Good morning, Charles, and welcome to Commodity Conversations. After an initial experience working in Paris as a broker in the inter-trade physical sugar market, you moved to Durban as the South African Sugar Association’s export manager. SASA was, and I believe still is, the central selling desk for South Africa’s sugar industry. What did the job entail?
It entailed selling about one and a half million tonnes a year of raw and refined sugar to the world markets. We had close relations with some Far East raw sugar refiners, and we gradually built up a white sugar sales book to East Africa, particularly in containers.
It was an exciting role because it combined both futures and physicals. Those are the best roles for a trader because you see how the two interact, giving you a good insight into price discovery. During my three years at SASA, we exported almost five million tonnes. It was fascinating developing new markets and new relationships with the trade and with the destination.
Cargill headhunted you, and you moved, I think, to the Philippines. Is that right?
Yes, I did – as a physical sugar merchandiser and to manage the company’s sugar business there. Cargill wanted to develop their sugar operations in the Philippines with domestic distribution, imports (when the country needed them), and to be involved in some of the US Quota exports. I was there about a year and a half before Cargill brought me back to Geneva as their Structured Trading Manager.
What is structured trading, and how did you manage it?
Cargill had sugar terminal facilities and elevation in Brazil. My job was to develop a downstream sales book through long-term structured contracts to provide the material for the trading team to leverage between origin and destination. Most contracts had quite a bit of optionality on both physical and futures. It’s an extended value chain with plenty of risks to manage.
It was a fascinating job because it linked origin to destination. We had some great customers; visiting their countries was an authentic cultural experience – and insightful into doing business the right way.
Was it more of a merchandising role or more of a customer relations role?
It was both. You must open doors to be able to trade. You need customer skills to develop credibility with customers for them to say, “Yes, let’s become trading partners.” The first cargo is often the hardest. It’s about getting your foot in the door with that first cargo, creating the access and then bringing in the trading cavalry.
My role for the first year and a half initially focused on opening doors and developing longstanding relationships. The subsequent years were more focused on trading around the contracts. It was the best role I could wish to have because it combined the people contact with some good usage of trading skills. Structuring a contract took time and energy, but it was exciting.
How long was an average long-term contract?
It could vary between one year to three years, primarily for three.
Cargill is famous for training their traders. What did you learn from Cargill?
I came to Cargill at a slightly later stage than most. I had done a reasonable amount of trading at SASA. I honed those skills at Cargill. Improving my trading skills and learning new ones was the best part of Cargill.
Cargill taught me the value of optionality. It taught me to always look at a trade from a risk-reward perspective, to take out the emotion, and to seek out value.
I sold to many end users – some of them wealthy families or family-owned companies – who didn’t have to trade. As a trade house, you must trade to exist. It makes a trade house creative in a positive way, seeking out trades that have an optimal risk-reward profile and then following through on the opportunities. Developing the proper risk-reward mentality was crucial to being successful.
After seven years with Cargill, you joined Aisling, one of the most significant and successful commodity hedge funds at that time. What was it like moving from a trade house to a hedge fund?
You can apply the skills you learn in a trade house to a fundamental hedge fund. Most of the people at Aisling were from Cargill, so we shared the same language and way of looking at markets.
At a trade house, you have long-term contracts and a physical flow. You arrive on day one at a hedge fund with a blank paper. You don’t have assets, so you can’t trade around them. You must create value in your own space, which for me was soft commodities, specifically sugar.
I was fortunate in that I moved there in 2009, the start of a bull run. Sugar had been flatlining between twelve and fourteen cents per pound (c/lb). Between 2009 and 2011, the price rallied to 30 c/lb, fell to 14 c/lb, climbed to 36 c/lb, crashed to 20 c/lb, and then retraced to 30 c/lb.
At a hedge fund, you must do your analysis. You must have contacts and put on risk, even though you could be wrong and lose a chunk of money. Once you’ve put your pillars in place, put on that risk, and made a positive PNL, you gain confidence. A hedge fund allows you to do things you wouldn’t be able to do in a trade house. You’re given a lot more risk to manage.
Some top traders from Cargill and elsewhere have recently moved to hedge funds. Would you recommend a physical trader move to a hedge fund?
I would recommend it on two conditions. First, they have at least 15 years of experience in a trade house where they have learned the ins and outs of trading. You don’t want to go to a hedge fund at 25.
The second element is that you must put on risk. Doing that in a trade house is usually a team decision, and you get pulled along. If you put on risk in a hedge fund, it’s all on your shoulders. You must accept that level of responsibility where it can go wrong, and it can go right, and it may be a volatile ride.
You must have a significant risk appetite and sense of independence to be the right fit for a hedge fund. Someone once asked if I could ever relax, to which I replied that it was only stressful when the markets were open. I always slept well at night!
Your next move was to Dubai to head up risk management at Savola. Could you tell our readers about Savola and what commodities you managed?
Savola is the largest food company in the Middle East. It is a Saudi company, well organised and well-established in its markets, particularly in Saudi Arabia and Egypt. Savola buys about two million tonnes of sugar annually for their refineries and about a million and a half tonnes of edible oilseeds. My role in Dubai was to manage the price risks in those flows.
Were you responsible for procuring those two commodities, or did you oversee the hedging and risk management?
Savola has a professional procurement team. I was involved in procurement, but we didn’t do it directly. I managed a separate risk management team.
You stayed in Dubai for a year and a half before returning to Switzerland. Was that move back a personal or professional decision?
It was a bit of both. Savola decided to close the Dubai office and move everything back to Jeddah. I liked Dubai, but in my mind, it always had a time limit to it. It’s a fun place, but I missed Switzerland.
Would you recommend young people to move to Dubai for part of their trading career?
I would, and the younger, the better. It’s a young person’s town like Paris is a young person’s town. Dubai is suited to a sort of 25 to 40 period in your life. It’s a place where you have fun and work hard.
Dubai is a meeting point between East and West, and culturally, it’s fascinating. There are different nationalities, different things going on, and different ways of doing business.
In August 2014, you moved to Schaffhausen in the German-speaking part of Switzerland as director of Commodity Risk Management at Unilever. It must have been quite a cultural shock moving from Dubai to Schaffhausen and from a trading to a risk management role in a Fast-Moving Consumer Goods (FMCG) company. How did that move go?
It went very smoothly. Schaffhausen is a lovely place to live and work. Commodity markets are stressful, but Switzerland allows you to have stress in the day and a more relaxed environment in the evening. It is an excellent combination.
Moving to Schaffhausen and a large multinational suited me well. Unilever has less trading appetite than a company like Cargill but is close to commodity markets.
I enjoyed the broader range of commodities. Until then, I’d done sugar and edible oilseeds, but I handled other things like dairy, cocoa, and some metals at Unilever. It was intellectually stimulating to learn new commodities and meet new people. I managed about eight or nine commodities for the company globally.
Which was your favourite commodity?
Sugar is my favourite commodity, partly because of the people. You might be surprised to hear that the dairy sector is my second. It is fragmented and global, with various international exchanges. It’s a lovely industry with great people, and so quite like sugar. You can also have lots of fun in cocoa if you pick the market right.
What is the difference between a trader and a risk manager?
For me, a trader and a risk manager are similar; if you trade, you must know how to manage risk. Risk is at the heart of it all. You start with risk, and then off you go. To be a successful trader, you must understand and appreciate risk to create a positive and consistent PNL by mitigating the bad trades and maximising the good ones. It uses a more offensive approach.
As a risk manager, you also focus on risk and reward either for hedging decisions or putting on a trading position. It is more of an approach to assess what can go wrong with either decision and put a plan in place to limit losses and capture gains. As a risk manager, I would say you have a broader appreciation of market risk, which in today’s volatile environment, is a more suitable way to approach trading. It uses a more defensive approach.
Okay, what’s the difference between procurement and risk management?
There’s a big difference. The risk manager knows the commodity markets and appreciates risk. The procurement manager knows the process but often has no notion or appreciation of risk.
At Unilever, the risk management team were part of procurement, but the company separated purchasing procurement from risk management. It was sometimes difficult for a procurement manager to understand the risk manager.
To be clear, when you’re talking about risk management here, Charles, you’re talking about commodity price risk management.
Yes. We weren’t responsible for other risks, such as counterparty risk. That was the procurement manager’s job.
FMCG companies are structurally short of commodities. Are the FMCG companies forced to trade the markets?
As a risk manager in an FMCG company, you look for price certainty and to mitigate price volatility. It is a very different mindset from a trader in a trade house who seeks out risk in price volatility for profit maximisation.
The objective of a risk manager in an FMCG company is to provide as flat a price line as possible, so the business can lock in margins over the medium and long term while at the same time using the volatility in the market to make the company more competitive.
An FMCG company wants you to flat line, but to be competitive, it needs the bumps – the ups and downs of volatility – to pick the right timing to cover hedges. It’s a delicate balancing act.
Commodity risk management isn’t just about beating an internal forecast. Nor is it about ensuring there’s no inflation from last year’s cost price. Inflation is the same for everybody. If wheat or sugar prices have gone up from last year, they have gone up for everyone.
To look at it from a pure procurement mindset is missing the point that it’s crucial to mitigate costs by buying at an opportune time, irrespective of inflation.
Consumer companies must have a strategy and build governance around it. They must have a mindset as to what is making them competitive. Beating last year’s price or the end-month forecasts is insufficient.
How do FMCG companies trade the market? If they thought, for example, that the wheat or sugar price would go up, do they buy further forward than they would otherwise do? And if they thought the prices would fall, they would buy more hand-to-mouth. Is that how it works?
I suspect FMCG companies are not as fast-moving as the name implies. How quickly could you get your senior management to take the trading decisions?
It would be quicker and easier to get approval when prices are low. It is difficult to convince senior management to put on hedges when the market is rising. It’s challenging for FMCG companies to understand why they need to pay up – and why the price might not revert to mean. It can cause delay, and a delay in an upward-trending market will mean additional costs. It can be challenging, but people trust you once you have a good track record. It speeds up the decision-making process.
The challenge is often with the structure itself. FMCG companies are heavy on people. It can take time to get everybody’s buy-in.
Companies must trust their risk management teams as they trust their finance teams. It’s an area of development in many FMCG companies.
How do you know when a price risk manager is doing well? What are the benchmarks?
It’s easy if you are a risk manager in a trading company – you look at the P&L.
A risk manager in a procurement function doesn’t have a clear PNL. You can look at it in various ways, but you typically base it off a market average versus where you hedge. You can also look at it versus the cost of the additional inflation or deflation that occurred because you made those decisions.
In all honesty, the area is ill-defined. We looked at it from different angles over the years, but there’s no correct method because there’s no P&L per se. You’re trying to beat the market and to keep it all as flatlined as possible for the business.
The rest is about whether you communicated well and involved the right people in the decision process.
What was the most challenging part of your role at an FMCG? Was it getting the markets right or explaining how commodity markets work to your colleagues?
Considering their volatility, we had a good run on most commodities, particularly dairy, cocoa and sugar. The challenge was more the education process, getting the teams to understand the markets.
In most FMCG companies, people move around every three or four years, so you start again each time someone new comes along. It can be frustrating to rinse and repeat, having built up a certain amount of knowledge and buy-in. FMCG companies like to move their employees between different roles and geographies. Traders tend to stay in their markets for many years. I think FMCG companies should look at more longevity in specific positions.
After over seven years with Unilever, you established your own consultancy company – CFCommodities – in January 2022. Could you tell me a little bit about that?
I had wanted to do it for a while, and I had the backing of some long-time customers. There are three aspects to what the company does today.
The first is to offer a boutique risk management advisory to industrial clients in sugar, grains and dairy. I provide insights into managing risk, pricing, and physical flows. Not all commodities trade the same way, so understanding the dynamics of each (volatility, liquidity, fundamentals) is essential to provide insightful advice.
Second, I offer a consulting service to some large management consultancies who want to understand how commodity price risk management works in the consumer segment.
Third, the company trades on the markets and provides a trading service to customers. It’s been a busy and active time, and the commodity markets have provided plenty of volatility and opportunity in the last 15 months.
So, the company takes positions on the market? Doesn’t it take away your independence as an advisor?
I don’t think it does. As Scott Irwin mentioned in your recent conversation, you must have some skin in the game to be a good advisor – but not enough to get flayed. I tell my clients what positions I take, my rationality for taking them, and my estimated risk reward. As Ralph Potter emphasised in his comments, trading is risk management. It is my speciality, and I don’t see any conflict of interest—quite the reverse.
Isn’t it difficult to follow multiple markets and be an expert in everything?
The best traders and risk managers know how little they know. As Socrates, one of history’s greatest philosophers, famously said, “All I know is that I know nothing”.
I like to think that I understand markets. I also have hands-on experience in the physical flows of the commodities I follow. There are some excellent, expert market analysts out there, and I buy in their services. I like the structure I have. It works.
To sum up, you started as a broker in Paris but moved on to become a sugar exporter in Durban and a merchant in Manila. You were a structured trade manager and a hedge fund trader in Geneva before becoming a commodity risk manager, first in Dubai and then Schaffhausen. You now have your own company. Which part of your career did you most enjoy?
There were three roles I particularly enjoyed before starting my company.
I liked my experience in South Africa. I was young to have that responsibility and exposure to the markets and combine futures and physicals. It was nice having a good industry behind you.
The second role I liked was being the structured trade guy at Cargill. It had everything I would want in a job: customer contact, analysis, and trading. I also loved learning more about managing risk and optionality. It ticked all the boxes and was in Geneva, a lovely city.
Finally, the hedge fund was challenging, exciting, and rewarding. A thrill a minute, and we even took delivery off the exchange twice!
Right up there is what I do now, running my own company. I can decide what to do and how and where to do it. I felt positive and happy from the day I started. It links everything I enjoy: trading, some excellent and reliable long-term customers, advice, analysis, and travel. I couldn’t ask for a better job.
I talked with Jeremy Reynolds a while back. He recently set up a shared-service company offering trade operations and contract execution. It seems you are doing the same but with a price risk management service. Is this move to shared services a coincidence, or is it a general trend?
It makes sense for some companies to outsource rather than hire. Using shared services, you access experienced and credible people. It is perhaps something the large consumer companies should use more, particularly in today’s environment where the markets are getting more volatile. It could be in their interest to buy in some of this off-the-shelf expertise.
Thank you, Charles. I wish you every success with your company.
© Commodity Conversations® 2023
This is part of a series Commodity Professionals – The People Behind The Trade.