Author: jonkingsman

You’ve had an extensive career in commodity finance. Could you talk me through it?

After graduating from university in 1997, I enrolled in ABN AMRO’s Management Training program and, after three or four years, joined their commodity finance division. I have always found commodities fascinating. Commodities have a tangible element that banking per se doesn’t have.

I started with inventory finance in the early 2000s with commodity repos. It was a small group initially. We did the simple stuff on LME metals, but then we dabbled around a bit in coffee, orange juice, and cocoa. It was a learning process, but it quickly grew.

The commodity world is incredible. It’s the people, the business, and the mindset. But for me, it was about understanding how commodities are traded. You must be curious and willing to go down a rabbit hole or two—to keep digging and trying to figure things out. There’s always something to learn, and it’s always intriguing. There’s never a dull moment.

I moved to AMN AMRO London in 2005, working more on the futures and derivatives. ABN AMRO sold the business to UBS in 2006, and I left after six months to join Standard Chartered Bank in New York. I worked in New York for nearly eighteen years with Standard Chartered and Rabobank before returning to ABN AMRO.

I met my wife in New York. She’s a coffee trader. She recently took a senior position with Starbucks in Lausanne, which is why we moved to Switzerland.

When I interviewed Karel Valken from Rabobank for my book The New Merchants of Grain, he said that Rabobank only finances the ABCD+ traders as the due diligence workload is not worth the time for smaller companies. Is it still the case?

When I started at Rabobank, for example, you had to have a minimum equity of $10 million to be a wholesale commodity finance client. That’s probably increased to over $100 million, with annual revenues of a billion. Capital is getting more expensive, so banks are looking for better returns. You put the same amount of due diligence and credit work into a $10 million or a billion-dollar deal.

Here in Switzerland, the smaller cantonal banks service the smaller and medium-sized clients, but their financing comes at a price. They’re more expensive. This lack of liquidity puts the smaller and medium-sized traders at a funding disadvantage.

Banks finance the smaller commodity traders contract by contract (transactional finance), which is operationally intensive. The ABCD+s are essentially corporate borrowers with revolving credit facilities. You lend against the balance sheet and the profitability.

Banks come in and of commodity trade finance. Do they misread the risk and then blow up? Is fraud a factor?

There have been numerous exits in the past few years. Most notable would have been BNP and ABN AMRO. Banks have become less keen on commodity trade finance in recent years. It is primarily driven by lower returns, higher capital requirements (partly caused by fraud losses), and increased regulation such as Basel, Dodd-Frank Act or MiFID. The combination of these factors makes commodity trade finance less attractive to employ capital compared to other sectors.

Numerous frauds have occurred in commodity trade finance recently. Some made the news, and others disappeared. Fraud undermines the banking sector’s confidence in commodity trading and changes its risk management culture. People prefer to put their money in an industry like FMCG, where they get paid good margins with little trouble.

I don’t think anybody starts a trading company and says, I’m going to defraud a bank. More often, something goes wrong, and rather than confessing to it and breaching their covenants, companies might say, ‘We’ll lie about it and hope we trade out of it.’

Even if it starts innocently, the fallouts are severe. The knock-on effects include additional scrutiny, more audits, and less access to credit insurance. Everything becomes more expensive and more complex. The whole process takes longer.

What advice would you give a young banker to watch out for fraud?

Be aware of herd mentality. Don’t go along with something just because the other banks do.

Don’t always rely on the financial reporting.

It’s part risk management and part plain old greed. You need to meet a budget, and this client pays more. Nobody wants to walk away from a client who pays a good margin. Still, the moment the music stops, everything falls apart.

One red flag would be if a client fully utilises their credit lines. The rule is, “If it’s too good to be true, then it’s not true. If your client is willing to pay double or triple the margin than other comparable clients do, then that’s not right.

Meet your clients at their offices or industrial premises. It’s a red flag if you always meet clients in a restaurant.

I once had a processor client, and we were financing stocks in a warehouse. I went to visit the warehouse for a due diligence check. The place was a mess. The floors were dirty, and the pallets were badly stacked and falling over. The office was filthy, covered in dust.

I thought, what’s the administration like if that is how they deal with their physical commodities? A year later, multiple containers went missing. We should have pulled our financing, but we didn’t. I learned to look at the surroundings when I do due diligence. Are the buildings maintained? Is everything as you would want it to be?

Is reputation risk a factor for the banks?

Reputational risk is a factor for sure. In my opinion, there are two elements to reputational risk. The first is the incidental reputational risk caused by, for example, consumer sentiment or social issues. It could be related to financing oil production, intensive farming, environmental damage like deforestation, or social issues like child or slave labour, etc. As a result, the bank could be subject to environmentalists’ protests and boycotts.  It is a moral corporate citizen question that not only applies to commodity banking. And it also changes. Palm oil is a good example. It used to be a wonder crop and the renewable biofuel of the future. It was the best thing ever, but now it’s frowned upon because of deforestation.

The second element is more severe and related to breaches of regulations such as KYC compliance, money laundering, etc., resulting in significant fines and penalties. The reputational fallout can be enormous. It’s not always quantifiable beyond the fines and penalties. Are you going to lose clients over this? How much revenue is associated with the loss of these clients?

In any case, you’d rather not be in the news. There is a saying that there’s no such thing as bad publicity, but I don’t think that is true for banks. You want to avoid those headlines.

© Commodity Conversations ® 2024

This is an extract from my upcoming book, Commodity Professionals – The People Behind the Trade

You are the chief sustainability and communications officer at Golden Agri-Resources (GAR), the world’s second-largest palm oil producer. You’ve been with GAR for eight and a half years, but before that, you were ten years with Rainforest Alliance. What made you move?

I worked for ten years with Rainforest Alliance and seven years with WWF. It was a long stint, and I was ready for a change. If you’re a communicator from the NGO community, you usually end up in a Nestlé, a Unilever, or a retailer, but brands and sales don’t motivate me. I’m motivated by how we grow things and how farmers farm.

I am the most city of city people. I grew up in Brisbane, but my father was a quintessential Australian who loved the bush. When we were kids, we were always off camping somewhere out West. He was always dragging us off to state forests and national parks. It spurred my love of the natural world and the environment. I’m a product of the 1970s when national forests were still working. I saw land used productively and managed for its environmental values. I believe my father is to blame for where I ended up.

Several former Rainforest Alliance and WWF colleagues have moved into corporate roles. It’s a good thing. You need an intersection between not-for-profit organizations, business, and government. You need them to mix and blend so that they understand each other better.

I was in Singapore in September 2015, and a friend suggested I talk with GAR. I did. It seemed like a great way to do what I love but in a corporate environment. It ticked all the boxes. My family agreed to move, so it all worked out.

I’m also a board member for the Roundtable on Sustainable Palm Oil, but you look at certification differently when you’re a business.

When you’re the standard system designing principles and criteria, you should ask yourself how the system drives continuous improvement for the whole sector. Unfortunately, it too often becomes, ‘How do you lift the top – the ceiling?’

The big difference for me coming to GAR—and why I joined—is that people will hold the company accountable for the weakest link in its supply chain, the smallholder. As a business, we must lift the industry’s floor with us. It’s what certification should be doing, too.

We’re asking, “Is this about lifting everyone or improving the top two per cent?” If it’s the latter, it’s of no use to us. Lifting the floor is critical to us as a business and industry and to Indonesia as a country.

Is there an issue with certification in that producers pay for it, making smallholders worse off?

I was perhaps atypical, even in Rainforest Alliance, but I’ve never agreed that certification suits everyone. Working in the corporate environment, I see how expensive it is for smallholders.

I share your concern about cost. Who pays? It is challenging because most certification systems don’t break 20 to 30 per cent of global production. The FSC is the most successful at maybe 30 per cent of global timber production.

I want to see smallholders improve their production practices. I want to walk them to the door of certification on the assumption that a standard system represents the best agricultural practice. But we should give them the right to choose. Do they go through the certification door and commit to a lifetime of paying an annual audit fee and all the things that come along with that? Or do we help them to behave appropriately, regardless of the certificate or the piece of paper?

I don’t believe certification systems have developed well for smallholders. You end up with a big gap between the certified and the uncertified, the latter making up the lion’s share of global production. It doesn’t seem to be the right solution. Certification is excellent for many things, but I don’t think it’s the only tool we should use.

Regulation is stepping in to do what certification hasn’t done. We see that with the EUDR and ISPO (Indonesia Sustainable Palm Oil), the country’s national sustainability certification scheme for palm oil. It will become mandatory by 2025. There is no easy answer regarding what’s better, certification or regulation.

I’m looking for a buyer who is prepared to pay the actual cost of commodity production, with all the externalities internalized into the price.

Now, let’s go back to your job. Do you spend your day on sustainability or communications?

In some ways, sustainability is communications. I spend much of my day trying to inspire, negotiate with, convince, and cajole people into doing things they may not want to do. Or to act faster than they feel comfortable with.

Sustainability is also about translating sustainability jargon into business speak. It’s essential to step back and translate external demands so the company can understand, absorb, and make informed decisions. Then, you must translate back out from inside the business to external stakeholders and explain why you’re doing what you’re doing at the pace that you’re doing.

I feel I’m communicating all the time. But it’s probably about 70 per cent on sustainability and 30 per cent on communications.

Before joining GAR, I spent over 20 years working in international environmental NGOs. I’m well-versed and battle-hardened in the campaigning and political world of the environment. I take my responsibility for sustainability seriously.

Judgment should focus on GAR’s actions in the field. What are we delivering? Are we meeting our commitments? If we’re not, are we explaining why we’re not in a legitimate, understandable, and acceptable way?

I’m proud of what GAR is delivering. Could we be faster? Could we do more? Sure, of course. But over the last nine years, we’ve delivered on our commitments to a deforestation-free supply chain and the transformation of our suppliers. We’re working hard on climate change and reducing our carbon emissions. Our CEO is a great advocate for that work, and I’m proud of the part I’ve played in getting him there.

We have previously worked with external NGOs on some environmental or social issues. We collaborated with Greenpeace to develop our approach to high-carbon stock areas. We’ve worked with OFI, Orangutan Foundation International, on orangutan conservation and training our staff on the estates and communities on zero harm to wildlife.

We prefer to work with local groups and organizations rather than international NGOs. We aim to build Indonesia’s local capacity to advocate for its environment and social issues.

Palm oil is the most environmentally sustainable vegetable oil, yielding five times more than sunflowers, six times more than soybeans, and ten times more than coconuts. Why aren’t these statistics reaching the broader public?

Those are just numbers. Numbers lack emotional appeal. It doesn’t matter how productive palm is compared to soy or rapeseed; you lose the argument whenever somebody posts a video of an orangutan in a devastated forest on social media. People regularly post videos from 2013 as if they were happening now. No, it happened ten years ago. It is terrible that it happened, but things have greatly improved in the past ten years.

We must put a human face on palm oil because the stats won’t help us. We’ve done that in a limited way at GAR, given that we don’t have the marketing budgets of a Unilever or a Nestlé. We’ve seen people wake up to the reality that you can produce palm sustainably. Millions of people here in Indonesia rely on the crop, directly and indirectly, for their livelihoods. It can be a force for good.

But it is hard to get people to listen to those good news stories when they are so attuned to the negative.

In the late 1980s, soy was the big bad, but it didn’t last long. The NGOs quickly pivoted to palm, partly because soy fought back, but palm didn’t. It’s a cultural thing. A lot of plantation owners did a Southeast Asian thing and put their heads down, ignored it, and hoped it would go away. And so, in the vacuum created, the only narrative that stood was the NGO narrative. We’re slowly winning. It’s slow because that narrative is so entrenched now.

But we won’t win with those numbers you give, even though I use them all the time. We’ll win it based on human stories with an emotional connection and by delivering on the promises the palm sector has made around decoupling production from deforestation, protecting wildlife, and reducing carbon emissions.

We’ve taken the approach within GAR to ask how we can get into the inboxes of the people who matter the most – customers, our financial backers, and shareholders. We’ve done that. Once we talk to people directly and put facts in front of them, they get on board with the idea that palm can be sustainable.

Taking that to a broad public communication has been more challenging, partly because no one wants to hear it from us. Still, we see some influential journalists finally getting the message.

It can be challenging to combat fake news; how you react depends on whether it is a lie or an interpretation of events. If it’s a straight-up lie, it would depend a bit on where it was published and who was repeating it. But, honestly, it’s like Whack-a-Mole.

You must decide whether it is essential for you to challenge it. Challenging everything would be exhausting and time-consuming and would not give you much. You’d be spending all your time doing that and none of your time establishing your narrative.

When I joined, GAR was in a similar situation, consistently playing defence. We decided to stop reacting to every little thing about ourselves and the palm sector and to take control of our own story. We framed that around the implementation of the GAR Social and Environmental Policy. If it didn’t have a connection to that, we ignored it unless it was an egregious lie. It has stood us in good stead and given us consistency in our narrative, which we underpin with data.

We’ve continued to progress. We report on what we’re doing, how it’s going, and why it’s stalled in some instances. This has built credibility and confidence in the business. Our people know what our narrative is. They know what to talk about if they are challenged. It’s about empowering our employees to feel they can speak up and have pride.

Could you just give an example of what GAR is doing to improve the livelihood of your smallholders?

We employ nearly 100,000 people across Indonesia, most working on farms or in factories. We provide early childcare facilities (BPAs) and medical centres for our plantation workers, funding and running them in buildings on our estates. We have more than 340 early childcare centres, with over 770 carers serving in the region of two and a half thousand children, from babies through to the age of five, after which children in Indonesia move on to primary school.

We are working on how to improve the performance of these early childcare centres. We want to empower the women who run these centres to take over some financial management and improve their skills and abilities to become small business managers.

Many children in our BPAs failed to meet essential developmental milestones, such as the ability to sort from small to large, recognize colours, or stand on one foot – fundamental things. By introducing measures like regular height and weight checks, scaling up our caregivers on some basic educational requirements, and connecting them with our health clinics and volunteer services, we now address maternal and child health-related issues around stunting and malnutrition, a problem in Indonesia. Doing this can fundamentally change the direction of these children’s lives.

© Commodity Conversations® 2024

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

 If I remember correctly, Ivo, you always wanted to be a teacher. How did you end up as a trader?

I have always had a vocation for teaching. Although I pursued accounting in Argentina, my focus lay in economics. I commenced a PhD program in economics at New York University, but unforeseen circumstances thwarted its completion. Consequently, I returned to Rosario and embarked on a career in trading. I have no regrets about this shift; I perceive striking parallels between the intellectual rigour of market positioning and the pursuit of scientific inquiry. Moreover, it proved to be a prudent economic decision.

Nevertheless, I always intended to return to teaching upon retiring from trading. Lacking a PhD, I am more akin to an industry practitioner—someone equipped with experience to impart rather than a purely academic figure. I enjoy teaching, but it is more of a hobby.

Some of my colleagues at Cargill affectionately dubbed me ‘the Professor.’ In collaboration with a colleague, Dave Buchanan, we established a Grain Academy within Cargill. Although I am uncertain of its current existence, it was an exceptional program complementing what you learn in your daily roles.

Cargill’s culture weaves teaching into one’s responsibilities, eliminating the dichotomy between work and education. In addition to learning technical tools, it fosters an environment rife with brainstorming, diverse perspectives, and open forums for discourse.

I’ve always viewed trading as an intellectual challenge. As a follower of the philosopher Karl Popper, I find his ideas particularly applicable to trading. Your game plan serves as a hypothesis you present to address the problems you encounter in the market structure. Subsequently, you test this hypothesis through the mechanism of profit and loss. Profit validates it, whereas a loss falsifies it.

Could you talk me through your current teaching activities?

I have been teaching at the University of Geneva since 2008 and recently became a fellow at the Erasmus Commodity Centre in Rotterdam. Additionally, I instruct a class on Agri-commodities in the Master of Finance program at Di Tella University in Buenos Aires and the Master’s program in Agri-business at Austral University in Rosario. Apart from these commitments, I am predominantly involved in seminars and lectures. Furthermore, even in more informal capacities, I coach and mentor individuals within the industry.

Preparing for classes, creating presentations, and keeping them current demands considerable time. It extends beyond the hours spent in front of the class. When presenting a class for the first time, I may invest up to 10 hours in preparation for a one-hour session. Once I’ve created the slides, updating them for subsequent classes typically requires one to two hours per session. However, developing a new theme from scratch consumes significant time.

Recently, I compiled a presentation on population dynamics and its future implications on food demand. This endeavour entailed extensive preparation, including reading many books and articles, conducting research, and verifying information by contacting the authors of relevant pieces.

Occasionally, I deliver presentations virtually, which offers the advantage of saving time and transportation costs. Nonetheless, I prefer teaching in person; it facilitates a stronger connection with my students.

Navigating diverse skill levels among students poses a challenge. There’s a risk of speaking at a level that may be too advanced for some while too basic for others. The key is maintaining a balance, ensuring everyone can understand the material while occasionally introducing concepts that challenge the more adept learners.

Furthermore, adjusting the teaching approach when transitioning from instructing young students one week to addressing executives the next presents its own set of complexities.

What makes a good teacher/educator?

Practical experience holds significant value in the realm of commodities. Students become highly engaged when they perceive their instructor has practical expertise. For many, studying commodities isn’t purely academic but a way to advance their careers.

Remaining current with the subject matter, such as incorporating recent real-world examples, is essential.

A dynamic presentation style is crucial to maintain student engagement. Occasionally, introducing surprising or even controversial concepts can stimulate lively discussions.

Drawing connections between commodities and various disciplines such as economics, politics, geopolitics, agronomy, meteorology, and new technologies enhances understanding.

What else? When discussing commodities broadly, it’s imperative to transcend specific geographies or products, ensuring a comprehensive approach. It is especially true in Geneva, where students have different perspectives and origins. You need to avoid falling into the trap of being a hyper-specialist.

Reflecting on my transition from trading for Cargill, where my focus was intensely narrow—mainly dedicated to predicting soybean and later sugar market movements—I now embrace a broader perspective. I derive satisfaction from forging connections and appreciating the larger picture.

Do you also teach people how to trade?

I’m uncertain whether one can truly teach someone to become a trader. However, it’s possible to refine and enhance the skills of those with a natural trading aptitude. Specific innate capabilities, such as risk appetite, are essential for success in trading and cannot be taught. While some individuals possess a high-risk appetite, others may have little or none. Beyond risk appetite, there are other qualities required for trading success. Once you have identified these abilities, you can nurture and develop them through training and education.

The analogy to a sportsman is a good one. Much like you can’t create a player like Messi out of thin air, you can improve Messi’s skills through proper training, discipline and nutrition.

Economics plays a pivotal role in equipping traders with foundational knowledge. I utilise a triangular framework to elucidate how commodity prices are determined. Microeconomics constitutes one angle of the triangle, with supply and demand as the primary price determinant. Macroeconomics forms the second angle, explaining how macro variables such as growth, inflation, and interest rates influence price dynamics. Investment funds represent the third angle of the triangle. They are the catalysers of price movements but not the determinants.

When futures markets are well designed, prices always converge to fundamental values. A recent example in the coffee market illustrates this phenomenon: over the past two weeks, funds drove prices higher in anticipation of a trend similar to that seen in cocoa. However, once their buying momentum waned, prices corrected lower, as the underlying fundamentals did not support the rally.

The interplay among these three realms—micro, macro, and funds—accounts for the dynamics of price movements. Microeconomics elucidates the fundamental factors driving price trends, while macroeconomics illustrates how external economic conditions influence this trajectory. And the funds act as the catalysts for price movements.

What educational advice would you give young people looking to enter the agriculture commodity sector?

When I began my career in South America, companies typically required candidates to hold degrees in economics, accounting, business administration, statistics, or agronomy to enter agricultural trading. However, upon relocating to Europe, I was surprised to discover that some of my colleagues held bachelor’s degrees in art, languages, psychology, law, and international relations. This diversity enriched our discussions, adding depth and richness to our perspectives.

The landscape has evolved since then. Employers now seek candidates with additional quantitative knowledge and basic programming skills.

While having a master’s degree may be advantageous, it’s not a prerequisite for entering the trading profession. However, the Master in Commodities program at the University of Geneva offers a unique advantage—a blend of practical work experience and academic learning. With students spending 70 per cent of their time gaining hands-on experience in a company and 30 per cent attending classes at the university, this program offers a potent combination, particularly when the sponsoring company has a well-organised training system.

Once you embark on a trading career, trading a diverse range of commodities, especially those with varying delivery mechanisms, is beneficial. Or if your company is not involved in different markets, it’s always interesting to have exposure to different qualities or distinct origins.

The delivery mechanism significantly impacts trading dynamics. For instance, in my experience trading soybeans, where delivery primarily occurs along the Mississippi River, you learn how the delivery mechanism affects premiums and spreads in a certain way. In the sugar market, where delivery occurs worldwide on a Free on Board (FOB) basis, futures serve as a source of origination, creating a completely different trading dynamic. Delivering sugar around the globe at a uniform price makes premiums more stable but time spreads much more volatile.

My last piece of advice is to ‘Choose your boss wisely.’ A supportive and inspiring boss fosters motivation, curiosity, and continuous learning. While you may not always have the luxury of selecting your boss when given the opportunity, prioritise not just the job but also the individual you’ll be working under. It will have a significant impact on your career.

© Commodity Conversations® 2024

The following schools offer courses on commodity trading:

University of Geneve

Masters: https://www.unige.ch/gsem/en/programs/masters/commodity-trading/

Diploma: https://www.unige.ch/gsem/cours/commoditytrading

Certificate: https://www.unige.ch/gsem/cours/cas-commodity-trading

Bayes Business School – City University of London

Masters: https://www.bayes.city.ac.uk/study/masters/courses/energy-trade-and-finance#accordion-v23-570233-header470242

Erasmus Commodity and Trade Center – Erasmus University of Rotterdam

Executive education:  https://www.eur.nl/en/erasmusctc

University of Luzern

Certificate: https://www.hslu.ch/en/lucerne-school-of-business/continuing-education/cas/ifz/commodity-professional/

 University of Fribourg 

LLM (for lawyers): https://www.unifr.ch/ius/llm/en/programs/commodity-trading/llm.html

J.P. Morgan Center for Commodities and Energy Management – University of Colorado at Denver

Different courses: https://business.ucdenver.edu/jpmorgancenter/

Universad Austral: MBA en Agronegocios: 

https://www.austral.edu.ar/cienciasempresariales/agronegocios/mba-en-agronegocios/

Instituto de Estudios Bursatiles – Madrid

Programa: https://www.ieb.es/executive-education/programas-directivos/agro-commodities/

University of Derby

Short course: https://www.derby.ac.uk/short-courses-cpd/online/commodities-trading/

University of Illinois Urbana-Champaign

Undergraduate degree in agricultural marketing: https://ace.illinois.edu/academics/undergraduate-degree

Graduate degree: https://ace.illinois.edu/academics/graduate-degrees

 

Suissenegoce:

Different courses: https://www.suissenegoce.ch/training

Lugano Commodity Trading Association

Certificate: https://www.lcta.ch/en/october-11-2024-january-11-2025-certified-commodity-trading-specialist-ccts/

 

I interviewed Nicolas, the CEO of Sucafina, one of the world’s leading coffee trading and roasting companies, for my book on coffee. The interview focused on the coffee business, and we didn’t discuss leadership and the role of a CEO. I contacted Nicolas for this book, and he agreed to contribute. We met at his offices in Geneva, where the building was being renovated, and I ended up on the wrong floor. We eventually found each other and chatted in the company’s kitchen. I asked him how he defined leadership.

“I define leadership as being able to do three things simultaneously,” he answered. “The first is to inspire people. The second is to manage people. The third is to contribute to the bottom line of the company. Vision is also crucial. A leader must define a clear vision and ensure everybody sticks to it.

“Culture, values, and vision make a company, but I would also add purpose. Our purpose at Sucafina is to create opportunities to improve lives. We deal with hundreds of thousands of growers worldwide; we can help improve their lives. It is what links everyone.”

While interviewing people for this book, I often stumbled over the expression, ‘Culture eats strategy for breakfast.’ I was initially confused by what it meant and then sceptical about whether it was true.

“Culture must be in people’s DNA,” Nicolas told me. “At Sucafina, we hire for values and train for skills. If you hire people who share the same values as you and buy into your culture, you can train them to be the best risk manager, IT person, HR person, or whatever. It’s difficult if you don’t have a commonality in the DNA of the culture and the values.”

Sucafina employs 42 nationalities in 49 locations in 36 countries. I was impressed that a CEO could impose, develop, or nourish a common culture across diverse cultures.

“To make a good cup of coffee,” he explained, “You need a blend of different origins, often from various continents. We are lucky at Sucafina to have this diversity; it is one of our strengths.

“We give everyone the freedom to speak to everyone. By sharing best practices, we learn from one another and improve. That’s one crucial thing. Second, we try to adapt to the local communities, mindset, and culture. We are a global company that acts locally. We try to empower local teams while maintaining a common message at the corporate level.”

“How would you define Sucafina’s culture?” I asked.

“In one sentence?” he replied. “I would say it’s what you see is what you get.”

Nicolas took over the responsibility for the company from his brother, who took it over from their father. He told me that his brother and father have a similar leadership style but are more hands-on than he is. He prefers a more delegating type of leadership, but what they do have in common is that they all walk the talk and lead by example.

I was interested in discussing the advantages a family firm might have in the trading world, but I was keen to talk further about leadership. Sucafina has the Sparks program to teach leadership, but I wanted to ask how successful it is. At school, I remember some kids were natural leaders, whether in sports or arts, and others followed them. Before meeting Nicolas, I discussed the issue with a friend, the retired CEO of a pharma company. He firmly believed that leaders are born, not made. What did Nicolas think?

“Some people are born leaders,” he told me. “Others are groomed to become leaders. However, to become a leader, you must have the ingredients of your personality, upbringing, and self-confidence.

“Sucafina’s Sparks program teaches leadership,” he explained. “It is a three-year course. Each year, we have between one and ten participants. So, on average, let’s call it six. As we have three years going on simultaneously, it’s 18 people. Up to now, I guess over 50 people have graduated.

“It is expensive but well worth the investment. In our industry, grooming people from inside the company rather than headhunting them from the outside is essential. By doing so, they truly live the company’s vision, purpose, and culture.”

Sucafina’s website highlights some of the women who have recently completed the Sparks programme. I was curious to learn what Sucafina was doing to promote gender equality.

“Historically,” Nicolas told me, “There have always been more men than women working in our industry, especially on trading desks. I have not yet been able to understand why. On the other hand, there are often more women than men in execution and operations and different departments such as HR or Communications.

“We want a mix of men and women,” he continued. “But we’re a meritocracy-based company. I do not want quotas for men or women. I want the most apt person to get the job. But yes, we want to promote women because we believe there are a lot of amazingly talented ladies out there who can grow and take on more responsibilities.

“For example, in East Africa, if we want something to happen on the ground with local communities, we empower women, and it’s often a big success. When we empower men, I cannot say the same thing. So, we want to empower more women.”

I asked, “Are there specific leadership challenges in trading companies compared to service, manufacturing, or industrial companies?”

“Humility as a leader of a commodity trading company is crucial,” he answered. “That’s one key difference. The second one is that in a commodity trading company, you start afresh each financial year and have your overheads to cover. Trading companies don’t have a recurrent built-in revenue to cover expenses, which you often find in a service industry like banking.”

Some trading companies have bought industrial assets to even out volatile earnings. I asked Nicolas if he had done the same.

“To reply to your question,” he replied, “I’ll go to our company vision, which is to be the world’s leading sustainable farm-to-roaster coffee company. We want to start at the farm, but we’re not farmers. We’re happy to be roasters but not brand owners.

“About ten years ago, we acquired Beyers Coffee, the largest roaster in Belgium. We also have an instant coffee business. Bayers and our instant coffee business are strategic as we can vertically integrate the supply chain. We will not be brand owners; otherwise, we will have conflicts of interest.

“These industrial assets also give us more predictability in our revenue. They indirectly help us by levelling our revenue and having a recurrent built-in margin.”

“Which is better, growth through acquisitions or internal growth?” I asked.

“Initially, I would say organic growth, but sometimes opportunities arise when you don’t expect them, and that’s where you need to acquire. Culture is critical when you acquire. You need to make sure the company you acquire fits the culture. It’s culture more than anything else.”

I quickly became overwhelmed when running our little analytical company and had to impose a structure to limit the number of people who reported to me directly. I wondered how many of Sucafina’s 1,400 employees reported directly to Nicolas.

“Eight,” he replied. “We use the acronym FIRST. F stands for finance, I stands for information systems technology, R stands for risk, S stands for staff and human resource, and T stands for trading and execution. So those five heads report to me, plus I have three further direct reports.

“Some of our managers only have four direct reports, but the average is about eight. It varies between five and ten, depending on the interaction between the manager and the employee, the level, and his responsibility.”

“How involved are you in the day-to-day operations and trading?” I asked.

“I’m involved in the company’s day-to-day operations, but it can operate quasi-normally without me. I’m aware of the trading positions we hold and the big-picture decisions.”

“If you decided to go and sail around the world for a year, would the company still work as well?” I asked.

“I would say for a couple of months,” he answered. “But not a year.”

I now wanted to return to ownership and whether family companies have an advantage over publicly quoted companies in trading.

“Whether you are family-owned, management-owned, or even private equity-owned,” he said, “I believe that commodity trading companies should not be publicly quoted. Why? Because of the unpredictability of the financial results. Share price volatility is not good.

“I’m not in favour of publicly listed trading companies unless you are an industrialist and have trading as your procurement arm, which enhances or not your profitability. Family businesses think and operate long-term. Commodity trading companies should have the management and the family as shareholders.”

Serge Varsano has instituted a company structure that limits his decision-making power. I wondered whether Nicolas had something similar.

“I have a board of directors, the majority of which are independent,” he said. “They empower me but impose certain limits in VAR, drawdown, counterparty, forex, etc. I navigate within these limits. I believe we’re well structured in terms of corporate governance for a company of our size.

“I’m here to make money but also to have fun. I don’t need to give a return to my shareholders of 30-50% a year. They’re comfortable allowing me to use the profits to grow the business.”

Serge Varsano also mentioned the importance of having fun in business. It made me wonder if I had had fun running my little company. I enjoyed the challenge, but was it fun? I am not sure.

“How do you inspire innovation as the company grows?” I asked.

“Innovation must be bottom-up as well as top-down,” he replied. When people have ideas, we must listen to them, assess whether they are feasible, and not be afraid of trying and failing fast. If you fail fast in innovation, you can fall back on your feet and re-innovate. If you don’t learn from your failure—and if you don’t fail fast—innovation can be a problem.”

I had to think about his answer for a while. It had never occurred to me that innovation could be a problem, but then I thought about the times when companies had introduced new IT systems only to see them fail.

“How involved do you get in recruitment?” I asked.

“I don’t see all candidates,” he replied, “But I often participate in the last round of interviews with key people or departments needing my involvement. I enjoy interviewing people because, as I said before, we hire for values and train for skills. So, through these interviews, I can understand whether a candidate shares our values.

“I always ask a candidate to share with me one experience that happened in their life from the age of five to 20 years old that contributed to the person they are today. I want something profound and sincere, not their exam results. It allows me to understand the person behind the CV.

“Sometimes, candidates reciprocate the question to me. I answer that at the age of seven, my parents put me in a boarding school in Switzerland without me knowing that I would go to a boarding school. I do not remember my parents telling me I was going. I suppose they did, but they didn’t explain the meaning of boarding school. You can imagine the trauma.

“It taught me how to survive in very unusual circumstances. On the other hand, it did not teach me to ask for help. It did not teach me to communicate. So, I often do things by myself. I’ve learned in the last decades how to work more with teams.

“The fantastic thing is that the kids I met at that school – I’m now 54 – are like brothers to me today. I can see them on the other side of the planet, and we can sit and have a meal, and it’s as if we haven’t seen each other for 20 minutes.”

“Last question,” I said. “What advice would you give someone taking up a leadership position for the first time?

“One: Listen and listen. Two: Lead by example. You cannot expect your people to do something you are unwilling to do. Three: Don’t be an asshole. We have an official “no-asshole” rule at Sucafina. It is independent of how much you contribute to the P&L or how great you are.”

I told Nicolas I had recently read Elon Musk’s biography and thought he was in the third category.

“Elon Musk is an exception,” Nicolas said. “I have just finished his biography. Working with him must be difficult and unpleasant, but he is one of the smartest guys on the planet. I give him the credit for being how he is.”

Dave Behrends, Sucafina’s head of trading, also recently read the biography. In a post on LinkedIn, he argued that Elon Musk breaks his four rules of management.

The first is ‘people are your best asset’.  Elon demonstrates that he views people as a tool. They start sharp but get dull over time, and you must ultimately replace them.

The second is ‘creating healthy work/life balance environments helps people thrive’. Musk orchestrates “surge events” that ask for the impossible of staff. It requires them to go from ‘always on’ to working nights, weekends, birthdays, anniversaries, and holidays with complete disregard for the strain it puts on people’s personal lives.

The third is ‘teams that work well together succeed together’. Elon has an ‘algorithm’ which dictates that you must challenge every rule or process. He discourages camaraderie as it limits people’s desire to challenge each other critically.

The fourth is ‘hire people better than yourself, empower them, and trust them to get you where you want to go’. Musk is highly opinionated. His decision-making, which often contradicts his team of experts’ opinions, is stunning. He fires people who challenge or disagree with him too much.

I discussed Dave’s post with a friend, a professor at a local business school, but he disagreed with Dave’s analysis. He told me that his four management rules might work in trading but don’t work in manufacturing, especially not in an innovative area such as space travel or electric cars. “You have to break stuff to succeed,” he told me.

“I’m not sure I don’t agree with your business school friend,” Nicolas told me. “I think it’s more about the ability of being one out of 5 billion and reinventing the industry you are in. Elon Musk has wholly reinvented the ecosystem through both Tesla and SpaceEx. To reinvent an ecosystem is something very bold. It requires out-of-the-box thinking, and you must be just one of a kind.

“Some traders are mercenaries who make money, take part of their money, and then start with the next page. When they lose money, they change companies. You could argue that certain commodity trading companies use people as a tool to generate money. It is what hedge funds do.

“And remember, Elon has a loyal and devoted workforce who love working for him. I would love to work for him for a couple of years,” he continued. “I would learn so much. Elon Musk is one of those people out there who have the courage and who can make the impossible possible. It’s all about leadership and the ability to go the extra mile and working very hard.”

“Elon Musk is the exception where the no-asshole rule does not apply. But I’m happy that Dave Behrends and I are aligned on this. It was not planned.”

© Commodity Conversations®2024

This is an extract from my upcoming book, Agricultural Commodities – The People Behind the Trade

A friend recently sent me a McKinsey report on the role of a CEO. It argued that the fundamental core of the CEO role consists of six things:

• Set the direction.
• Align your organization in that direction.
• Mobilize your leaders to deliver in that direction.
• Work with your board.
• Connect with a group of stakeholders.
• Manage your effectiveness.

I am not a big fan of McKinsey. Having recently interviewed the CEOs of Sucden and Sucafina, two successful trading companies, I thought McKinsey had missed the point by concentrating on strategy rather than culture. As we all know, culture eats strategy for breakfast.

I contacted Michael Whitney, a leadership coach and recruitment consultant with Kincannon Reed, to ask him what I was missing.

“How you behave as a leader will characterize how others in the organization behave,” he told me. “Your behaviour as a leader is essential. Take just one example: if you stifle discussion and jump all over somebody, they will think twice about stepping up in the future. You may miss something vital if you don’t allow people to contribute.

“A CEO must trust the employees, and the employees must trust their CEO. It is particularly relevant in a trading company where the bets are big and decisions are taken quickly. A trading environment requires an awful lot of trust. As a leader, you must look people in the eye and ask them: Can I trust you to deliver this?”

“But doesn’t the McKinsey article concentrate on strategy rather than culture,” I insisted.

“Culture is embedded in all of those things,” Michael replied. “You can have the best strategy in the world, but if you cannot forge a good relationship with your board chair or board, you will not be around for long. Your capacity to manage-up will determine the success of your strategy. The board must trust you.

“For example, I was coaching a CEO for whom communication was a bit of a challenge. He was ferociously bright, but he over-communicated. He saw problems and solutions quicker than anybody else in the room, but he was not winning the board, and his executive team was becoming frustrated.

“I worked with him to get him to understand that less is more. How do you take fifteen minutes and turn it into one? What’s your core message? Keep it simple and adapt to your audience.”

I asked Michael how easy it was to tell the difference between a manager and a leader.

“Sometimes you meet somebody, male or female, and just say, Wow. They have an aura. They exude a level of self-confidence which is not brash or in your face. They can listen, engage with you, and make you feel you’re the most important person in the room. You feel drawn and connected to them. Many people are leaders, but great leaders have that aura, that natural presence.

“A leader can seamlessly move between two things,” he continued. They’re confident and happy with strategy, thinking at a high level, and setting a direction of travel. But they are equally as good at making it happen and executing against it. It sounds easy, but it is challenging.

“Looking at leaders through history, it’s also about the moment. A specific set of circumstances will dictate having one type of leader versus another. It goes back to that war versus peacetime scenario.

“Look at what a great leader Churchill was during the war, but he was soon voted out of office once the war ended. Leaders have a life cycle and a sell-by date. Things change around them, but they may not adapt.

“The manager is functionally strong. There isn’t much you can’t tell a manager about how to run a trading desk or a crushing plant. They master their market and the S&Ds that drive it. But ask that manager how they will double the company’s revenue over the next five years. They can’t extend into that.”

Michael spent 13 years in the British Army, and I asked him to list three things he learned there that helped him in his later career.

“First, the armed forces are highly selective and prepare you to lead from a young age,” he answered. “Leadership training is a constant throughout your career. The army teaches you to think logically when making assessments and judgment calls and how to write and communicate succinctly.

“Second, the armed forces teach you cadence. There are periods of intense activity and periods of less intense activity. You go off on operations, and the intensity can be extreme, but you can’t sustain that level of commitment and effort. There are periods when you must reduce the cadence to focus on other things and rebuild the capability to operate again at an intense level.

“Business can learn from that,” he continued. “In business, you have what I call the Duracell bunny syndrome. People think their ticket to success is to be continually moving at a hundred miles an hour. I am not sure it’s the right thing to do in business. People get tired. They burn out. Pausing and thinking gives you the springboard to get back in and reposition.

“The third thing I learned was the value of constant self-reflection. The armed forces expose you to people with more experience than you – strong personalities who will firmly state their case. You must be mature and humble enough to reflect on what they say.

“I’m not sure of the extent to which many business leaders are open to that reflection, to ask why their personality is conditioning them to behave in a certain way. The armed forces continually expose you to your peers. You don’t have a choice but to pause, reflect and think.

“Leaders must understand themselves. They must be able to say, “This is where I stack up and where I don’t.” They must understand their weaknesses and where they need to improve.

I recently talked to a retired CEO who argued that the most critical role of a CEO is to choose, train and form his successor. I wondered if Michael agreed.

“Succession planning is key to any organization,” he told me, “But you must ask if the CEO is the best person to be doing it.”

“I’m working with a CEO who views his executive team as a stable of potential successors. It’s like a horse race. I am not sure it is the right approach, even though he realizes that not every horse will be a winner. You risk having a bunch of egos competing against each other rather than working as a team.

“You can turn that question around and ask if it is better to appoint internally or externally. Do you want an internal person who understands your business  and can hit the ground running, or are you happy with somebody who offers  something different but will take a little longer to understand what makes the business tick?”

“When does a search for a senior leader go well, and when can it go badly?” I asked.

“It goes well when you and the client invest the time upfront to have a series of conversations with a quorum of people, colleagues, board members, etc, who have views on what the candidate should look like. It can be challenging because opinions differ, and people often don’t know what they want.

“Having these conversations across the organization can give you a clear understanding of what is non-negotiable and where there is scope to compromise. You’re never going to find the perfect person. There will always be trade-offs, and you must understand them.

“The other dimension is around culture. It’s relatively straightforward to tick the boxes on a role’s functional aspects, but the intangibles matter. For example, how does the person behave and react in various situations, especially under stress?

“You must ask the search committee to articulate their company culture now and what they want in the future – not just the core values listed on their website, but what matters to them and the organization.

“A search goes less well when the people you are talking to struggle to articulate the above because it leads to uncertainty and indecision.”

Finally, I asked Michael what advice he would give to someone taking a leadership position for the first time.

First, you must understand yourself. You must be able to say, “This is where I stack up and where I don’t stack up.” You must have emotional intelligence and deep levels of self-understanding and self-awareness. You must understand your weaknesses and where others on your team are needed to back you up.

Second, you must understand that there will be times when you will have to draw upon the support of others and that you must nurture the people who have complementary skills and personalities to you, even if these people tell you what you do not want to hear.

© Commodity Conversations® 2024

This is an extract from my upcoming book Agricultural Commodities – The People Behind the Trade

When I started working on my new book on agricultural commodity supply chain professionals, I quickly realised that I had significant gaps in my knowledge. One of the biggest was my complete ignorance of the world of insurance. I had worked for many years as a physical trader and broker, but we always traded FOBS or C&F. I don’t think I ever traded a CIF cargo. As I started to delve into the matter, the first thing that struck me was the connection between marine insurance and the law.

Lord Mance, formerly Deputy President of the UK Supreme Court, said,

“Insurance and the law are inextricably linked at all points. Insurance is not like making cars or widgets. It depends on agreements and wordings for its force and effect, and agreements and wordings depend on the law for their force and effect”.

The second thing I learned was that insurance is so incredibly complex that someone could write a whole book about it. Therefore, I was delighted to find someone who had written an entire book on the subject and could answer my stupid questions. I have always loved meeting fellow authors. Only an author can share Winston Churchill’s pain when he said,

“Writing a book is an adventure. To begin with, it is a toy and an amusement. Then it becomes a mistress, then it becomes a master, then it becomes a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster and fling him to the public.”

K.S. Vishwanath (Vish) has nearly 40 years of experience in marine insurance in India and the Far East. Since 2008, he has been a freelance consultant based in Bangalore. He has written a highly acclaimed book, Insuring Cargoes—A Practical Guide to the Law and Practice, published in the UK. The second edition was released in March 2023.

Vish told me that although there are many scholarly works on the subject, he felt there was still space on the bookshelf for a book written by a practitioner that focused on practice rather than theory. He wanted to write a book that provided solutions to the issues a practitioner confronts daily.

“The shipping industry is in turmoil with the events in the Red and Black Seas,” he told me. “Still, on a different level, the insurance sector’s most significant issues are excess capacity and severe competition. In many parts of Asia and Africa, this leads to the commodification of complex risks. The European markets are less affected.

“Many risks are complex to price. Insurers, hungry for premiums and profits, may not price them correctly.

“Insurers develop volatility in their books and must make a profit to build a reserve for any significant loss. An insurer will take a pyramid approach, where most of their business comes from a low frequency of claims, but one or two of those claims will be of high severity.

“The bottom line should always be at the back of your mind as an underwriter. Still, market and broker pressure may force you to introduce excess volatility into your book. Competition is severe. If I say no to a business, the brokers will say, ‘You’re cherry-picking—if you want profitable business from this client, you must also do some high-risk areas.’

“As an insurer, you must ask yourself, “Is my business sustainable over a long period? Am I being fair to the clients as well as my shareholders?” These are things which I would lose sleep over.”

“You mentioned that the insurance market is in turmoil because of the Red and Black Sea situations,” I said. “What are the issues there?”

“The Red Sea is one of the world’s most important shipping zones,” Vish told me. “An underwriter with less appetite for risk may say they will not write business for voyages via the Red Sea, but most companies will do the business but increase their rates. It increases traders’ costs.

“The other issue is that avoiding the Red Sea will increase transit time and adversely affect a moisture-sensitive cargo like grain. Going from the Red Sea through another climatic zone may lead to condensation issues in bulk cargoes.

“Sweating and condensation can be a particular problem for containers but may be excluded under the insurance. Desiccants only work for a limited time; they stop working if containers take longer routes or are otherwise delayed.

“Piracy is still a risk if you go through the Red Sea. Traders must ensure they get piracy extensions in their policies. Some bulk cargo owners only have the ICC clauses B and C. It is untested whether they cover piracy ransoms. It is preferable to get piracy extensions.

“The Dark Fleet is the biggest issue in the Black Sea. Some underwriters insure Dark Fleet ships, but if there’s a significant incident, there may be no recourse against the ship owner via the P&I Club (1). The IPOC typically covers an oil spillage but doesn’t cover the Dark Fleet. (2)

Another issue is that some vessels switch off their transponders as they approach the area. Russian exporters may take Ukrainian grains and mix them with Russian grains, but insurers or traders cannot know that.

“Imagine you are a trader,” I said, “what traps should I look out for when I insure a cargo?”

Most companies, even the big corporate trading houses, pay too little attention to insurance. Senior management must embed good insurance practices across the whole organisation. The CFO or the insurance manager may try to get the cheapest premium, but how about the coverage?

“What’s the deductible? Have you covered heat, sweat, and spontaneous combustion? Is rejection risk covered? The corporate office should drive risk management and insurance.

“First, appoint a good broker and don’t encourage brokers or underwriters who don’t ask for copious information. Brokers should be fussy with details and fully understand the business.

“Second, do a benchmarking exercise. How does my insurance programme compare with my competitors? A good broker should do a benchmarking exercise.

“An all-risk policy will not cover rejection, seizure, or condemnation by food, health, port, tax, or quarantine authorities,” he continued. “You require a rejection risk, which few people take. Insurers have little appetite for rejection insurance. There are specialist markets that write this class of business. The rates may be high, but at least attempt a small limit, start somewhere and cover rejection risk.

“What are the specific challenges for agricultural commodities?” I asked.“

Shortage is a big risk for any bulk cargo,” he told me. “The shortage could be due to various reasons.

“If there are multiple receivers and ports, it’s entirely possible that some excess delivery has been made to a receiver in another port or your port.

“The draft survey may not reflect this as the tendency is to match the draft survey with the bill of lading. A draft survey method is not an exact science but depends on the condition of the sea, the swell, the wind, and the surveyor’s experience.

Another issue concerns moisture, self-heating, and dust accumulation. Another risk is quarantine due to loss or fear of loss. Insurers sometimes specifically exclude the rejection of grains by some importing countries when grains arrive with traces of genetically modified crops.

“And of course, you have this piracy and general average, theft, water damage through bad weather. These are the usual claims.”

“There has been an increase in fraud by sellers and buyers over the past few years.

“An example of seller fraud would be when a surveyor fails to notice that a container has not been correctly sealed. When the surveyor leaves, the seller unplugs the seal, removes the cargo and puts some rubbish inside.

“There are three types of buyer frauds,” he continued.

“The first type is where a buyer and seller have been trading for a while and build trust between them. The seller agrees to discharge shipments against a letter of indemnity, but suddenly, there is a dispute, and the buyer refuses to pay.

“The second type of fraud is the one-time fellow who places an order with you, forges the bill of lading or signs the bill of exchange, takes delivery of the original bill of lading, and disappears.

“The third type is imposter fraud, where someone pretends to work for a big company, shows industry knowledge, creates an email ID that resembles a corporate email ID, and gives the name of a first-class bank but with a fake account number and address. The buyer then intercepts or forges the documents, discharges the cargo, and disappears.

“Watch out for red flags. Go to a trade body like the Chamber of Commerce or the company to ask whether they know this email or this person or if it is fake. You should never enter today’s market with an unknown buyer or seller.”

“Are there things that you should particularly watch out for containers?” I asked.

“For general cargo like machinery, toys, and electronic items, containerisation is a better risk for insurance companies than shipment in break bulk. Still, containers will have problems with coffee, cashew nuts, and grains because of heat-sweat issues. Containerisation has reduced losses but has not eliminated them.

“Damages, theft, pilferage, water damage, and piracy are common claims in containers and breakbulk.

“How is technology affecting the insurance world?” I asked.

“There is an issue with automated crew-less vessels,” Vish told me. “How will they reduce losses? Will General Vverage come down? Will they encourage piracy? We need to see.

“Artificial intelligence will streamline claims processes. It can give you an online platform where claims and documentation are more straightforward. It can help underwriters generate proper premiums through data analytics.

“The sky is the limit for technology. Embrace it or be left behind.”

“Do claims often end up in court?” I asked.

“Insurers in the US and Europe don’t deny legitimate claims,” he replied. “They will negotiate, but they won’t deny. Most European and American companies have a strict Chinese wall between underwriting and claims to avoid the temptation for the underwriter to increase profitability by reducing the claims. Arbitration is compulsory in Western markets, but arbitration is only for quantum disputes, not for determining liability in India.

“If somebody files a case in a court in India, it will take 15-20 years before a judgment comes. By then, I will have retired from the insurance company and collected my bonus. So why should I bother? Compulsory arbitration would resolve this.”

“Could you give me a pre-trade checklist for insurance?” I asked.

“Absolutely,” he replied.

“The most important thing is to spend time on insurance. Don’t go for the lowest possible rate. Identify brokers or experts. Benchmark your program and spend some time on risk engineering. Identify insurance companies with an excellent claims-settling philosophy.

“You should then consider your chartering philosophy and how you select a vessel. Do I go for the cheapest ship, or do I go for a good-quality one? You may save on freight today, but what if a 5-million-dollar claim is not payable?

“Look for any gaps in my coverage. Consider taking rejection risk insurance. It is costly, but ask whether it is better to have it. Identify any unique exposures in your business and tell your insurance company about them.”

“And for companies in general?” I asked.

“Companies should use insurance to protect their balance sheets. Large corporates often forget this and go for the cheapest premium instead of ensuring best-in-class coverage backed by risk management. As a consultant, I have always told my clients that insurance should be driven from the top to embed the right message within the organisation.

I’ll give you an example of a textile mill in India whose products were brand names here. A new CFO joined them, saying, “This is not a low-lying area. We have a water shortage in this area. Why are you paying $50,000 for flood insurance? Cancel it.” The board applauded the decision, but there was a freak flood the following year, and the company went bankrupt.

Protect yourself against anything which can ruin your balance sheet, even though the chances of that happening are rare.

Notes

(1) A P&I club is a mutual insurance association that provides members with risk pooling, information, and representation. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members. Originally, P&I Club members were typically shipowners, ship operators or demise charterers, but more recently, freight forwarders and warehouse operators have been able to join. Source Wikipedia

(2) Click here to read more about the risk implications of the Dark Fleet.

© Commodity Conversations® 2024

Peggy and I have two things in common. We both worked as physical commodity merchants at Cargill before moving to futures brokerage.

I started as a futures trader at Cargill and found the shift to physical commodity merchandising challenging. I wasn’t a good salesperson and didn’t enjoy convincing people to buy what I was selling. It was not a problem that I had as a futures trader. The liquidity in a futures market is such that there is (almost) always someone willing to buy when you want to sell or sell when you want to buy.

I enjoyed being a futures broker. I built a small group of clients who trusted me to do my best. I never needed to convince my clients to do something. We discussed their hedging and risk strategies together, and I executed them in the market.

After four years working as a vegoil merchant with Cargill in Amsterdam, Peggy made a similar move into futures brokerage, joining Natixis Bank in London.

“I moved to London partly for personal reasons,” she told me. “Still, I saw it as a huge job opportunity to apply my knowledge of the physical commodities sector to a financial markets role. Natixis was setting up an agricultural brokerage desk for futures and options. They had people for coffee, cocoa, and sugar and took me on for grains.

“I enjoyed working as a physical commodity merchant,” she continued. “Cargill has a fantastic culture with a strong entrepreneurial spirit. Cargill taught me to be entrepreneurial. I still benefit from all that today.

“At Cargill, I was a merchant responsible for one of the vegetable oil product lines. My interactions with our clients were commercial and competitive. I had to understand what the market was doing and watch for whatever everybody else was doing. I had to follow inflows from South America and keep on top of refining margins.

“I found the commercial nature of the job fulfilling, and I especially liked the tangibility of it. I could watch the chartered vessels arrive in the port of Amsterdam and then depart with the products we traded aboard. I found it thrilling. So yeah, I really enjoyed that.

“My first line manager was an accomplished salesperson. He taught me how to connect with clients and have different approaches for different clients.”

“Why did you choose commodities as a career?” I asked.

“I did a master’s degree in business administration from Erasmus University in Rotterdam. Unfortunately, their Commodities programme didn’t exist then. I decided to study business administration as it provided a comprehensive knowledge base in the field of business. It allowed me to study and work abroad, which I found very appealing.

“I was keen to work in a fast-paced environment,” she continued. “When I saw Cargill’s advertisement for graduate trainees, I just knew it was for me.”

“What was your role at Natixis?” I asked. “And, more widely, what is the role of a futures broker?

“Unless they have been in the industry,” Peggy replied, “it’s challenging to understand futures markets or what a futures broker does.

“There are two types of brokers: execution brokers and clearing brokers. The former provides access to the markets and executes trades for clients. They also offer market data and find liquidity.

“Clearing brokers process clients’ trades after they have been executed. They hold the client’s assets, guarantee the client’s obligations and contribute resources to the default fund maintained by the clearing house. These default funds serve to absorb losses from defaults and protect the sustainability of the future’s markets. Natixis was an execution and clearing broker.

“Although it was a significant change from physicals to derivatives, it felt like a natural evolution of my previous role. In addition, I was also involved in physical commodity financing, namely the financing of coffee stored in exchange-approved warehouses.

“Banks offer significant credit lines to clients, larger than a standalone brokerage house would. During periods of high price volatility, clients need enough credit lines not to be forced to reduce their positions. It is a natural business for banks to finance their clients, whether in the fields or the futures markets.

“In 2008, one of our clients, a Brazilian sugar producer, built up a sizeable, short position in the market and couldn’t pay his margin calls. The exchange asked the producer to reduce their net position, but they didn’t. The exchange held the company in violation of its position limits and instructed brokers only to accept liquidating orders.

“This episode brought home to me the responsibility of the clearing member. It made me understand how well the system works and how vulnerable you are as a broker. It is a low-margin business where a client bankruptcy can wipe out your profits for years.”

“Did the move to electronic trading change how brokers operate?” I asked.

“It was challenging for brokers when the trading floors closed,” Peggy said. “Clients had direct access to the markets via their office screens and often did their own trading. You could quickly lose contact with them. There were fewer points of contact.

“The more successful brokers understood they needed an edge. Some offered proprietary research. Others specialised in execution, for example, in arbitrage between raw and white sugar or between New York and London cocoa – the tricky stuff. Others competed with lower execution fees, looking to reduce their overheads.”

I asked Peggy what she liked and disliked about being a futures broker.

“I liked dealing with many different clients in various sectors,” she replied. “I had soft-commodity clients worldwide, from Brazil to Vietnam and Singapore to Europe. I had tradehouses, producers, and corporates as clients. It kept things interesting. I enjoyed travelling and networking, not just with the clients but with others in the markets.

“What I didn’t like was that as a futures broker, you deal with a standardised financial product, which can be less attractive than dealing with shiploads of physical commodities.

“Also, as a futures broker, you don’t necessarily get to understand a client’s strategy. It’s what I enjoy most in my current role, where we tailor and bespoke OTC products to individual client’s needs. To do that, we must understand their objective and their strategy. On an OTC desk, you must get to know every customer to understand what they’re after and how to price it.”

Peggy has worked in commodity sales with Lloyds Bank in London for the past five years, covering Energy, Metals and Agricultural products. I asked her how her current position differed from being a futures broker.

“Futures contracts are standardised products,” she told me. “They trade on an exchange and require daily margin calls. There’s no counterparty risk as the clearing house guarantees them. The clearinghouse is the seller to every buyer and the buyer to every seller. If a counterparty defaults, the clearing house assumes the risk of loss.

“OTC contracts are not standardised but are bilateral and customised agreements between counterparties. They’re not traded on the exchange and are often not subject to margin calls. “You can customise the parameters of a swap, such as the quantity, the currency, the length, etc. They are always financially settled, whereas futures can be financially or physically settled depending on the market.

“The beauty with OTCs is that liquidity is not restricted to the volumes on the exchange as some market participants will warehouse the risk and not hedge them fully with futures. It means you can sometimes offer more liquidity to your client.”

Peggy has had two extended career breaks for maternity leave. After her first career break, she took a return-to-work programme with Macquarie Bank to get professionals like her back into the workforce. Still, she was back on maternity leave by the time she finished the programme.

“It’s not how these programmes should work,” she told me. “But hey, life happens.” After another two years off, she applied for her second return role in commodity sales at Lloyds Bank.

“Those two breaks were a big disruption,” she told me. “Still, they have been a positive for my career. They allowed me to do something new and have a different role in the industry. I went from a commodity merchant to a futures broker, from commodity finance to commodity sales.

“Looking back, I’m grateful for my different experiences, but maintaining a career is much easier than restarting one. There is a lack of returners programmes that offer viable re-entry at a suitable level. However, this is changing as the corporate institutions that provide them are beginning to realise these programs give them a competitive advantage in accessing talent.

“At Lloyds, I am one of the organisers of a pilot sponsorship scheme to support women’s career advancement, matching female colleagues with senior leaders to drive diversity, equity, and inclusion. It shows you how sentiment has changed over the years. It would never have happened when I started my career.”

© Commodity Conversations® 2024

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