Home » Blog

Blog

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.

Do you actually need CTRM when trading or purchasing commodities?

Posted by Jan van den Brom

CTRM

As a provider of a Commodity Trade and Risk Management (CTRM) system. I am asking myself this question almost every day for many years.
Building such a system takes quite some courage and dedication, because it requires much dedication, effort and time to get it right. Capturing the world of commodity trade in a computer system is not so easy. This caused by the flexibility required compared to other business system such as ERP. Especially not when your dream is to do this with an easy to use interface. The latter I find most important as I believe that all great things should make complex matters easy to deal with.
 

Need of CTRM

So do need people who are involved in commodities and trade or purchase a system to help them doing this? In the last years I gained some experience and learned that the answer is not a simple yes or no. The answer depends on many situational factors such as the size of the operations and the number of trades or purchases. Although these look on the surface the most obvious reasons. I learned it is actually not. The real answer lies in the ambition of the commodity trading company or purchasing entity to grow and utilize technology to enable that growth.
 

CTRM Implementation

Implementing a CTRM system nowadays is in the perspective of technology availability not even such a large effort anymore. This is particular true when the CTRM system is specialized at certain commodities. Here at Agiboo we have a real focus on sugar, cocoa, coffee, grains and oilseeds. With availability in the cloud a commodity company can be up and running in short amount of time. That is however just a technicality. Benefiting from CTRM and utilize it through the core of the organization does require to be determined and shape a foundation which allows growth. That foundation should allow extension of profitable trades or purchases, reduce the workload at the back office and give full control on risk and trading or buying positions.
 

Investment?

I guess when things are stable and there is no ambition for growth a CTRM system does not make much sense. In that case the system is only considered as extra costs. When there is ambition a CTRM system is probably the right way to go as that ambition will also cater for the acceptance of a proper implementation and training. CTRM is not just a piece of technology, it also enforces you to think through your business processes. You might decide even to improve those or to alter them. From that point it is not a cost anymore but a valuable investment.
 

A different question?

Ambition for growth and CTRM go in my perspective together. I dare to say that it is a critical success factor at minimum for a CTRM implementation. It is there where business and technology meets and makes a difference. Maybe I asked myself the wrong question from the beginning. Should it not be if a commodity trader or purchaser can afford not to utilize CTRM so some extent?
 
 

Current markets are volatile.. do you know your WYCNATHH ?

Posted by Bart Kroon

How we read current soft commodities markets?


Apparently markets have reached structurally lower grounds and became more volatile last few years. The origin of these lower prices cannot just be explained by supply and demand, since these trends are across the commodity complex. Cocoa, Sugar, and Coffee all trade far from their peaks and even their 5 – 10 year averages. I believe that such is driven by multiple factors. First an abundance of supply over limited demand growth. Second, despite an excess of financial liquidity, there seems to be less interest to invest and speculate in commodities by financial players. Third I consider that current prices reflect the structural lower crop input cost (and interest rates) and the increased supply chain efficiency.

Demand growth might be impacted by demographics;  stagnating markets in North America and EU, whilst Asian consumption is growing but from a lower base level. On the economical side, for the growing economies in North America en EU, it could be that consumer money starts to flow back in more durable consumer goods. There might be less need to indulge oneself in the (cheaper and easy to spend) fast moving goods area. Additionally matured markets are negatively impacted by a “health trend” and an increasing a choice for quality and value over quantity and price.

 

Impact for soft commodities on the shorter/longer term

 

On the short term most impact will be felt in the producing countries. The best example is in Cocoa; the recently announced 700 CFA farmer price in Ivory Coast. This price level will not incentive famers to invest, on the contrary it probably will further strengthen the outflow to financially better yielding commodities such as palm oil.

We have seen similar trends in Asia, where the Cocoa crop, despite rising local grinding demand, is shrinking in favour of others. Who could have thought that Indonesia would be a significant net importer of Cocoa 5 years ago! The latter is not only the result of price levels, it is also the result of a government stimulating cocoa processing capacity whilst at the same time stimulating a crop conversion to rice and corn. I believe that when Cocoa prices in NY would have been structurally at USD 3.000 – USD 3.500 the outflow from Cocoa would have been significantly less in Asia.

 

On the longer term one could argue that, the best recipe for low prices is low prices. Low prices will shakeout underperforming farmers and eliminate “waste” in the supply chain. The best performing farmers are motivated to acquire land or land-rights and increase their farm size, and such will then lead to a better long term performance of the supply chain. Some stimulation from governments in crop infrastructure (access to knowledge and input, absorbing volatility) and/or investment support (access to finance) would help. SME’s should be stimulated to rationalise the supply chain en to distribute knowledge/inputs/and finance. Then in the end low prices could be a driver to achieve a better economic structure of an industry. We have seen this happen to various commodities over time (Dairy /Sugar/Meat in EU, Sugar/Soy in South America). On Cocoa and Coffee however there still a lot to gain!

 

 

What does this mean for soft commodity traders / companies?

 

The downturn in prices, and the sometimes even steep declines in short time periods, made its casualties. It is a volatile and disruptive environment! Several trading companies faced unexpected losses, whilst requiring extended funding to cover hedges. This is happening in an environment where banks are forced to reduce leverage. Usually lower prices lead to lower margins in the chain and thus execution risk for traders increases. Mostly processors and manufacturers benefit from low prices, hardly the consumers. In a small market as the cocoa market one party defaulting might create a chain of defaults throughout the industry. This was actually what the volatile cocoa market experienced the last 12 months. A disruptive environment is a trigger for both; consolidation amongst more mature players in an industry, and new players (smaller, more innovative) in an industry. We have seen such happening in coffee, cocoa, and I expect it to happen in sugar as well.

 

How can commodity traders arm themselves against these risks imposed by these lower and volatile markets?

 

When it comes to market volatility the most important thing is that you know your WYCNATHH – What You Can Not Afford To Have Happened! When you know the limits of your company then you can set your controls and measures to around that. It allows you also to anticipate on managing disruptive or less favourable scenarios. Continuous measurement of exposure to markets, to counterparty defaults and to forex movements is key, particularly in derivative dominated markets you need such on a real time basis. Mostly the obvious risk metrics will be sufficient when applied consistently and frequently and we observe that finance providers and shareholders increasingly ask for Value at Risk type of monitoring. Value at Risk (VaR) is a mathematical and statistical model that based on historical and / or random simulations, predicts the likelihood of future value of a trading or risk portfolio.

A VaR is basically allowing a company to evaluate its potential risk exposure in monetary terms to their WYCNATHH! As a software vendor for commodity trading and risk management software we anticipated this trend and are able to provide Value at Risk tools to the market. We can integrate our VaR tool to different systems, and for these companies that use our software platform AGIBLOCKS it does not even require an integration, it just a matter of adding a VaR license.

 

 

CTRM and disruptive technologies

Posted by Jan van den Brom

CTRM disruptive technologies

Last week Thursday I attended the CTRM conference in Amsterdam. The main theme was CTRM and disruptive technologies. There were many interesting speakers who put their vision on the table about our future as an industry. Obviously as in any industry they are mostly dictated by new trends and technical possibilities. This year mostly about block chain, micro services, open source and cloud. The latter looks already passed the trend stage. Some vendors could move to the cloud offering and others (mostly providers of large monolithic CTRM systems could apparently not. The general public however reached a high acceptance level on the CTRM cloud offering already and my experience is that many expect this as a standard nowadays.

The monolithic approach

The common believe since the 90’s in the industry was that a cross commodity system would be the holy grail for CTRM. Many tried and as many failed. Their have been many reasons for that. It is my believe that crossing commodities require to much functionality which is in contradiction or disturbing between each other. This is especially true when a CTRM system should cater for functionality for all commodity groups. i.e. Energy, Metals and Agricultural or Soft commodities. When you ship bags of coffee it can be rather frustrating to also have functionality for pipeline transport. The complexity of certain commodities did not help either. Even within a group of commodities the functional need can be completely different. Trading wheat is not the same as cocoa beans. All kind of different special functions are needed. For sugar: White premium support can be essential to get it all right, where at cocoa it can be essential to support arbitrage as two exchanges quote in different currencies. There are numerous examples.

Providing CTRM

The answer to that dilemma always has been to put as much functionality as possible in a CTRM system. For this reason the development of such system is rather costly and takes years. The CTRM landscape is now filled with vendors who have usually a kind of specialism on a certain commodity or commodity group. Energy is maybe the most prominent, where it is then called and ETRM system. Other reasons are for example the size of possible users and expertise required. Building a software system for a large audience gives more possibilities to invest than for a specific market and probably you require some kind of passion to the commodity industry to facilitate the knowledge and expertise in the build process.

Technology impact

The influence of available technology during the years definitely had its impact on the industry. Cloud offering, web based technology to be used on tablets and smartphones, but also general architecture allowing quicker implementations and configurability. Here we at Agiboo have focused on to make CTRM available with Agiblocks for specific industries and also for companies who wanted to start with CTRM and have a quick affordable implementation. Last Thursday I realized more than ever that we are at the doorstep of a new era in CTRM.

Future of CTRM

The user audience will evolve in their expectations of how CTRM software is made available and gets cross integrated in their existing information technology infrastructure. Not only that will be important, the success will also be determined about how its get integrated throughout communities and new business technologies. The speed of rising technologies and adaption to it is increasing every day. New business technologies will be commonly used in a short amount of time. Blockchain is a very good example. At the moment this technology is adopted in the commodity trade or purchase process, CTRM will have to act on it.

Impact on the CTRM industry

The answer might be in microservices. This concept we adopted to some basic extent by breaking it up in (agi)blocks. The question however is how these disruptive technologies will influence a relative small market such as the commodity industry. In addition it will be important how you allow yourself to react on it and make it available to your clients. At Agiboo we adopted since our existing the Agile development method and DevOps. For now it has proven to allow us to integrate new technologies consistently.

Looking forward

Disruptive technologies will change the way we work and maybe even how we think in the commodity industry and it looks like that disruption is closer than we think. Personally I look forward to it to facilitate these technologies with our Agiblocks CTRM platform.
 
 

( function ( body ) { 'use strict'; body.className = body.className.replace( /\btribe-no-js\b/, 'tribe-js' ); } )( document.body );