Good morning, Jerome, and welcome to Commodity Conversations. Could you please tell me about yourself and your career so far?
I am Swiss and grew up in a little village in the Swiss Alps. My mother would probably tell you that when I was growing up, I spent more time on the ski slopes or the hockey rink than in the classroom. However, I was good with numbers and decided to go into accountancy, joining KPMG. I then joined PWC, where I passed my accountancy qualifications.
One of my main audit clients was an oil trading company, and I spent a lot of time in their offices. I quickly became interested in supply chains and trading. I found it fascinating to be able to put together the global news that I was reading in the newspapers with my day job. Geopolitics has always interested me. It was fascinating to me.
There was someone from Cargill on my accountancy course, and he suggested that I apply for a position with the company. I went through a round of interviews, and Cargill gave me a job. It was not in Geneva as I had expected, but in an animal feed nutrition mill that Cargill had recently bought in Switzerland. It was a family business that had to be integrated – financially, system-wise, and culturally – into a big multinational. It was a fabulous experience. I learned agribusiness there, stocks, shrink, and cash flow – all pragmatic and tangible activities.
After spending two years with the feed mill, I moved to Geneva, where I became the controller for their energy business. Cargill then sent me to Minneapolis to work as a financial controller in their North American energy business. I spent four years there.
After deciding to focus more on its core agribusiness, Cargill sold their energy business to Macquarie Bank. I was involved in the transaction, and headhunters began to call me, offering me various positions. One of those positions was as a financial controller for ADM’s grains business out of Hamburg, Germany. I talked it over with my wife, and we decided to take the offer and move to Germany, where I spent three years.
I then moved back to Switzerland with ADM to be the divisional CFO (Chief Financial Officer) of Global Trade – – ADM’s international distribution and marketing arm.
Just last week, ADM also made me CFO of their International Corn Milling business – starch and sweeteners.
Was it easy for your family to follow you to Minneapolis and Hamburg?
There is a saying that you cry twice when your company transfers you to Minneapolis – once when you arrive and once when you leave. It was initially complicated. My wife worked for Nestlé and had to quit her job when we moved to Minneapolis. Nestlé contacted her after we had been there for a couple of months and offered her a position.
As for my two daughters, they quickly made new friends within the French-speaking community. It is easier to create bonds with people who speak the same language. It was a fantastic time for the whole family – and we visited 28 states in our four years in the US!
Is your wife also in finance?
No, she is head of procurement for Nespresso. ADM doesn’t trade coffee, so there is no conflict of interest.
Could you tell me a little about the role of the CFO in an organisation like ADM?
I see my principal role as the glue between trading, execution, and the other functions within the company. I act as a chief of staff, supporting the BU (Business Unit) presidents in their roles and providing the financial information they need to make the best possible decisions. I work with them to develop and implement the strategy.
I play a coordinating role in liaising with corporate headquarters and the group CFO, making sure that we are in tune with corporate strategy.
I am overall in charge of the contract execution function and have a role in seeking efficiencies and increasing productivity. Trading is a high-volume, low-margin business, so productivity gains are always welcome.
Lastly, I have a fiduciary responsibility to ensure our financial accounts and reporting are timely. ADM is a publicly listed company.
What is the difference between a CFO and a Financial Controller? I see you were both during your career.
The role of a financial controller is to ensure that accounting and reporting align with US GAAP (Generally Accepted Accounting Principles).
In addition to a fiduciary role, financial controllers ensure that internal controls are respected and follow up on internal audits. Financial controllers report to the CFO.
So financial controllers have more of an audit, compliance, and accountancy role than a CFO?
They ensure that the company respects internal and external financial controls and complies with international accounting standards. This is a critical role as the last thing a listed company wants is to restate their historical financials for misstatement or error under the governance of the SEC (US Securities and Exchange Commission)
Besides controlling, another important part of the finance function is FP&A (Financial Planning and Analysis); each BU has a yearly plan, and we have a monthly meeting to ensure everything is on track. Part of my job is forecasting future earnings and capital requirements and updating those forecasts in line with any market changes or events.
I work with the BU president to ensure that the BU’s plans respect the company’s capital limits. I also look at the expected returns of new investments.
Is it fair to say that a financial controller would focus more on the past while a CFO would look more to the future?
I think that is a fair way to put it.
What are the biggest challenges in your role as CFO of a major trade house?
It is probably managing the information flow. We have a fantastic bunch of people here at ADM, and they constantly come up with ideas for new businesses or how to develop our existing businesses.
It can be challenging to separate the great ideas from the good ones – to decide where to allocate our resources and ensure that we have covered all the risks and business implications, such as tax.
It can sometimes be frustrating for team members when their ideas are turned down or shelved for later, but we all understand that we must prioritise the best ideas.
I don’t work on my own. We have a finance team, a controller team, a financial analysis team, and a business development team. Together we ensure we continue to invest and that our existing businesses operate profitably.
How closely do you work with your risk managers?
What are your most significant risks?
Credit and counterparty risk is one – the risk of a client or supplier defaulting on a contract.
When I spoke with Greg Morris for my book The New Merchants of Grain, he mentioned that ADM operates from origin to end destination and that this mitigates much of the counterparty risk. Is that still true?
Operating along the supply chain and sourcing commodities from local ADM companies reduces counterparty risk.
People in the energy markets often trade ten years forward. We don’t deal that far ahead in agriculture, and that reduces our performance risk. We trade this crop year and the next one, so the mark-to-market risk is less than in the energy markets.
What are the other risks?
Operational risk – a boat stuck somewhere that could lead to a vessel arriving late and being out of contract – so default risk.
There is weather risk, for example, a hurricane in the US or a drought in Argentina. We have an advantage because we are a global company with a geographically diverse portfolio. It reduces our market risk compared to local players. If there is a drought in Argentina, we can source soybean meal from Brazil or the US.
There is also a risk of having a rogue trade somewhere. I experienced it earlier in my career, and it’s not nice. One of the worst nightmares for a financial controller is to have “bottom drawer contracts,” transactions that traders don’t put into the system.
I am fortunate to work with great leaders who set the environment – the tone – from the top. They acknowledge that traders can make mistakes and that errors happen. If the trader declares it immediately, they know they will be treated fairly. However, they will be harshly treated if they try and hide it.
Do you have trouble sleeping?
I am cheerful and optimistic, and business problems don’t keep me awake at night. A big part of our job is to deal with these issues and find mitigation strategies and solutions when they pop up.
However, as I mentioned earlier, I do have two teenage daughters. They can sometimes be more challenging than a ship that is running late.
Moving on to the finance function, please explain the difference between transactional or cargo-by-cargo finance and overall finance.
Big companies can issue bonds and syndicate bank loans. We don’t have to worry too much about financing our treasury operations.
Smaller companies are in a less fortunate position and often struggle to obtain the financing they need. Banks will often only finance them on a cargo-by-cargo basis.
In 2019 I interviewed Karel Valken, the head of CTF at Rabobank. He told me that the bank only wanted to finance the big trade houses because the due diligence made it unprofitable to fund the smaller trade houses. How easy is it for small trading companies to obtain commodity trade finance?
Funding can be challenging for smaller companies, but it shouldn’t be a problem if the margins are there. A trading company will get financing if it is making profitable deals.
CFOs in small companies will spend more of their time obtaining financing than allocating it internally. I spend most of my time not raising funds but ensuring we allocate them efficiently.
McKinsey recently wrote that the commodity trading sector would need an extra $300- $500 billion in trade finance. Do you agree, and if so, is it a problem?
The world trade in agricultural commodities will not grind to a halt for lack of finance. I am a great believer in markets. If the margins are there, the finance will be available. The margins will adjust to enable the sector to finance its activities.
Why do banks come in and out of trade finance – do the risks of a blow-up offset the margins on regular business?
Sometimes, a bank might come into commodity trade financing without understanding how trading works and how traders manage the risks. It eventually leads to problems, and the bank will exit the sector. We work closely with our banking partners to ensure they understand our business and we understand theirs.
Do you have to compete internally for funds?
Yes, we compete internally for capital. Most big companies set thresholds below which a BU president can take investment decisions. Above those thresholds, they would have to take the plan to HQ and compete for internal funds.
But before doing that, we must ask, “Is the projected investment a good strategic fit?” For example, we would not invest today in a banana plantation, even if the expected returns were good.
Second, we must evaluate expected returns. We have a weighted-average cost of capital and need to beat that by a certain percentage.
Compared to our processing businesses, we don’t have significant CAPEX requirements in our trading business. The capital we employ is mainly working capital. If we get a decent return on our working capital, we don’t have to worry too much – but we must ensure that we get the returns!
Would rising interest rates affect your plans and strategies?
Absolutely. As the cost of capital increases, so too must our expected returns. However, with the current market volatility, our expected return is robust.
Higher interest rates mean we are getting more requests to extend credit to our clients. Risk management is vital in a more volatile market.
Do you lend money to your clients?
There is sometimes a spread – a margin – between our internal cost of capital and our client’s cost. Some companies may look to capture that margin, but it is not something we do. We are physical commodity traders. We are not a financial institution. I would not use the company’s balance sheet to play the role of a bank. We may offer credit line financing to a client, but only if that client is strategic to our business.
Commodity prices rose dramatically in 2022, and although they have since fallen, some smaller companies must have found it challenging to finance their margin calls on the futures exchanges.
It was challenging for some smaller companies, especially those specialising in origination. They buy the commodities at their origin and then hedge them by selling futures. When prices rise, they must pay variation margins on their short futures positions even though they have offsetting positions in the physicals. Even if a company is hedged, it will still have to pay variation margins on its futures positions. Of course, if futures prices fall, the exchanges credit their account with the money against variation margins.
I didn’t hear companies failing to make margin calls when futures prices rose. It shows that the system works and that the necessary finance is there. Remember that the trading companies were more profitable during this period, and I imagine that this gave the banks more confidence in supplying finance.
At ADM, we had no problem financing our trading during this period.
A financial controller must evaluate the prices of some difficult-to-price commodities. Is that an issue?
No, it’s not an issue. The markets we trade are liquid, and it is relatively easy to value our open contracts. In some cases, we look at the last trade or use external evaluations from brokers.
It was different when I was in energy, where some contracts were less liquid and difficult to mark-to-market – especially for the far-forward positions.
Do you have daily or real-time P&Ls (Profit and Losses)?
I am not a big fan of real-time P&Ls. Traders should focus on the markets and information flow and not on their P&L constantly.
Real-time P&Ls can be helpful in risk management, but I believe daily P&Ls do the job perfectly well.
Also, we are physical traders. Our function is to move products from areas of supply to areas of need to serve our customers, meaning there is a basis component in the price of the products (difference in value between the physicals and the futures). We can get real-time futures prices but can’t get a real-time basis. That reduces the value of a real-time P&L.
You are the CFO of a major trade house – how could your career develop from here?
I have no plan. I enjoy what I do today and get involved in new businesses. I am constantly learning. For example, I am involved in a new distribution business in Pakistan. I am on the board of this new venture. I meet new people, get to know a new culture and country and face new challenges. I told my boss to keep offering me new challenges.
What advice would you give to a) a young trader and b) someone considering getting into the business?
I would tell a young trader to spend time – at least six months – with your finance and operations teams. It will make you a better trader. It will also help you realise that you can have a great career and a lot of fun in a support function. You don’t have to be a trader to enjoy a fantastic career in commodities. Other jobs within a trade house can be just as satisfying as trading.
I would tell a young person thinking of joining the business that they must be passionate about the job. All the people here are driven. They think and breathe commodity trading all day long.
Thank you, Jerome, for your time and input.
© Commodity Conversations® 2023
This conversation is part of my upcoming book, “Commodity Professions – The people behind the trade”, due out at the end of this year.