The developments surrounding the war in Ukraine follow each other in rapid succession. First and foremost, we lament the situation for the country of Ukraine, as well as for the people of Russia who did not want, start or support this war. But obviously, a global conflict with the size and scale such as this has its effect on markets and economies as well. Since our industry is a volatile business even in the best of times, we’ll address some of the factors at play with respect to the commodity-trade side of these unfortunate events.
Volatility in commodity trading
The volatility of commodity markets exposes producers, buyers and traders to a lot of uncertainty almost by default, exacerbated on a global level by the reality of the last two years. Just as we were about to move away from and almost perpetual vortex of precariousness and above-average levels of risk as they relate to the RM-part of CTRM, sudden and substantial price changes have once again claimed center stage by the current events that have come to replace the pandemic as main disruptor. Uncertainty, it seems, is here to stay.
For one, Russia is a powerhouse when it comes to commodities, producing and globally exporting huge amounts of materials that other countries have come to depend on for anything from fuels and energy to agricultural products, foodstuffs, production and manufacturing. As the country is increasingly becoming isolated from the rest of the worlds, driving up prices in the process, keeping track of global positions in real-time has become even more complicated than we were already accustomed to.
Meanwhile, Ukraine is among the largest producers of sugar beets and sunflower oil, while its output of grain and potatoes is among the highest as well. So much so, that the two countries together are known to be Europe’s breadbasket.
To put some numbers on these statements, the International Food Policy Research Institute estimates that combined exports constitute as much as 1/8th of all food calories traded in the world. Corn, wheat and sunflower exports amount to 20, 30 and even 80 percent of global trade respectively. Short term, there is an immediate effect on grain exports, while longer-term effects include impacts on fertilizer and energy inputs, according to IFPRI.
You don’t have to look beyond recent price trends to factor in the importance of Russian and Ukraine on global markets, notes ING. “CBOT wheat has rallied by more than 70% this year, with prices breaking above US$13/bu and trading to its highest levels since 2008. Corn has also seen strength, rallying almost 30% this year and taking it to levels last seen back in 2013. Finally, soybeans have rallied by more than 25%, breaking above US$17/bu at one stage – levels not seen since 2012.” You can read the full analysis here.
Feed Navigator too has commented on current events, citing everything from global crude oil and oilseed values to soybean, corn and wheat exports. EU trade groups for cereals, oilseeds, animal feeds and other have set up contingency plans to help mitigate the loss of exports from the two crisis-stricken countries.
Meanwhile, seeking alternative supply could be good news for sales from the European Union, Australia and North America, notes Bloomberg. Shipments from India, traditionally not a major exporter, are swelling as higher global prices make its grain more competitive.
What-If Analysis in Agiblocks
As we’ve said before, the commodity trade is a volatile business even in the best of times. Risk management is a continuous loop that takes the route of risk identification, assessment, analysis and reporting to establishing key changes, communication and adaptation – and then back to risk identification. Defining those risks is key, so a dynamic margin management – keeping track of your position and changing course if needed – is an essential part of risk management analytics when dealing with predictability and profitability. That’s why we’ve introduced strong tools for risk management in Agiblocks, including features for OTC contracts, Value at Risk and what-if analysis. Tools that now have a valuable – albeit reluctant – part to play in navigating these waters and weathering a storm for which there really are no reliable long-term forecasts.
A what-if or sensitivity analysis is a powerful decision-making tool that helps you to understand what kind of business impacts can arise from dynamically changing one or more variables, greatly assisting you in risk management decisions.
OTC contracts for instance, often represent huge underlying values. You can use our tools to understand how responsive output is to given changes, as the financial and logistical implications of outstanding contracts can be readily generated by shifting variables such as price, volume and supplier – providing valuable insight into managing, covering and insuring contracts to minimize risk and maximize profits.
As trade margins have decreased and oversight increased, keeping costs down and minimizing errors has naturally become the focus of many commodity-related firms. There are many, many different aspects to deal with all at once – ranging from physical commodities, commodity trading and speculative trading to commodity logistics and finance and risk management – even without the external variables from an inherently volatile market and current or future global events.
We’ve got you covered with Agiblocks, our flagship CTRM solution.