Murilo is an old friend from my many years in the sugar market. He is almost unique in that he has worked all along the supply chain, first for a trade house (Louis Dreyfus), a bank (Macquarie), a producer (Raizen), an importer, and a food company (Tharawat in Saudi Arabia). He is now Hedgepoint’s head of sugar and ethanol for the Americas.
With over 10 years of experience in price-risk management for agricultural and energy commodity chains, Hedgepoint became an independent company in 2021 following a spin-off from EDF Man Capital. Operating globally, the company is strategically positioned near major commodity exchanges, with offices in São Paulo, Uruguay, Chicago, Zurich, Dubai, and Singapore.
“I’ve been on both the sell and buy sides,” Murilo told me. “It allows me to put myself in my client’s shoes. When you do so, you know where it hurts. You know where the hurdles are. You know where the opportunities are. You know how they think. It makes it easier to shape a product.
“It helps with the language you use and how you communicate. It also helps in terms of my network. Ours is a small community, and I’ve been in the business for so long that I have ended up knowing everybody. Sugar is a big family.”
“We can’t control prices,” Murilo explained. “We are price takers and invest heavily in market intelligence to predict in which direction the winds are blowing so that we can help our clients protect their price risk. We also invest in understanding our client’s culture and risk appetite. We must know what risks a client might want to avoid and the risks they accept.
“If we combine an understanding of where prices are going with a sense of the sort of risk-management products a client prefers, we can personalise a risk-management strategy for each client – a custom-made product for the clients.”
“We invest a lot of time and resources in building our S&Ds and our trade flows, understanding weather, yields, planting intentions, politics – everything that affects production. Fundamental analysis is our bread and butter. We capture a vast quantity of data and use our reasoning and technology to process it in a meaningful way.
“We also pay attention to macro factors, particularly the dollar. If the dollar goes up, producers’ profits increase in local currency, allowing them to sell at a lower price. The rule of thumb is ‘dollar up, commodities down.’
“We also look at and use technical analysis for short-term moves: moving averages, support and resistance, and that sort of thing. It helps us to pick the right moments to place or lift hedges.
I wanted to move the conversation to Brazil and its challenges in production and logistics.
“Agribusiness is undoubtedly the most efficient industry in Brazil,” Murilo told me. We are second to none globally in terms of productivity and efficiency. People tend to think of agriculture as an old craft with small farms. It’s not that at all. It is at the cutting edge of technology, not only for the seeds but also for best management and industrial practices.
“Our first challenge is growing the sector to meet expanding global demand through higher yields and more efficiency without damaging the environment. People often paint Brazil in a bad light in agriculture because of deforestation in the Cerrado and Amazon, but nobody mentions that Brazil’s energy matrix is 90 per cent renewable.
“Infrastructure is our second challenge. Agricultural production has been increasing so quickly that it is hard for the country’s logistical infrastructure to keep up. Brazilian interest rates are among the highest in the world, making it complicated to get a return on infrastructure investment, whether rails, roads or ports.
“The country’s politics can be challenging. Policies and priorities change when the government changes, making investing complicated for the long term. It doesn’t help build confidence for long-term investors. That said, there are many things that the government has done right. During the eighties and nineties, the government privatised the railways and the ports, reducing government interference and increasing efficiency. It allowed the sector to tap international capital markets.
“The rail system has expanded significantly, making rail transport cheaper, safer, and more reliable.
“Some new roads are also being built privately, especially in the far north. The privatisation of logistic infrastructure has allowed agricultural production to flourish.”
“Are poor logistics holding Brazil back?” I asked.
“Logistics struggle to keep pace,” he replied. “However, things are improving fast, allowing expanded grain production in the frontier lands in the north. Previously, if you wanted to bring grains from North Mato Grosso to Santos, you would have to ship them 3,000 kilometres over poor roads. The new ports and roads in the north have cut these distances to 500 kilometres. The northern ports have also reduced ocean freight transport distances to Europe and the Panama Canal.”
From my days as an analyst, I remember how the high cost of inland transport shapes the crops farmers grow. When I started in the sector, Brazil’s sugar distillers provided all the ethanol in the country. However, corn ethanol production is taking market share in regions far from the ports. It makes more sense for these regions to use their corn for ethanol to supply the local fuel markets than transport it to the ports. The cost savings are further improved as the fuel distributors no longer transport gasoline to these remote regions.
People often complain that moving soybeans to Santos Port costs more than moving beans from Santos to China. I asked Murilo if that was true.
“It’s true,” he replied. “it’s partly because ocean freight is much more efficient and cheaper than road and rail freight. There is also less weight loss with ocean freight than with road and rail – particularly road. You lose a small percentage of weight when you move grains by trucks over poor roads. It is small, but it is significant. However, rail is taking an increasing share of the transport from farm to port; weight loss is becoming less of a factor.”
Jim Heneghan mentioned that US farmers are blessed with the Mississippi River Basin. River transportation is more environmentally and economically efficient than road and rail transport, giving US farmers a significant advantage over their Brazilian colleagues. I asked Murilo to comment.
“You are right,” he told me. “Brazil’s rivers are less workable than those in the US. We may increase barge transportation a little, but rail is the future for Brazilian crop exports.
“Moving commodities by rail increases our economic costs but not necessarily our environmental costs. Hydroelectricity accounts for about 60 per cent of Brazil’s energy matrix. Our rivers are not easily navigable, but they provide green energy.”
“Let’s move now to port elevation – the receiving and loading of grain onto ocean-going vessels,” I suggested. “How much does it cost to load a vessel at Santos?”
“This information is private,” he replied. Still, it should be about $11 per mt. Elevation used to cost as much as $36 per mt before privatisation. It initially fell to $18 per mt and stayed there for a few years, but it has been on a downward trend for the last twenty years.
“The ports have invested in faster, more efficient ship loaders. Thirty years ago, daily load rates were 2,000 to 3,000 mt/day. A terminal in Santos can now load as much as 40,000 mt/day.
“They have also invested in bigger and better warehouses, making segregating different qualities of commodities easier and speeding up reception.
“What’s the secret to a good elevation operation?” I asked.
“Efficiency is the secret to elevation,” he replied. “You must keep the costs down. It is a capital-intensive business. Maintaining high throughput volumes shrinks your fixed costs per tonne. Every penny counts.
“It can sometimes lead to a fight between the producers, trading companies, ports, and logistic operators. Traders and producers like to concentrate shipments and sales when prices are highest.
“Logistic operators like to ship the same quantity every month and don’t want the port and rail systems to stand idle. However, this is less of a problem because Brazilian agricultural production has increased significantly. The ports and rail systems run at 85-95 per cent capacity all year.
“There is a difference in how the sugar sector has developed compared to grains and oilseeds. The country’s sugar producers have become the biggest traders and exporters of sugar and have bought and built rail and port infrastructure. They have constructed an integrated value chain. The trading companies play that role in grains and oilseeds. Traders, not producers, own the grain and oilseed logistics infrastructure.”
© Commodity Conversations® 2024
This is an excerpt from my new book, Commodity Professionals—The People Behind the Trade, which is now available on Amazon.
