Doug has over 30 years of experience in trading commodities. After graduating, he joined Cargill, where he became the head of both the UK non-grain import business and the UK grain business. He moved to Switzerland in 1997, where he became the global head of petroleum trading before his departure after ten years with the company in 2000.
Doug then went on to lead Crown Resources’ global petroleum trading business. He consulted as an energy market expert to a large US hedge fund before co-founding the Merchant Commodity Fund in 2004. In 2010, Doug and his business partner, Mike Coleman, acquired the RCMA Group, a diversified global physical commodity trading business based in Singapore. The Group’s most significant investment came in 2016 with the green-field construction of the first major oilseed rape processing plant in the UK for thirty years, Yelo Enterprises.
You left Cargill in 2000 to join Crown Resources Petroleum. Four years later, you co-founded MCF, Merchant Commodity Fund. Could you explain the motivation for MCF?
We worked extensively with hedge funds during my tenure at Cargill in petroleum from 1997 to 2000. Oil prices were coming to the end of a 20-year bear market and were as cheap as chips. There was a demand for exposure from the early pioneering hedge funds in that sector. Cargill had an entrance via OTC-type structures. I met Tudor Jones and saw his flagship operation in Connecticut. I thought, “Gee, this is where we should go.” I began to understand how the hedge funds worked.
When I left Crown Resources, I consulted with Cataquil Asset Management, which was run by Paul Taradji and Rob Ellis. They had a couple of billion under management. I hoped they would delegate some of their funding to us. It didn’t all work out for several reasons, one being that the partners fell out quite spectacularly, but it whetted my appetite to get into the space.
Mike Colman, who worked with me at Cargill, called me in early 2004. He said he had funding to start a hedge fund and asked if I would partner with him. I agreed, and we set up MCF together.
One of the problems that fund managers face is that they can’t take or make physical deliveries against an expiring futures contract. They can’t play the convergence. You once took delivery of physical sugar by teaming up with a trade house. How did it work out?
The fund has taken physical delivery twice. We took physical delivery of rubber from the Tokyo Exchange, where one could cash and carry the physical rubber. The physical carry versus deferred futures was attractive. It was a small delivery, but we did it early in the fund.
In 2010/11, we were bullish on raw sugar and felt there was a substantial risk of a significant blowout, upwards of 30-40 cents a pound. We had invested significantly in that view. Being in a hedge fund and not seeing the physical flow makes it challenging to understand how much a customer wants or doesn’t want a commodity. It is critical when you’re taking prices way above their long-term cost of production. We took delivery to get some clarity on that.
Looking back, it was a logistical and administrative hassle, even though it provided us with the necessary visibility. Despite the heavy inverses, we saw sugar moving quickly through the system to end users. However, it was hairy, and we haven’t done it since, and that was 13 years ago. We now watch the price delivery and futures convergences from afar.
That’s interesting. I always believed that you took delivery to play the convergence and stay in the spot position beyond expiry.
We are a fundamentally based hedge fund. We examine supply and demand, and cash information is crucial. However, convergence on expiry is dangerous because it boils down to playing chicken with your counterpart.
A classic technical squeeze occurs when the futures shorts cannot deliver the volume of physical commodity the futures longs hold at expiry. The shorts have no option but to buy back their positions at whatever price the longs decide.
However, what tends to happen is that the shorts deliver anyway, and it is up to the longs to prove that they don’t have what they delivered. Everyone mucks around for a while, and it usually ends in arbitration. It becomes a massive waste of time. We prefer fundamental commodity valuations. We don’t play convergence at expiry.
I’m learning a lot here. In 2010, you and Mike Coleman acquired the RCMA Group. Did that come from believing you can’t trade commodities without being involved in the physicals?
Despite a 28 per cent return in 2008, we had massive redemptions after the Madoff affair. Investors lost confidence in managed funds and wanted cash. They didn’t trust anybody. We had $1.3 billion of redemptions. I realised we had to diversify into other areas.
We knew the owner of RCMA Group as Mike Coleman came from the rubber industry. I felt that rubber was interesting. Nobody really knew it. RCMA was a slow business within the traditional Asian world, but it had international offices and distributed rubber in the United States and Europe. We thought we could use the company as a starting point to build a conventional trading house where we could move physical commodities, earn a margin, and get away from speculative trading. We would also benefit from firsthand, physical information in the markets we chose, which could be potentially helpful for the hedge fund.
I suppose RCMA was too small in the physical markets to provide you with genuine insights into the physical markets. Am I correct?
Initially, RCMA was limited to rubber. It was the world’s largest independent distributor of natural rubber, employing approximately 150 people. We brought in a CEO to manage the business while we concentrated on the hedge fund. Rubber had been trading at $1,500 to $2,500 per tonne for a long time and then entered a significant bull market, driven by massive stimulus in China following the global financial crisis. Prices spiked to $5,500 per tonne. We were in the physical flow, saw the scarcity, and participated actively in the bull move. Also, as you’re aware, your distributing, trading, and wholesaling margins expand when prices rise. We had a combination of riding the bull market and making excellent margins. By skill or by luck, our timing was perfect.
Do you still own all those businesses? I know you’ve given up sugar, but are you still involved in the rubber industry?
Over the next five or six years, we diversified into sugar, cotton, coal, coffee and palm oil. The main ones were cotton, sugar, and rubber. We bought a Guatemalan coffee mill and a coffee distribution business in Vietnam. We had rubber and latex storage facilities in Rotterdam and a rubber distribution network in the United States. We built the group into a mini trade house with around 500 employees in 30-35 countries, generating cash lines of a few hundred million dollars and achieving a profitability of around $10-20 million per year.
I became somewhat demoralised in 2016-17. Prices were trading in a low-price range, and margins were under pressure. People costs were not dwindling. Credit exposure was underpriced. You could blow your full-year profits on a single counterparty default. The risk-reward of being in the business in such a low-price environment suddenly looked bleak. I decided to pivot.
We sold the rubber trading business and gradually phased out the other wholesale businesses. Did we sell at a profit? No, we dismantled them or passed over the teams to different companies.
We pivoted the company closer to the consumer, moving away from wholesaling and taking a small margin on high-volume products to focus on branded items. We initiated the Yelo project and established a large electricity retail business in Singapore.
I thought that Yelo originated from the idea that you can’t trade commodities without assets, but you’re saying you wanted to get closer to the consumer. Is that correct?
I had been aware of the Yelo project for a while, as a friend had brought it to my attention. He wanted to build a rapeseed processing facility in the UK to capitalise on government subsidies for renewable energy. It didn’t have to do with commodities; it was more about getting subsidies. It lacked a clear vision.
I didn’t look at it that way. I liked the idea of the green energy front-end that would allow us to be competitive on variable costs. However, I wanted to expand into refined oil and animal feed, creating differentiated products. I found that much more exciting.
Why do ag traders make millions while oil traders make billions?
The disappointing aspect of agriculture is that it yields a harvest only one or two times a year. You get a lump of supply coming at one time. The beauty of oil and petroleum commodities is that they’re produced and consumed daily. It’s a river that continues to flow.
Petroleum is a larger market with more volatility and intricacies than agriculture. It offers a variety of products that you can trade and participate in, providing more arbitrage opportunities.
However, perhaps the most important thing is that oil has more volatility than ags. Volatility is where you make big money. Agricultural volatility is only about the weather: a drought or a flood.
What advice would you give to a young person looking to make a fortune in commodities?
Find a way in and then be inquisitive. Don’t get bogged down. Navigate to a position to generate wealth through your skillset, whether in physical flows, assets, or derivative trading. But before you do that, ask yourself, “Do I want to make money?” That is the critical question you must answer.
Don’t be scared to take risks. You won’t know everything, but if you’ve done enough groundwork to understand the risk, you shouldn’t be shy about taking it. Every risk should be uncertain; we’d all be doing it if it weren’t.
If you make a mistake, don’t let it deter you. Learn from it and make sure it isn’t terminal. Life and careers are long, and you will undoubtedly make mistakes along the way. You shouldn’t be worried about the errors; they will make you better at what you do.
The above is an extract from the second edition of my book, Commodity Conversations – An Introduction to Trading in Agricultural Commodities, available on Amazon.
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