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To be able to make Agiblocks the best solution it can possibly be, our developers and business specialists draw on their extensive knowledge about Commodity Trade Risk Management in general as well as about the business practices associated with particular commodities. On our blog page they share their knowledge with Agiblocks users and with the CTRM community at large. Updates on the Agiblocks solution will be announced and explained here.

Is industry specific CTRM, a critical success factor?

Posted by Jan van den Brom
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Common practice in CTRM selection

 

In the past decades I have been involved in many selection processes for a commodity trade and risk management (CTRM) software solution. The world of commodities can been be divided into three main categories which are: energy, metals and agricultural / soft. The latter mostly comprising agricultural excluding grains and oil seeds.

 

In many cases during selection processes, companies reviewed or even selected software which had a good evaluation in other commodities than the commodity traded. They had the perception  that any CTRM solution will cover 80% of the functional needs and thus they didn’t require an industry specific CTRM.

 

CTRM implementation has its challenges

 

Experience taught us that many CTRM implementations have not been successful. Despite success rates have gone up in recent years, there is definitely still a challenge to be successful in implementing specific CTRM. The latter is particularly true for companies that manage multi commodities out of the different categories. When for example you trade mineral oil and cocoa beans, it can be rather challenging to present a meaningful combined position. Sure, you can overcome such a challenge, but it requires time and investment.

 

For commodity trade and risk management implementations there are many critical success factors. For example, the quality of the business process definition and the budget for the software vendor to execute a proper implementation. Also, the flexibility of the vendor responding to customer change requests and the ability to integrate in the remaining IT landscape. In the end the willingness to accept standard software for standard processes is also an important contributor of success.

 

Commodity industry specific CTRM

 

Unfortunately companies often underestimate or sometimes even ignore the specific requirements of the industry or commodity complexities in the selection of a specific CTRM solution. A vendor can act flexible on change requests. However, when architecture is not sufficiently supporting the basic functionality for a specific commodity, then the implementation loses the momentum you need to be successful. Each commodity has its specific trading and risk characteristics. Companies need to address those characteristics in a specific CTRM. Then it will support the business satisfactory.  Some of these characteristics seem sometimes minor details, but these can have significant impact. Once you do not sufficiently address those characteristics, an implementation is bound to fail.

 

The Devil is in the Detail

 

For almost every commodity there are multiple examples of such commodity specific details. For example in coffee trading. There, the premium of an unfixed arabica contract is priced with cts/LB it becomes very difficult to execute it. When that is not possible in the system, you get stuck and start with changing requests to your vendor before you even populate the first contract.

 

This is just an example, there are many more. Think of buying in number of bags instead of metric tons. For Cocoa the need to facilitate arbitrage between London and New York markets, and these markets have also different currencies. One can trade cocoa products such as cocoa butter and powder on ratios. Also, sugar, on white or polarization premiums. Those details affect not only the deal capture, but also they will find their way into the calculation and presentation of risk positions and valuation.

 

Choosing the right basic architecture is critical

 

Missing a detail does not jeopardize an implementation, but missing multiple details does! For example when you apply a good CTRM solution specific for a certain vertical to a different vertical. E.g. an energy solution (sometimes referred as an ETRM system) for agricultural or the other way around. You can imagine the logistics of transporting oil through a pipeline is incomparable with loading bags of coffee beans into a truck. Pricing and hedging mechanisms and practices differ completely.

 

Overstepping commodity categories makes it often worse. The London Metal Exchange (LME) has for example very different rules than the Chicago Mercantile Exchange (CME). The list of industry specifics might look almost endless. But by selecting a CTRM solution it does matter if you have to bridge 100 items or only 5 ! The ability of your vendor to offer flexibility an the agility of the CTRM in configuring these details is key.

 

A personal recommendation: attention to detail

 

My personal recommendation for any selection is not to underestimate the importance of industry specific CTRM. But to verify the functions and features in detail which you require in your industry. You can prevent implementation delays or even failure by small details not supported in pricing or hedging mechanisms, when you select the most suitable specific CTRM solution. Our aim at Agiboo is to facilitate industries with specific commodity software solutions. At this moment agricultural and soft commodities. This also means that we have chosen not serve some commodity industries. We adhere a focused approach. We also estimate that the functionality cover of a CTRM should be 95% or above for success.

 

Is Blockchain Changing The World of Commodity Trade?

Posted by Markos Gkogkos
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We probably see at least one article every day popping up in our Linked In page about blockchain technology. Sure, it is something new and worth to know, but still, can blockchain change the whole concept of how we exchange value in commodity trade industry?

 

“Blockchain” in simple words

 

A blockchain is a list of digital records (blocks), which have a connection with each other, they are secured and play the role of public ledger of all cryptocurrency transactions.

Blockchain and Bitcoin

Blockchain and Bitcoin

 

Sure, sounds simplified enough, but still how would you describe it to your 10 year old kid?

 

“So, kid, imagine that instead of dollars we use another currency, not physical, but digital. That’s Bitcoin. Even though dollars and other types of currencies have a central authority control, Bitcoin doesn’t. This means, we have no banks in the middle when we want to make a purchase thus there is not any one keeping formal record of the payment. It’s just us and the seller. This is blockchain!”

 

Well, probably now it is way too simple. However the kid probably has a better view on the basic term of blockchain. How does it work though?

 

How it works

 

By providing such a platform where Bitcoin overcomes all the difficulties of traditional banking, blockchain acts like a distributed public ledger and everyone has a copy of all transactions ever occurred. Don’t panic! Everything run under hash encryption, in this way everyone can see the transactions without accessing your personal details and information of your transaction.

 

Too many words again! Can you draw it for me? Sure, let’s make it even fancier for our eyes and see how it works:

 

How blockchain works

How blockchain works

 

Now that we have a common ground about blockchain and how it works let’s discuss about the world of commodities.

 

Blockchain technology in commodity trade

 

This public ledger technology gives promising solutions to financial transactions and services also in the industry of commodities trading. What is the need of clearing houses if we can have the chance of automated post-trade “smart contracts”? Well seems easy but still looks like a path where no one has ever walked on it.

Trading soft commodities requires besides market volatility, also management of supply chain and counterparty, risk. The concept of blockchain could make a good fit for tracking these physical commodities along the supply chain, where a lot of transnational procedures are still recorded on paper. When you have the benefit of managing all the title transfers electronically through a distributed public ledger, certified by any counterparty of the supply chain, it could eventually increase trust between the market players (and reduce counterparty risk) and ease hedging processes due to elimination of clearing.

 

Blockchain and Commodities

Blockchain and Commodities

 

We are all convinced that technology will change a lot of things and eventually transform the sector of commodities trading. Even the ones who still keep the traditional mindset of keeping most records in paper and spend hours and days in organizing their book cases, oh yes, even the ones who right now are checking the newest contracts in their Excel sheet. However, there is a long way to feel secured and let technology overcome our businesses in that extend.

 

We can, though, make baby steps in accepting the reality. Implementing commodity trading and risk management software, powerful enough, which can be our “friend” in a daily routine of a trader, is probably one of the first steps. Only once you have digitized the transaction and trade management process you can make a step towards blockchain.

 

Conclusion

 

In a nutshell, blockchain is the future for transaction validation and now is starting becoming the present in a variety of transnational environments. This technological concept is triggering the foundation of a new era in commodity trade and an inspiration for the CTRM software solutions providers. At this point in time we definitely can’t answer right away with a “Yes” or “No” the question “Is blockchain changing the world of commodity trade?”. We could all agree that evolution of things is humanity’s moving force, Information Technology being the evidence of this philosophy. From that perspective information technology and the commodity trade industries are bound to become close friends on the longer term. And the best way to anticipate that friendship is to invest in and keep your technology platform updated.

 

5 Historical Facts Impacting Coffee Price

Posted by Markos Gkogkos
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Coffee is one of the most well-known soft commodities in commodity trading and the coffee price can be rather volatile. The three main derivative markets of coffee, New York (USA), London (UK) and Sao Paulo (Brazil) offer much potential and initiate a set of possible circumstances for hedging and speculation. In this way the coffee market retains a “healthy blood flow” with a constant liquidity and opportunity.

 

Have you ever been curious, though, to look back to events which had a strong impact on the coffee price?

 

1. Brazilian frost of 1953

When Brazil faced a critical frost back in July 1953, the Brazilian coffee harvest reduced dramatically that year. This severe frost caused price volatility on the market, however after the recovery of the frost, production moved up and the result was the decline in prices.

2. The “Black Frost” of 1975

The frost of 1953 was nothing compared to the “Black Frost” of 1975. Paraná, the “coffee capital” of Brazil had its first snowfall and in one night a huge frost covered all the coffee growing region with coffee trees, causing serious damages. Because of the look of a burnt land when viewed from the air, the incident took the name “Black Frost”.

3. Brazil’s drought of 1985

The results of Brazil’s big drought back in 1985 were the reduction of stock levels and the weakness of Brazil’s dominant position as a powerful coffee stockholder. The coffee price increased since the production was significantly dropped.

Parana State Brazil coffee

4. Collapse of International Coffee Agreement in 1989

ICA, is an international commodity agreement between coffee producing countries and consuming countries. In 1989, ICO, didn’t achieve to reach an agreement on new export quotas, which led to the breakdown of 1983 ICA. Within a month the coffee prices declined suddenly.

5. The rise of domestic consumption

Bloomberg’s recent reports, indicate that the domestic consumption in mayor coffee producing countries like Vietnam is anticipated to incline. The outcome of this would be the increase in coffee price and the limited exports.

 

Future Opportunities

 

Although these historical facts can cause a headache to someone who wants to start trading coffee, as mentioned before that shouldn’t be a discouraging factor. The potential of coffee commodities market grows rapidly and opens constantly new doors for new traders to come on board. Looking at the past facts can shield one with knowledge. But focusing on the future opportunities can strengthen one’s motivation for success.

Monitoring your risks and perform the appropriate changes in your trading strategy, of course, is in your top priorities. Each kind of soft commodity requires a unique approach in its trading strategy. It also requires investigation of the market’s trends and of course experience. When you start a career in coffee trading you will probably need to consider all the underlying risks.  You should boost your confidence by using secured software to support and guide you in your daily transactions. Choosing the right CTRM software is like choosing the right airline company to fly to your destination with confidence and flexibility.