A Conversation with Indrek Aigro, Copenhagen Merchants

Good morning, Indrek. Could you please tell me a little about grain brokerage at Copenhagen Merchants?

We were initially a Northern European grain brokerage company, mainly involved in wheat exports through the Baltic Sea. We have historically identified ourselves as an origin broker. Today, Copenhagen Merchants is present in the Black Sea, so we are involved with the region’s four exporting countries. We have an office in Sao Paulo, Brazil. We have six offices in all, mainly positioned according to exporting origins.

The markets are constantly changing. Destinations now accept more origins, which brings an element of competitiveness and creates a function for companies like ours. We must have a geographically wide footprint to preserve our value to the market.

The broker’s function is also changing. Price discovery, historically the broker’s job, is less important now as markets are more transparent. Our value now is in the intelligent delivery of market information, execution, and logistics.

Torben Christensen founded Copenhagen Merchants in his basement in 1977. Is he still involved in the business?

Torben officially retired in 2016, but he’s in the office three or four times a month, so it hasn’t been a complete exit. Torben’s son, Simon, took over the CEO role from his dad, and the Christensen family still own the company.

How long have you been with the company?

I joined in 2007, so close to seventeen years.

What are your responsibilities – your day-to-day role?

If you ask a broker or a trader to identify themselves, they will reply that they are a corn, wheat, or beans guy. I’m a wheat guy. Wheat is close to my heart. I’m originally from Estonia, and when I joined the company, it was natural that I looked after the markets in the emerging Baltic States. Nowadays, I’m responsible for brokerage overall. I still broker for a small portfolio of loyal clients, but my job is mainly developing new offices, products, and markets. Our world is changing super-fast, and we need to adapt to those changes.

How do you manage the communication between the different offices? Getting everyone to talk to each other and share information must be challenging.

It’s challenging for a company like ours to maintain and do well, especially given the time zones and cultural differences.

We have around 30 brokers in six different offices. If everybody calls everybody even once a day, it’s hundreds and hundreds of phone calls. You can’t do that. You need to be more innovative as today’s markets are such that business opportunities appear and disappear much faster than when I started seventeen years ago.

We invest heavily in digital tools and have developed a platform – CM Navigator – for both internal and external use, where we keep our bids, offers and vital analytical data. Everybody has access to it.

It’s like in sports when you train a football team to become perfect for a match, where everybody can read each other well. To succeed, we must have the right tools, the right people and the right attitude.

We’ll return to the digital part in a minute, but let’s first talk about the individual competition between the brokers. How do you get around that problem?

It is one of the core challenges and is why brokerage companies tend to be small. It is a barrier which restricts growth. At some stage, brokerage companies often split up, and people go on their own. We see that happening a lot.

Copenhagen Merchants is one of the few brokerage companies that acts like an organisation. I would attribute this mainly to our culture and our values. We try to think with 30 heads but talk with one mouth. We do not cherish individual achievement; we cherish group achievement. Nobody in our company is valued according to what they do individually. Business often happens between different brokers or offices. The more business transacted between brokers and offices, the better it is because it shows how our team benefits from the structure around them.

We are getting into uncharted waters today because of our size. We don’t see many similarly sized brokerage companies, which means we cannot follow any given examples. However, we strongly believe that combining our digital platform and shared culture allows us scalability.

Brokerage requires drive and competitiveness, but it should never be destructive. It comes down to the value set of people. I don’t know if we have been lucky or intelligent, but when we recruit brokers, we place more weight on their value set than their skillset or the tonnage they have brokered in the past. They must be a cultural fit for us.

Let’s go back to brokerage. Why hasn’t it moved online? There have been many attempts to move brokerage onto platforms, but none has worked. How are you progressing on that issue?

I don’t think any company is strong enough on its own to drive or disrupt the business, but we must stay on the frontline to see what is going on – which direction the wind is blowing.

Why hasn’t the business moved online? There are several reasons.

The number of transactions is relatively small, and the number of standardised contracts is even smaller.

There is always a lot of discussion about terms when you trade physical goods – load speeds, documentary instructions, etc. They often depend on the destination. Morocco, Algerian, and Tunisian terms are all different.

The contracts are significant – a cargo of beans or corn is worth tens of millions of dollars. It is not the same as buying a plane or train ticket.

Nobody has been able to standardise contracts enough to digitalise them. Even if you take the most standard flows, say, Brazilian beans to China, it is billions of dollars of flow in a relatively standardised format. The number of contracts is small enough – and the contracts are big enough – not to incentivise you to click and do the business.

Why does a market need brokers?

It’s a good question. The market needs brokers for different reasons now than twenty years ago.

Historically, a grain broker gave you price discovery to tell you the value of your goods at a certain point and time. The broker also helped build trust between counterparts by saying that this is a good buyer; you can trade with them. Sometimes, the broker’s function was to offer execution and post-trade services.

Brokers must look in the mirror and ask what value they can deliver in five or ten years. Price discovery is no longer a broker’s primary function. The markets are so transparent anybody can find out the value of their goods. The execution services are becoming increasingly automated, both with blockchain solutions – where the ABCDs have invested heavily in Covantis – and AI.

First, we believe that the primary function of a broker will remain the intelligent delivery of information. We have tens of thousands of data points on prices, analytics, S&Ds, line-ups, freight, etc. Choosing the five relevant data points for a client and delivering them at the right time is a significant value-add.

Second, people often look at a broker’s execution service as passing on emails between buyers and sellers. However, that is not the core of the service, and it can be automated relatively easily. The core of the execution service is to avoid disputes and arbitrations. It starts with designing and constantly improving the contract standard to leave the minimum room for interpretation. It is about offering advice to counterparts in case of differing opinions and mediation to find a solution.

GAFTA arbitrations do not take commercial interests into account. Sometimes, one counterparty needs the other one more than the other way around. We have access and visibility to the value of the continued trade relation in addition to the legal standpoint. Our execution service is more about consulting than just passing on emails.

The third angle is visibility into freight and freight’s visibility into brokerage. We have a multimillion-tonne trade book ahead, traded but not executed, plus we hear what the others are trading. We have a relatively good visibility into the next six months’ trade in certain areas. It offers some unique insights into the freight market and how to evaluate the freight rate correctly.

In our opinion, this is what the market will need from the brokers in the future.

You offer a kind of informal mediation service.

When we conduct the business and issue the contracts to both parties, we take control of the execution service and the post-trade processes, starting with the vessel nomination and ending with payment. During this process, something often needs solving – big or small.

The money is not made in catching the last quarter of a dollar per tonne in the port. The money is made by executing efficiently and minimising or avoiding demurrage. We try to control the process thoroughly and then give our opinion as a neutral counterpart in the transaction.

The freight brokerage side you offer dovetails into the physical grain brokerage. Has it always been like that at Copenhagen Merchants?

Copenhagen Merchants began as grain brokers in 1977, and we started freight brokerage one year later. We have been in freight for 45 years. We evolved from freight brokerage into freight trading. We own and manage a fleet of vessels, some in joint ventures. We are principal traders on freight, but we preserve our neutrality on grain. There is synchronised value in both.

So, there’s no conflict of interest?

I don’t see any conflict of interest. Yes, we may have a long or short position on freight, but I don’t see how that could conflict with our service on the grain brokerage side.

Neutrality on grain is paramount for us because it allows our business model to live. I have only once been short barley, and that’s when my colleague thought he sold wheat to one client, but accidentally, I bought barley from mine. We needed to perform and cover in. It’s the only time we held a position on the grains.

Do you give risk management advice, even informal, to your grain clients?

We don’t. Some companies offer consulting, but it involves increased compliance, possibly even a banking license. We haven’t found the synergies there.

Copenhagen Merchants offer a lot of market information, but the conclusions are yours to make. Two people looking at the same data can arrive at two different conclusions depending on their unique situation or position.

We provide daily market reports and live data on our digital platform – news that others haven’t yet published.

Do you publish prices?

We do but in an anonymised format. We group prices to specific base ports. But we also publish physical bid and offer data you can’t get in typical market reports. You can usually get indicational values of the goods, but it’s much harder to access genuine bids and offers you can trade on.

Copenhagen Merchants owns terminals. How do they fit into the brokerage?

We have terminals in the Baltics, Poland, Denmark, Sweden and the US. Although they are often owned in joint ventures with other companies like, for example, Viterra or Bunge, we are the majority shareholders and manage them. They are independent and service the free market on a competitive basis.

The synergies to the grain brokerage business are regional. Our terminals in Poland execute Polish and Ukrainian grains. There is a brokerage element, there is a freight element and identifying synergies is part of our job.

The synergies are there. For example, if you supply Ukrainian corn to our Gdansk terminal, you want to sell it for the maximum price, load it out quickly, and then get paid. We want the same as a terminal owner, broker, and freight trading company. Our interests are aligned.

Remember, the geographical scope of our brokerage is much broader than our terminals.

What is your earliest point of intervention on the brokerage side? Is it ex-farm or ex-terminal?

We don’t trade with farmers except in countries where farmers have 100,000-plus hectares and are also trading companies. Most of our business is FOB or C&F, but we also deal in rail cars. We sometimes trade containers, and we occasionally trade trucks. We do railway business in countries where rail dominates, like Ukraine and, increasingly, the EU. We previously brokered cargo and rail cars in Russia. It is a question of liquidity. If there is enough liquidity, we broker it.

How many different hands does grain go through before it ends up on the ship?

The domestic market is usually two-tiered in exporting countries like Denmark, Germany, the Baltics, or Romania. The farmer produces the grain and sells it to an originator, who then transports it to the port, loads it on the vessel, and sells it FOB to an international trader. In some countries, like Poland, it’s a three-tier system, with the originator selling it to a local trader who loads it on a vessel and sells it FOB.

The Northern European markets are over 90 per cent FOB business because the originators don’t want to go to destinations. Their function is to identify their first liquid logistical point, usually FOB, and sell the grain FOB to a trading company.

Sometimes, an end consumer will buy the grain and ship it directly to its destination, where the buyer distributes it to the local processors, feed compounders, flour mills, oil crushers, etc.

We have recently seen a regionalisation process where global trading companies have lost market share because of compliance requirements and other issues. Some second-tier trading companies are becoming more assertive in specific destination markets. For example, some focus on West Africa or Iran, while others focus on wheat marketing in South America. Not everybody can do everything.

Sometimes, a trader sells to another trader and then on again. We can see strings of six to ten companies before the grain is lifted and delivered to the destination. It varies.

Do you find that brokers and traders add more value when supply chains are disrupted? There’s less need for traders and brokers when everything’s going well.

I would add three elements to this disruption.

First, you need a healthy amount of volatility in the market. If the markets are flat, traders find it hard to identify trading opportunities. But too much volatility paralyses the business. Unfortunately, we are dealing with a growing amount of volatility in today’s markets.

Second, you need healthy prices. Ukrainian farmers are selling corn today for $85 ex-farm. It’s unhealthy. We need a healthy supply chain. It is not sustainable if prices are too low. It starts disrupting the business. The markets are more straightforward for everyone if prices are not too soft and not too high, combined with healthy volatility.

Third, wars, pandemics and weather disruptions are becoming more frequent. Traders analyse markets, but analytical thinking does little good when trends break. People trained to think analytically – to approach their markets analytically – might be disappointed if a black swan turns up.

Apart from wars and weather, what is your biggest challenge?

Recruitment is one of the biggest challenges for brokerage companies. There is a global shortage of people. The younger ones are not curious about agribusiness and are more interested in consulting, finance, and start-ups. The problem is acute in Sao Paulo, where demand is growing fast. I hope your blog and book stimulate young people’s curiosity about our business.

Thank you, Indrek, for your time and input.

© Commodity Conversations ® 2024

This is an extract from my upcoming book Commodity Professions – The People Behind the Trade.

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