations implementing this type trading and risk management platform.
risk is the fact they often have business of centralised trading strategy typically Making price risk management
units all over the world, all of which look for technology platforms with a a more integral business activity is
create exposure to commodities. An range of tools including multi-entity crucial for those companies facing
international chocolate maker, for access, multi-currency functionality changing markets and a more volatile
example, might have several production and multi-Gaap software solutions. price environment. When establishing
units in different regions, each Today’s trading and risk management a strong strategy for monitoring
forecasting a certain level of demand platforms provide a variety of and managing commodity price
for cocoa, dairy products, sugar and tools to easily build, manage and fluctuations, agribusiness organisations
energy. As such, establishing a central mitigate enterprise-wide commodity must have access to the necessary
trading desk that serves different positions. This can include: native unit tools and be able to implement robust
business units across an organisation conversions, with formulas linking systems and processes to support
can be a useful strategy when hedging end-products to raw commodities; risk management activities. With
against commodity price fluctuations. family curves projecting illiquid the support of a centralised trading
These desks can be stand-alone products to liquid market equivalents; technology solution, enterprise-wide
profit-and-loss centres reporting to spread correlation management; real- risk management can become more
procurement or treasury and servicing time prices; valuations against curves efficient, effective and successful.
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managing risk in agricultural commodities

GLOBAL EXPANSION
An increasingly diverse set of market participants require agricultural price risk management
tools that can not only match current needs but can also adapt to future market
developments, says Tim Andriesen, managing director of commodity products at CME Group

Hedging has always been a popular Customer feedback has also enabled Historically, the over-the-counter
way to manage commodity price the continued development of CME (OTC) market fulfilled a lot of the
risk, particularly in more developed Group’s agricultural options complex. demand for non-standard options.
agricultural markets and among the In the past, we found that while many However, regulations put in place
processors and manufacturers that of our customers were interested in after the onset of the financial
form the middle of the agricultural using options to manage price risk, crisis in 2008 have squeezed OTC
value chain. However, the popularity they were often deterred by high market activity, driving demand
of this form of risk management premiums in times of market volatility. for non-standard options products
has also spread to other parts of the With this in mind, CME Group offered by exchanges instead. As
market in recent years. Producers are developed a range of options that carry Tim Andriesen these new options products have
becoming increasingly sophisticated in lower premiums but still provide solid gathered pace in the market in recent
their use of hedging tools to manage protection against price fluctuations. years, CME Group’s customers tell
risk, for instance, as are end-users A corn producer, for example, might us they have begun to replace the
of all types. We are also seeing an want to hedge against a drop in prices traditional tailored OTC offerings
uptick in interest in agricultural risk when planting corn for the upcoming in this area. Indeed, it is difficult
management in new countries and season in January or February. for OTC products to compete with
regions around the world. In line with Traditionally, the producer would exchange-traded futures and options
this increased activity, agricultural buy an option that expires in November in markets with slim margins, such as
organisations continue to become more on the following December’s futures the agricultural sector. Our bid-ask
astute at managing risk through the price. However, CME Group’s short- spreads are extremely tight and the
use of futures and options products dated new crop options contracts market is very deep and has a lot of
such as those offered by CME allow producers to buy a contract liquidity. As such, CME Group has
Group. And access to a diverse set of covering a shorter period of time at a been very successful in designing
risk management tools is crucial for reduced premium. A contract covering products to help customers manage
businesses that wish to hedge against the planting season, for instance, commodity price risk.
fluctuations in agricultural commodity would expire in May, rather than in In line with increased interest
prices efficiently and effectively. November, and would therefore cost in hedging commodity price
As interest in this area of risk less. Such products have been created fluctuations throughout the world’s
management continues to grow, as a direct result of interaction with agricultural markets, CME Group
exchanges must maintain a constant customers who have expressed interest will also continue to expand the
dialogue with their users, keeping in using options in a more targeted way. global distribution of its risk
abreast of market trends to ensure As a result of this focus on customer management products on Globex,
contracts provide the necessary feedback, CME Group’s non-standard CME Group’s global electronic
coverage. CME Group, for example, options products – such as options trading platform. For example, since
worked with the market to tweak the on calendar spreads or short-dated 2010, traders have had access to
specifications of its live cattle contract, contracts – have been gaining traction Bursa Malaysia’s benchmark palm
which celebrates its 50th anniversary in the agricultural market. CME oil futures contract on Globex.
this year, to ensure it remains consistent Group’s weekly agriculture options This means Globex offers hedgers
with current commercial terms. traded more than 110,000 contracts and traders access to the two most
Improvements in feeding productivity in October 2014 – the second-highest popular vegetable oil contracts in the
in the livestock market in recent years volume since inception and a 245% market – soybean and palm oil. Such
have resulted in larger cattle. Since the increase in average daily volume partnerships provide CME Group’s
contract is physically delivered, we want (ADV) year-on-year. By November customers with a great deal of
to ensure delivery of cattle is consistent 2014, open interest in 2015 short- flexibility when it comes to managing
with the physical marketplace. As dated new crop options had already commodity price risk, and we look
such, it is very important for us to stay reached more than 45,000 contracts. to continue building partnerships
close to our customers and ensure our More than 26,000 contracts traded throughout the global agricultural
products are appropriately designed to during November 2014, a 158% markets to ensure that continues to
reflect their needs. increase compared to November 2013. be the case for our customers.
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managing risk in agricultural commodities

TRADING TALENT
After an active year for mergers and acquisitions, competition is fierce among agricultural
trading companies looking to attract the best staff, says Commodity Appointments’ Matt Havill

The agricultural trading job market is periods of intense activity, such as tracked more than 2,100 career
likely to continue to be very active in that seen in 2014, competition for the moves across the commodity trading
2015, according to analysis conducted best staff can become fierce. It can be markets in 2014, which saw 347 job
by executive search firm Commodity challenging for organisations to find changes within the agriculture and
Appointments. Although trading and retain strong personnel at the best soft commodities complex, specifically.
conditions in key markets such as of times but, with so much change The most active companies were
grains and sugar have been poor of late, occurring throughout the agribusiness Brazilian bank BTG Pactual and
recruitment activity tends to spike in markets, the healthy rivalry seen for the global commodity trading house Noble
the periods immediately following the top talent this year is likely to continue Group. In addition to the companies
execution of mergers and acquisitions – into 2015. that are looking to hire new employees,
and 2014 has been an active year As a direct result of this competition, we also work with a wide range of
for deal-makers. from a remuneration perspective, the individuals to help them find new
Recruitment levels have been boosted industry is beginning to develop into roles – from traders to country heads,
by deals such as Chinese agricultural a more mature trading environment. and risk managers to chief executives.
trader Cofco’s $1.5 billion purchase of Many agricultural companies – from This provides us with insight into
a controlling stake in Noble Group’s large physical players to asset-light the remuneration packages offered for
agricultural trading unit last April trading houses – are starting to many different positions and levels at
following its earlier acquisition of a implement more desirable bonus organisations throughout the industry.
51% stake in grain trader Nidera NV structures in order to attract and keep Thanks to our ability to track each
in February, as well as the launch of traders and commercial teams. Such sector and collect detailed information
Alvean; Cargill and Copersucar’s schemes are typically directly related to on how employees are remunerated,
50/50 sugar-trading joint venture in the profit and loss performance of the our clients are fully equipped with
August 2014. While the entrance of trading desk. the most up-to-date information
new participants in this market has Companies that wish to attract necessary to attract and retain the
had an impact on hiring trends, several the top talent must have access to desired talent. As an example, during
large merchants and banks, such as quality information about the typical a recent salary benchmarking exercise
JP Morgan and Barclays, have salaries, bonuses and benefits offered for a client that wished to ensure its
also been in the process of by competing firms. Through the traders were competitively remunerated,
winding down divisions or use of extensive in-house data Commodity Appointments gathered
diversifying portfolios and information-gathering data from more than 1,100 traders
away from the resources, Commodity across the European gas and power
commodities sector, Appointments can harness sector. This allowed us to paint a
freeing up traders big data to analyse where detailed picture of compensation trends
and risk managers the markets have been, throughout this section of the market
for positions at where they are now and for our client.
other agricultural where they are likely to Firms that wish to compete for,
trading go in the future. We and attract, the top trading and risk
companies. have an entire team management talent in the agricultural
In general, any dedicated to collating markets need to have access to the right
restructuring or key information on information. By partnering with an
diversification of remuneration and providing executive search firm that can provide
trading organisations analysis, intelligence and this data, trading companies can
is likely to lead to trend forecasting we can use ensure they have access to the market
movement of the to help our clients. intelligence and analytical tools that
industry’s top talent. Commodity will help them to build a successful and
During Appointments satisfied workforce.

Matt Havill, Commodity Appointments T: +44 (0)20 3008 7653

Client Partner – Ags & Softs www.commodity.jobs E: [email protected]
Commodity Appointments
managing risk in agricultural commodities

EXTERNAL PRESSURES
Hardi Wilkins, global head of risk and trade compliance at Export Trading Group (ETG),
discusses how agricultural commodity risk management strategies have evolved in response to
recent market shifts spurred by the latest global financial crisis

The financial crisis of 2008 set in processes are in place to assess the with whom. At present, ETG’s trading
motion a chain of events that has new market participants that have partners are a good blend of established
shaped the price risk management begun to enter the market in recent trading houses and small to medium-
policies of agricultural organisations years? How have the tools used to sized traders with strong ties to our
in recent years, and the landscape of trade and manage risk changed market space. As they rely, to varying
trading across the financial markets as a result of new regulations, degrees, on our operational and
has changed irrevocably as a result of and how has that affected your financial capabilites, for ETG, existing
tighter financial regulations. Various risk management strategy? What relationships and a strong track record
monetary policy initiatives, put in will these changes mean for the in the relevant market also count for
place by central banks in an attempt internal structure of your business? Hardi Wilkins a lot when it comes to choosing the
to repair the economy, have also had How should an organisation partners with which we trade.
an impact on the market. New rules position a growing trading and In addition to tighter oversight
covering reporting and capital, as risk management function? What of the financial markets by global
well as liquidity requirements, have about the information technology regulators, central banks brought
changed the face of many markets, infrastructure that underpins your interest rates to record lows following
including commodities. In addition entire organisation? the financial crisis in a bid to bolster
to affecting how financial markets There are many important factors the markets. Now that sufficient time
operate, these interventions have also to consider as the markets continue has passed, central banks around the
affected participants in those markets. to adapt to the post-crisis world. At world are beginning to change gears,
Organisations of all shapes and sizes Export Trading Group (ETG), a implementing policies of monetary
have exited the commodity trading global supplier of African agricultural normalisation, which could result
space in recent years and have been products, we believe we are on course in volatility throughout the global
replaced, to some extent, by new to develop a viable and competitive financial markets.
players with fresh ideas and capital. risk management infrastructure fit for Speaking at the International
How have agricultural companies today’s agricultural trading markets. Symposium of the Banque de France
developed risk management strategies in Paris on November 7, 2014, US
in response to the market shifts Regulatory impact Federal Reserve chair Janet Yellen
brought about by the 2008 financial On the whole, the impact of new said that while “the headwinds
crisis, as well as the various policies financial regulations has been material associated with the financial crisis will
put in place by regulators and central and I believe that, while first-movers wane”, the normalisation of monetary
banks in its aftermath? Organisations such as ETG are absorbing the initial policy “could lead to some heightened
that remain active in markets such as impact of the new regulations, we will financial volatility”.
agricultural trading have been forced ultimately be the first to benefit from The Fed has pledged to provide
to rethink risk management and these changes to the structure of the clear guidance regarding future
trading, reformulating strategies to financial markets. monetary policy in an effort to
tackle this brand new financial world. However, following the financial minimise any disruption to the
crisis, the push toward tighter global financial markets. However,
Thinking ahead financial regulations has affected our uncertainty about the global economic
There are several major factors that trading space. At present, the playing growth trajectory, the strength of the
any participant in the agricultural field remains uneven, since these new US dollar and the likely direction of
trading markets should take rules have resulted in mispricing to interest rates could still play havoc
time to consider before putting some extent. Rallying to meet new with commodity prices. As a result,
a new risk management strategy regulatory requirements in various this has been a strong theme in the
in place. Questions that should regional markets has also inevitably risk management strategy ETG has
be asked include: who can – and resulted in casualties, having an impact developed over the past two years, and
should – you transact with? What on where and how we trade, as well as it will continue to be a major factor
 feature

when making decisions in this area of cannot be priced, it should not be management (CTRM) solutions
the business. Against this backdrop traded. As a strong player in the credit provider for our business. Given
of monetary policy normalisation and market, ETG has access to a range ETG’s focus on African agricultural
an increasingly important African of vanilla OTC and exchange-traded markets, we were particularly
continent with growing import products on both the buy side and the keen to partner with a CTRM
and export demand, constructing a sell side. software solutions provider that has
successful risk management strategy a proven track record in emerging
has not been a simple task. Risk infrastructure markets. After researching our
Of course, such tools and strategies options, we chose to partner with
Finding the right tools must be underpinned by a strong Just Commodity, because we felt
Risk optimisation should be the main internal infrastructure in order for an the company had the necessary
aim of any agricultural price risk organisation to successfully manage products and experience to deliver
management effort. As such, hedging its exposure to commodity price risk. on the particular requirements of our
can be a very effective tool for an The significance of an integrated view markets, traders and risk managers.
organisation that wants to de-risk cannot be understated when it comes As we did not have legacy
its trading book while maintaining to structuring the risk management trading systems, when it came to
its physical market position. ETG function within a company. Strong implementing the new software,
has developed successful and cost- processes and procedures are crucial, integration with our existing
effective risk management strategies and must be based on solid systems enterprise resource planning system
by hedging total risk attribution, as and a robust risk framework that are has been relatively easy. Our goal
well as focusing on combinations of well-understood across the company. is now to produce a world-class
different types of risk – such as price, By putting such an infrastructure in integrated treasury, supply and trading
currency, operational and credit risk. place, a centralised specialist team can system with a forward-looking focus.
It is important that such strategies use available data to monitor exposure We believe this partnership with Just
are flexible enough to operate in a and risk to constantly develop metrics Commodity will help ETG develop
constantly shifting environment. and effect real mandate shifts in such a system.
The level of sophistication of the line with changing market events Risk management strategies will
tools used by ETG to hedge price risk and emerging trends. This type of always be under pressure to remain
is generally dictated by the trading structure has resulted in a transparent flexible in the face of external market
environment. In our experience, a environment for ETG, with dynamic forces – whether that relates to
string of vanilla products can often detection capabilities and risk monetary policy, new regulations or
produce a better result than a more share via a network of accountable even just the vagaries of supply and
tailored product, so we tend to stakeholders trading in 11 core demand in the commodity markets.
favour such structures over complex, commodity types across 40 countries. Agricultural organisations must plan
packaged off-market paper. A strong risk management ahead, ask the right questions and
Over-the-counter (OTC) products function also requires a sound IT partner with excellent third-party
are appealing in certain circumstances infrastructure. Twelve months vendors in areas such as technology
due to the benefit of deferred ago, ETG set out to identify in order to build a solid base for their
settlement but, as a rule, if a contract the best commodity trading risk price risk management activities.
managing risk in agricultural commodities

ADAPTING TO CHANGE
The continued evolution of commodity markets has necessitated the development of
new risk management strategies and created demand for a more diverse pool of
trading partners, says Mike LeSage, president of Cargill Risk Management

The commodities market is in the generally looking for more dynamic includes corporate and industrial
midst of the longest price slump in strategies that are flexible enough to clients in more than 60 countries –
25 years. In 2014 alone, commodity meet their needs in an ever-changing the producers and consumers of
prices declined by about 10%. Lower commodity market environment. more than 55 commodities and
grain prices are coinciding with Cargill believes the long-term consumers of 15 currencies. Cargill
significant weakness in energy and outlook for commodities is positive, Risk Management’s customers are
petroleum markets. In this type as changing demographics, income looking to navigate the commodity
of environment, businesses seek growth and the expansion of the markets with varying objectives and
optionality to protect margins and middle class continue to create greater priorities, but we can work with all of
control costs. demand. However, risk management Mike LeSage them to provide customised solutions.
Uncertainty about future tools and expertise will remain in Farmers and ranchers, for instance, are
commodity market developments demand as businesses look to protect a key market segment for Cargill Risk
also creates volatility. Geopolitical profits and prevent losses. There Management. We have seen significant
and macroeconomic conditions is a range of strategies available to growth in the use of risk management
are a major influence. With 2014’s agricultural organisations interested solutions among these groups to
slowdown in emerging markets, in hedging against price fluctuations. complement the physical delivery of
we have seen dramatic price Cargill Risk Management works crops to other parts of the supply chain.
fluctuations due to concerns about with customers to manage and Cargill Risk Management also
burdensome surpluses. In this hedge commodity price risk using works closely with some of the world’s
kind of environment, agricultural customised solutions – these can largest and most respected pension
organisations around the globe span vanilla options, to over-the- plans, endowments, foundations
typically look to risk management counter (OTC) swaps, to structured and mutual funds. Institutional
strategies, such as hedging, to products. Cargill’s price risk investors generally allocate 3%–5%
protect their businesses by managing management solutions are typically of their portfolios to commodities,
commodity price fluctuations. implemented through a direct for inflation protection and portfolio
Cargill founded its risk financial relationship with a customer diversification. These groups look to
management business unit in or within the supply chain to price – diversify their portfolios and gain beta
1994. As a provider of customised or re-price – the commodity as part of and alpha exposure to commodities.
commodity price risk solutions for the physical contract. We offer such organisations access to
customers around the world, Cargill Working together, our trading our global footprint and fundamental
Risk Management’s customers and risk management teams can gain trading insights, as well as expertise
include producers and consumers of in-depth insight into the risks that in OTC structuring and hedging. For
agricultural, energy and base metal agricultural businesses face. Through example, we can create customised
commodities, as well as institutional Cargill’s global footprint and its indexes based on fundamental analysis
investors seeking exposure to these physical trading operations in the of micro, regional and global supply
markets. In recent years, the general major agricultural markets – we trade and demand, leveraging Cargill’s
approach to risk management has in 15 currencies and more than 55 physical insights.
changed among our customers due commodities, including grains, meat,
to external market developments dairy, softs, edible oils and animal New players
such as financial regulation, as well feed proteins – we are able to gain a In the aftermath of the 2008 financial
as a number of events that continue unique perspective that becomes a crisis, many agricultural companies
to affect the demand and supply of part of the risk management process. started transacting with a wider
commodities around the world. As range of risk management providers
such, many of these organisations Customised solutions as some participants pulled back
have started to rethink their approach Cargill Risk Management has from certain markets, including
to risk management. They are now built up a solid customer base that commodities. While, in the past,
 feature

many organisations typically sought

risk management solutions exclusively
from large banks, the market has
started to open up. Cargill Risk
Management, for example, can offer
customers a strong alternative based
on 150 years of commodity markets
experience, a stable balance sheet
and a reputation as one of the world’s
largest, privately held companies.
As a result of the post-financial
crisis regulations introduced under
the US Dodd-Frank Act, Cargill
registered as provisional swap
dealer with the US Commodity
Futures Trading Commission
in February 2013. Cargill Risk
Management is the only authorized
business unit within Cargill
underwriting commodity swaps.
Although there have been
additional costs to ensure compliance
with these new regulations, we are
committed to providing competitive
products to our customers. When
it comes to how we interact with
customers, little has changed. Our typically seek customised solutions discipline and control. As such, it
discussions with customers and the that can provide greater effectiveness is important to create a structure
solutions we provide continue to and efficiency. Customers are also that will help customers achieve
follow the same guiding principles looking to work with trusted partners their budgetary goals. We work with
that have led Cargill’s business for to develop their risk management our customers to achieve discipline
150 years. Our strict adherence to capabilities. In line with this in setting targets to defend or
integrity and transparency assures attitude, Cargill Risk Management strengthen margins.
our customers that we have their best encourages a holistic approach to risk Cargill Risk Management can also
interests in mind. management. We take into account provide tailored solutions utilising
the value of the underlying product, our proprietary technology platforms.
A holistic approach energy inputs and currency exposure, Several members of Cargill Risk
Tighter regulation of the financial because each of these factors impacts Management’s trading technology
markets has contributed to the the bottom line and should be team sit on the trading floor to better
continued evolution of the structure addressed when mitigating risk. understand the needs of our trading
of the agricultural trading markets A holistic approach should begin and risk management divisions. As a
in recent years. However, we have with an assessment of the customers’ result, the IT team gains insight into
also seen substantial changes in needs to gain an understanding of the technology requirements and has
terms of how end-user organisations their general level of risk and to assist developed strong expertise in this area
approach risk management internally. in the process of creating customised of the business.
Many agribusiness players are now solutions. We work with customers A swap dealer’s products and services
seeking to develop a more dynamic to build a hedging strategy based on should offer the necessary flexibility
and comprehensive approach to risk the pricing period, time of shipment, and control to respond in real time to
management. Our customers have exact volume, expiration and other market volatility and changing business
become more proactive and strategic factors that affect pricing. We then dynamics. Such attributes are crucial
in managing their portfolio of modify a structure that aligns with in constantly changing commodity
commodity exposures versus a single their risk profile. markets. As agricultural businesses
commodity or currency. Once a customised strategy has continue to take a more proactive
Price points are impacted by a been established, it is vital to remain approach to managing commodity
variety of factors, so simply hedging vigilant about updating it as and price risk, demand for more dynamic
risk through futures trading or a fixed when market changes occur. In our strategies will only continue to
instrument will not meet all of the view, an active hedging strategy increase, as will the demand to work
needs of our customers. Instead, they should include diversification, with experienced partners.