Author: jonkingsman

Good morning, Maarten, and welcome to Commodity Conversations. You are the CEO of Vosbor, a digital agricultural marketplace. Could you tell me a little about yourself and your career so far?

I am from the Netherlands and started my career in 2009, working in M&A with an investment bank in London. I covered financial institutions, many of whom were in difficulty because of the subprime mortgages on their books. The Icelandic government hired our firm to advise on the restructuring and capitalisation of the country’s banks, which became my first project.

It was common for analysts like me to work 100 hours a week in the office, but I liked M&A a lot. It was challenging, competitive and financially rewarding. I wasn’t planning on a long career in investment banking, though. I remember doing an all-nighter in the office, and my manager – twice divorced in his mid-forties – walked in at 7 am. He asked me if I had spent all night in the office. I replied that I had, but the report he had asked for was on his desk. I thought he would thank me, but he said I looked terrible and told me to go home, shower, and be back for a meeting in an hour. I realised I could end up like him if I stayed in M&A.

In 2015, I got together with some friends and formed Vosbor to trade niche commodity products. We focused on the Black Sea, where we sourced durum wheat, barley, and other feed ingredients and shipped them to East Asia. I loved it. In 2019, we switched direction to what we are doing now.

While preparing for this interview, I found little information about you on social media platforms. Is that intentional?

As a trader, I learned the value of keeping success quiet. We are still in beta mode as a platform, so we have been operating somewhat in stealth. We plan to go live this quarter, and you will soon hear more from us. We will start a media campaign and do more interviews before the launch. Yours is the first one.

What led you to transform your little trading company into a platform?

One of the things I realised when I started Vosbor was that the business happens almost entirely offline. I didn’t understand why. Few markets still operate offline. If you want a pair of shoes or need a new washing machine, you go online and get it delivered.

I understood that secrecy can help traders, but the flows are already transparent. Keeping trade offline just made it less efficient. When we started Vosbor, we did our business over the telephone and by email. We frequently had misunderstandings over details communicated over the phone or misinterpreted via WeChat. Sometimes a set of shipping documents was too big, and the email didn’t arrive. These sorts of inefficiencies made no sense.

As a small trading company, we also understood that we could never compete with the grain majors. We had no infrastructure and little trade finance, so we mainly did back-to-back deals. We realised that we had to find our competitive advantage. We identified it in technology.

The latest information I found is that you have six employees, offices in Amsterdam and Singapore and a valuation of $7 million. Is that up to date?

No, it isn’t. We have over 30 employees now. We have offices in Amsterdam and Singapore, but we also have people working for us in China. We do not share our valuation, but we raised $7 million in the last funding round.

How did you eat while you were setting all this up? Did you live on your savings?

Yes, I lived on my savings for nearly two years, but we managed to raise funds when more groups started participating in our beta phase.

You have a former president of Cargill and the ex-CEOs of Viterra and Bunge on your board. How did you meet them, and to what extent are they involved in the company?

I met Chris Mahoney about three years ago when he had recently retired as CEO of Glencore Agriculture – now Viterra. I pitched the project to him, and after some time, he joined with one condition: to have skin in the game as an investor. I reached out to Soren Schroder after he left his position as CEO of Bunge. He also came on as a director and an investor. Both Chris and Soren are actively involved in the project.

Our Chairman, Bram Klaeijsen, is a former President and Regional Director of Cargill Asia-Pacific and has been a supporter from day one. Another director, TC Ong, also worked at Cargill and was previously a board director at COFCO. They bring a wealth of experience, great networks, pertinent opinions and determination to add value!

Aryan van den Blink was also on our board. He was ex-Cargill and my trading mentor for years. He quickly became one of our most fervent promoters. Without him, Vosbor would probably not exist. He sadly passed away in December.

You have venture capital backing. How difficult was it for you to obtain?

It was difficult at the beginning. VC investors can’t get their heads around the commodity trading business and don’t understand that it takes place offline. However, VC investors love large addressable markets – and the physical agricultural commodity market is enormous.

It took us many months to convince the first investors, but the interest from the grain majors helped. Getting VC funds involved in the last fundraising round was more straightforward.

Imagine you meet a potential VC investor at a conference; what do you say to him? What is your elevator speech?

The most important trade, the agricultural commodity trade, takes place almost entirely offline. It is a fast-growing $250 billion market, with international grain trade doubling in 20 years and oilseed trade nearly tripling. By digitising the physical commodity trade, we’ll be the first to capture real-time commodity price benchmarks that no one can access today, enabling us to transform the $30 trillion agri commodity derivative trade.

Trading will become more efficient, transparent, and cheaper. We are now in beta mode with nearly 70 different groups from the industry – the leading players included – and over 180 individual beta users.

Will you charge a transaction fee on trades?

No. We want to build liquidity quickly. If we charged transaction fees, we would become a digital broker, which is not our goal.

So, how will you make money?

When liquidity builds, we will automatically generate price benchmarks for the physical markets in grains and oilseeds. These benchmarks will be valuable for traders and anyone interested in agriculture, from farmers to financial investors. More specifically, they will enable us to build swaps and synthetic derivatives for, say, Black Sea wheat or Brazilian soybeans. The CME has tried to launch these products but failed to create strong liquidity.

Once we have launched derivatives, we must match bids, offers, and counterparties and collect margins. We are already building the infrastructure for this. When we take on this active role as an exchange, we will start charging commissions on these derivative trades — in the same way that futures exchanges do, but at lower rates!

It sounds like you intend to become a PRA – a Price Reporting Agency.

We see value there. PRAs are sensitive to manipulation in less liquid markets. Having real-time trades visible on a platform reduces the possibility of manipulation. Our platform will show volumes and market depth, which the current PRAs can’t provide. This aggregate data has value. However, we will never share client or trade-specific data.

Will you have to register as an exchange?

We are in discussion with the relevant authorities, but as a physical commodity exchange, we don’t need to register until we start to trade derivatives.

Where are you now?

We are still in beta mode with our users testing the platform, but we plan to go live in the first quarter of this year. We will launch physical and paper trade in 18 grain and oilseed products, mainly focusing on Asia, where most of the buyers on our platform are based. On the other side, we have sellers covering all the major supply markets.

Is the paper market cash settled?

Yes, but with a possibility for physical delivery.

How does Vosbor work – is it Blockchain based?

No, it is not Blockchain-based, but we use zero-knowledge proof, a cryptographic method to verify information without sharing the data. Its origin is in Blockchain, but Blockchain technology is challenging to scale and does not offer much advantage over the cloud. Zero-knowledge proof allows us to build credit in the system without participants having to share what they are trading.

How does it work?

If you wanted to buy a cargo of soybeans from me, it would be difficult for me to assess whether you are a suitable counterparty quickly. Using zero-knowledge proof, I can send an enquiry to the system to ask, for example, whether you have traded soybeans in the past on the platform – and in what volume. If you agree to share that information, the system will confirm whether you have traded a similar volume to the quantity you seek without sharing the details of what you have traded. It is a great way to get feedback on your counterparty without them having to share sensitive, confidential information.

Trust is the basis of physical commodity trading. Is this the way you create trust?

Ultimately it is all about trust, and zero-knowledge proof allows us to build that initial trust.

How else do you build trust?

We have a functionality where you can place indicative (not firm) bids and offers on our system. You can send this to an environment we call our Exchange, where everyone can see all the bids and offers. Once you accept my Exchange bid or offer, I still need to accept your acceptance.

Or you can send it to a second environment, called OTC (Over the Counter), where you only see the bids and offers made directly to you and the ones you made directly to others. It is like a dark pool in the equities markets. It replicates how the physical commodity business works today. You don’t share your bids and offers with everyone – you send them to your preferred counterparties.

You can also request performance bonds. We have various functions to limit counterparty risk for our users.

We, as an exchange, need to earn trust. We have put a lot of effort into cyber security and risk mitigation. Some of our team come from the IT departments at major banks covering derivative markets, where they learned how to build ultra-secure software and manage access in a regulated environment. In addition, we have regular security audits done by leading security firms. It costs a fortune and slows our development down, but the investment will pay off.

There is a lot on your website about food security. How will your platform help in that regard?

Food security is positively correlated with trade because of a widening mismatch between where crops are produced and where they are consumed. Complex geopolitics, climate change and economic uncertainty have made the role of traders more crucial than ever. We contribute by adding liquidity to the market. The more liquidity you have, the better markets function – and the better for everyone.

Traceability is a big issue for traders, and there have been various initiatives, like Farmer Connect, to allow users to track their ingredients. Can your platform aid in following the value chain from farm to fork?

Yes. Consumer goods companies struggle with traceability when sourcing from smallholders, but on our platform, they can track provenance via a string, providing the seller does so too.

Brokers are active in the physical agricultural commodity market. Do you welcome brokers?

We welcome broker participation. Our platform is no different from the futures markets, where brokers intermediate on behalf of traders, some of whom are exchange members who could place orders directly. Brokers know their customers inside out. They add value to the market.

Have you built an AML – Anti-Money-Laundering – safeguard into the platform?

Yes, we allow participants to do their AML and KYC (Know-Your-Client) procedures in a secure digital data room where you can chat and share information in private. You can track who shared what document and when it was opened or downloaded.

There have been various attempts to move physical agricultural commodity flows onto an electronic platform. Why and how do you think you will succeed when others have failed?

I compare it to quitting smoking. Everyone who smokes knows it would be better if they stopped. Everyone in the physical commodity industry knows it would be more efficient to embrace digitisation and put the supply chain onto an electronic platform. Nevertheless, it is difficult to give up smoking, and it is difficult to give up a method of doing business that you are used to – especially one that has existed for centuries.

It is a bit of chicken and egg – you need liquidity to attract participants, but you need participants to build liquidity in the first place. To do that, you must create a solution that is not five times better than the existing model but is fifty or one hundred times better. People won’t give up on their old habits unless you do.

When we started, people told us that we should focus on only one part of the value chain and build an execution or quotation system. However, we realised that for it to work, we would have to cover all the needs of a modern trader.

I think an essential part is ensuring that digitisation doesn’t disrupt the relationship angle of commodity trade because, as you said, it is all about trust. Therefore, we put a lot of effort into building integrated communication tools.

At the same time, everyone has different needs. Buyers, sellers, or third parties – like shippers or surveyors – have unique pain points. We identified critical supporters within those groups and determined what drove them to our product features. We analysed feedback to convert on-the-fence users into fans. We doubled down on what these users love and addressed what held others back. I wanted to avoid creating something that many people want a small amount, but rather build a product that a small number of people want a significant amount. That is how you turn fans into fanatics.

We spend a lot of time with our beta users, focusing on improving our product/market fit rather than growing our user base. When CBOT went digital, or ICE started, there was resistance too. They convinced significant players, who then helped them launch their platforms successfully. We take a similar approach.

To what extent are you competing with Covantis?

Although there is some overlap, we’re solving different parts of the same puzzle. Our focus is on the market, both pre-trade and trade. Covantis services post-trade operations. Our platforms are complementary, and Covantis shareholders participate in our beta.

Covantis plays an essential role in getting the industry to commit to digitisation. We have a good working relationship with them, and it will make sense for our two platforms to communicate with each other as we develop liquidity.

Do you handle payments?

Transactions can be either basis CAD (Cash Against Documents), TT (Telegraphic Transfer), or L/C (Letters of Credit). We do not currently handle payments, but we plan to address them later. Our CTO (Chief Technology Officer) was previously CTO at KOMGO, a trade finance platform, and he has excellent ideas about integrating finance. As a trader who struggled to get financing, I’m keen to make it easier for non-traditional lenders to finance the commodity trade.

Turning to your role as CEO and Founder, what are your challenges?

Time is a big challenge. I would love to spend more hours with clients, understanding their concerns and how best to address them. It involves a lot of travel, which is time-consuming. Travelling has been challenging over the past few years with all the Covid related restrictions. I was in China in November, where I spent fourteen days locked up in a hotel room before meeting anyone!

Nevertheless, Covid didn’t slow us down – on the contrary, it has helped us because it showed the industry that they need to digitise.

Recruiting and training IT developers is also challenging. You won’t find any IT developers with a history in trading, execution, or related business. We do internal workshops to teach our teams about trading, but it is a steep learning curve and takes time. We are a fast-growing company and constantly looking for new talent. If any of your readers are interested in joining us, don’t hesitate to get in touch with us through our website.

Thank you, Maarten, for your time and input, and I wish you every success with your project.

© Commodity Conversations ® 2023

A guest blog by Corinna Olearo, Head of Commodity Research and Price Risk Management, Nestlé

All opinions expressed are solely my own and do not necessarily reflect the views of my employer.

An exceptional year has just ended for the commodity markets (agricultural and energy) not only in terms of the price level, as several commodities reached levels never recorded before, but also in extreme volatility.

In February 2022, for instance, the price of Arabica coffee reached US$5,700 per tonne, not seen in the previous ten years. Similarly, the US corn, soybean, powdered milk, and natural gas prices have hit record highs for the past 9-10 years. Palm oil, wheat, European natural gas, and aluminium reached unprecedented levels between March and August 2022.

These markets peaked around mid-2022 and have started a downward trend. They have lost between 20 and 70 per cent of the value from the maximum recorded in 2022. Nevertheless, their valuations are still above the average of the previous ten years.

Have the drivers behind what some analysts named the “commodity super-cycle” disappeared? Let’s take a step back to analyse the factors that determined recent commodity price inflation.

An unexpectedly sustained demand

Although some of the inflation drivers were present before the Covid-period, the global pandemic was the main trigger for the increase in market volatility.

With the onset and rapid spread of the pandemic in the first quarter of 2020, expectations of a fall in global GDP wrongly led people to assume that there would be a fall in demand for essential goods. On the contrary, consumers in lockdown shifted their demand from the services they could not benefit from (tourism, restaurants) towards consumer goods. They also took advantage of the increase in savings and the various fiscal support programs promoted by different governments (for example, Brazil’s Bolsa Familia and the USA’s American Rescue Plan). A drop in demand was recorded only for those commodities linked to out-of-home consumption or travelling – and limited to the period of strict lockdowns.

Since mid-2020 and throughout 2021, there has been substantial growth in Chinese imports. The increase is due to several factors, including post-lockdown demand, the easing trade barriers between the US and China, and the willingness of the Chinese government to build strategic food reserves in a period of supply uncertainty.

Finally, we should mention the phenomenon of green inflation, which accelerated in 2020 as governments and private companies increased their commitments to reduce carbon emissions. The resulting policies directly impact demand for the raw materials related to renewable energy. These include metals to produce batteries or solar panels (aluminium, nickel, copper) or the various commodities used to produce biofuels (ethanol from sugar cane and corn, soybean oil, rapeseed oil, etc.).

A series of Black Swan events

A sequence of unprecedented shocks hit commodity markets in 2020-2021.

Lockdown measures limited the availability of labour, particularly immigrant labour. They significantly impacted the palm oil industry in Malaysia – the second biggest palm oil producer after Indonesia – where immigrants make up 80-90 per cent of the workforce.

Combined with the limited availability of labour, the unexpected surge in demand for consumer goods contributed to a global logistics crisis, impacting both land and maritime transport.

But the pandemic wasn’t the only problem. In March 2020, a container ship got stuck in the Suez Canal, which carries 12 per cent of global trade, blocking its passage for five days.

Finally, various extreme climatic events hit in 2021, reducing agricultural production. Brazil – the world’s leading producer of coffee, sugar, and soybeans – recorded its worst drought in a century. In July, the worst frost in twenty years reduced Brazil’s Arabica coffee harvest. Unprecedented flooding hit China and Europe in the summer, negatively impacting crops.

2022 – the expected market rebalancing was disappointing

The year started with high commodity prices corresponding to reduced stocks in various markets, but most analysts forecasted a progressive rebalancing of supply and demand. After all, high prices cure high prices! Instead, Russia’s invasion of Ukraine in February – the most unexpected event along with the pandemic – upset those predictions.

The Black Sea region accounts for 30 per cent of world wheat exports, 15 per cent of corn, 75 per cent of sunflower oil, 15 per cent of fertilizers, 9 per cent of aluminium, 12 per cent of crude oil and about 20 per cent of natural gas. Russia’s invasion of Ukraine led to considerable uncertainty about the availability of these raw materials, which provoked reactions from various countries that further reduced supply.

About twenty countries imposed restrictions on exports of agri-commodities in an attempt to control domestic inflation. Indonesia banned palm oil export for about one month. Another consequence was the worsening of the energy crisis in Europe – already underway since 2021 – which impacted global energy markets and, indirectly, agricultural production. Natural gas represents the main production cost of fertilizer and aluminium.

Finally, Europe recorded its worst drought in history, reducing the availability of energy resources (hydroelectric and nuclear energy) and raw materials.

What to expect for 2023?

It is as difficult to predict the course of the war in Ukraine as it is to make weather forecasts. Weather is the primary variable of energy, and food matters.

However, most market analysts expect commodity prices to experience a continuous and gradual decline during 2023. On the supply side, they expect production to increase thanks to the positive margins obtained by farmers over the past year, despite the increase in their production costs. They expect slower global economic growth, if not a recession in some countries, to limit demand.

In addition, the supply chain congestion triggered by the pandemic has been resolved thanks to the reduction in global demand. Finally, the dollar appreciation of the last two years should also result in lower purchasing power by non-US importers—most agricultural commodities trade in dollars.

 Main “known unknown”

Among the main uncertainties of 2023 are the consequences of the unexpected reduction of Covid control measures in China and the evolution of the European energy crisis.

China surprised most analysts by reducing Covid control measures in recent weeks. It is difficult to predict the consequences of the impact of this decision on the Chinese economy. There has been a sharp increase in infections, which has delayed an immediate return to tourism and restaurants reopening, which would positively affect commodity demand.

The European energy reference price (TTF) is currently at levels last seen before Russia invaded Ukraine. The European Union has accumulated high stocks thanks to the flow of Russian gas, albeit reduced by 50 per cent, and imports of liquefied gas from the United States. However, the European energy crisis is far from resolved. Cold weather over the next three months could reduce gas stocks, and the main question is the extent to which the European Union can rebuild reserves before next winter.

Since the end of August, Russia has almost stopped gas exports to Europe. The European Union may again have to compete with China for liquefied natural gas exports from the United States.

Opinions expressed are solely my own and do not necessarily express the views of my employer.

Do you have something to say – would you like to contribute a guest blog? Do not hesitate to contact us!

Good morning, Ivo, and welcome back to Commodity Conversations. First, could you tell us a little about yourself? 

I am from Rosario in Argentina. I studied accountancy at university and then did a master’s degree in economics. I joined Cargill in 1989 and worked with them for almost 30 years in Rosario, Buenos Aires, Sao Paulo, and Geneva. I was Cargill’s world manager for soybeans until 2011, when I moved to sugar and ran Cargill’s sugar division. In 2014 we created Alvean, a joint venture company between Cargill and Copersucar. It was the biggest sugar trading company in the world. I was the CEO until I retired in 2017. 

Did you watch the World Cup final – and how do you feel about being world champions?

 Yes, we watched it with family and friends. It was a great match. I am very happy for Messi’s achievement, which was still missing in his career, and for my children’s generation, who are experiencing this joy for the first time.

How do you spend your time now?

I now divide my professional life into three:

I am a non-executive director in various companies, including Sucafina in Switzerland and Adecoagro in Argentina.

I lecture on agriculture and commodities at the University of Geneva, the Universidad Torcuato Di Tella in Buenos Aires, and the Universidad Austral in Rosario.

I devote the final third of my time to venture capital investing in the ag-tech space with Glocal and Hedgit, among others.

You recently published a book, Commodities as an Asset Class, which questions whether commodities can effectively hedge against inflation. What prompted you to write it?

From March 2021, I began seeing a lot of stuff, mostly from investment banks, advising clients to invest in commodities to hedge against inflation.

I discussed the topic with Alan Futerman, one of my students at the Universidad Torcuato di Tella, and we decided to investigate it. We questioned the conventional wisdom of the time, and our research proved we were right to do so. There is little correlation between commodity prices – particularly the general commodity indexes – and inflation.

Is that the case for all commodities?

You can divide commodities into energy, metals/minerals, and agriculture sectors. Energy makes up about 60 per cent of the pie, of which crude oil takes the lion’s share at 42 per cent of the total. Agriculture and metals are around 20 per cent each. Speaking about commodities as one class can be misleading.

Today, most people invest in commodities through indexes, of which there are four main ones: DBC, GSCI, CRB, and BCOM. Each of these indexes includes a different number of markets and gives different weightings to each.

So, no correlation at all?

We concluded that energy markets correlate with inflation better than metals/minerals – and that metals/minerals correlate better than agriculture. But the best correlation, even if far from perfect, is with precious metals prices.

We think this may be because agricultural commodities have a faster supply response than others. You can replant your crops each year – and sometimes you can have two crops a year, for example, with wheat and rice in India. However, opening a new mine or oil field can take five to ten years.

The impact of productivity is a factor in agriculture. We have seen faster productivity gains in agriculture than in metals or energy. In real terms, agricultural prices have been in a long-term downtrend since 1960 – so you must ask why an investor would buy commodity crops as an inflation hedge. Purchasing the total income stream (P x Q) – buying shares in producers – allows you to reap the benefits of efficiency gains. It seems a better alternative than buying just the products.

Although the correlation between inflation and commodity prices has been low in the long term – from 1960 to 2021 – there have been specific periods where the correlation is higher. However, that requires an active strategy rather than a passive one. You need to follow the supply and demand of each commodity. And bear in mind that the energy transition path will certainly change relative values in the future.

Did you look at gold and Bitcoin?

Yes, we looked in detail at the correlation between gold and inflation. We concluded that over the last 60 years, precious metals have correlated better with inflation than other commodities. However, this has been less the case over the recent past. Lately, gold prices have not followed inflation as expected.

Why do you think that is?

We think it may be because people have invested in cryptocurrencies rather than gold. At one stage, cryptocurrencies reached a market capitalisation of $3 trillion. Gold has a market capitalisation of around $12 trillion and silver of $1-1.5 trillion. You can make a case that the $3 trillion that went into crypto would have otherwise gone into gold, boosting its price.

We devote the last chapter of our book to Bitcoin. We ask how a monetary system based on Bitcoin might work; is it money – a medium of exchange – or a speculative asset? We concluded that it is the latter; we call it a hyper-liquid collectable. However, other cryptocurrencies may evolve, which have a better monetary function than Bitcoin. It would avoid Bitcoin’s trend to monetary disequilibrium due to its supply inelasticity.

How do you deal with different periods? Correlations can depend on when you start and stop the data series.

We started in 1960 to give us a 60-year data set.

We then analysed the data decade by decade. Commodities lost versus inflation in the 1960s. They gained versus inflation in the 1970s, but that was an exceptional period where you had the end of the Bretton Woods Agreement, two oil embargoes, and massive grain shipments to Russia, now characterised as the Great Grain Robbery.

Although commodities were a good hedge in the 1970s, their prices significantly lagged behind inflation during the 1980s and 1990s.

Commodity prices rose dramatically in the 2000-2010 period, but it had nothing to do with inflation. China entered the world market and needed raw materials – energy and metals – to fuel its economic growth. The Chinese began eating more meat, increasing soybean imports for animal feed. It was a big demand pull across the commodity board.

The 2000s also saw the introduction of biofuel mandates, increasing demand for crops beyond food. During the 2010s, commodities lost once again relative to inflation. Remember, inflation was low throughout the first two decades of this century and only picked up during Covid.

We ended the analysis in our book in Q4 2021, but 2022 didn’t change anything. For example, agricultural commodity prices are at about the same level now as they were a year ago.

Commodity markets are usually in a carry or contango structure with forward prices higher than spot prices. Long-only investors typically lose out when they roll their positions forward when the spot month expires. How did you take that into account in your analysis?

 We also analysed the spot months series, not considering the roll cost. However, I would like to make two points.

First, you have a positive rather than negative roll return when you have an inverted market – where the spot price is higher than the forward price. However, an inverted market is an anomaly in terms of inflation. In an inflationary environment, forward prices should be higher than spot ones.

Second, rolling has nothing to do with inflation. It costs money to store and finance commodity stocks, so you are correct to say the typical structure is a carry or contango. An inverted market – where spot prices are higher than forward prices – suggests genuine scarcity in the spot market, with demand greater than supply. That is a fundamental and not a nominal phenomenon. But in an inflationary environment, you would expect forward prices to be higher than spot prices. It would negatively affect the strategy of going long commodities as a hedge. There is a contradiction there.

It leads me to the difference between correlation and causation. If a mismatch between demand and supply drives inflation, then that mismatch should result in an inverted market.

There is a debate in economic theory as to the causes of inflation. We side with the people who believe that inflation is a monetary phenomenon.

Prices can also rise because of supply factors, but we don’t call that inflation. It’s a change in relative values. Commodity prices may increase, but they also fall. Inflation is a general and sustained increase in prices. Supply price changes are more specific in time and place.

In the current environment, you could say that loose monetary policy drives 70 per cent of inflation and that supply-side factors drive the other 30 per cent.

How do you arrive at those estimates?

They are more guesstimates than estimates!

Monetary policy has been loose in the US and Europe, and inflation has reached around 10 per cent per year. Switzerland has a more orthodox or balanced approach to monetary policy, and inflation has been running at three per cent per year. I guess the Swiss inflation rate of three per cent reflects real inflation in food and energy prices, while the additional 7 per cent in the US and Europe is the result of their loose monetary policy.

You must also look at how monetary policy has changed over the past two decades. When we had the first big round of quantitative easing following the 2008 financial crisis, most of the increased money supply disappeared into bank reserves or as excess reserves at the Fed. You had a significant expansion in the monetary base, but M2 did not grow proportionally. It resulted in a contraction of the money multiplier. The new money didn’t end up in people’s pockets.

With Covid, the central banks changed strategy and printed money that ended up with the public – who then spent it. As people couldn’t go out or travel because of Covid, they didn’t spend their money on services. Instead, they spent it on goods.

The price of lumber is a helpful indicator. It increased as people spent their money on home improvements but collapsed when the economy opened, and people could go to concerts and restaurants again. In addition, rising interest rates are slowing the housing sector, further reducing lumber demand. Lumber prices are lower today than they were before Covid.

Although commodity prices have a weak correlation with inflation, they have a stronger correlation with monetary policy: prices rally when it loosens, and vice versa. It relates to their correlation to tight or loose financial conditions.

How do you incorporate exchange rates into your analysis? 

The dollar exchange rate rises when the US monetary authorities increase interest rates, creating commodity headwinds.

Most people follow the US dollar index. It is a basket of six currencies, some of which, like the Swiss Franc and the Swedish Krone, have nothing to do with commodities. Besides, critical currencies like the Chinese Yuan are missing. Maybe we should look at the US dollar against a basket of commodity-exporting and importing countries’ currencies, such as Brazil for soybeans and sugar and Chile for copper.

You should look at the US dollar against the currency most relevant to the commodity that you follow.

You mention sugar. I have previously talked with investors who bought sugar as a hedge against US inflation, but they bought the world market and not the US domestic market.

We looked at commodities in terms of US inflation, but there is room to improve that. There is always room to improve everything!

The US CPI, the Consumer Price Index, has changed over time. If we used the 1980s basket, US inflation would be at 20 per cent, not 10 per cent. It means that your commodity-inflation hedge performs even worse. In 1960, US consumers spent an average of 17.5 per cent of their disposable personal income (DPI) on food. This share has now fallen to less than 10 per cent.

In the past, some academics argued that commodities are a hedge for equities and bonds. Did you look at these correlations?

Not specifically, but we looked at how an investment portfolio performed with and without commodities.

And what did you find?

An investment portfolio that includes commodities performs worse than one without them. It negatively affects its returns.

But we are talking here about passive investment. We are against passive investment in commodities, particularly if you have the wrong entry point.

For example, if you had bought commodities in 2010, you would be losing big money today because of lower nominal prices and about 35 per cent inflation since then. The same applies if you had bought commodities a year ago. Some commodity prices today are about the same as a year ago, while inflation has run at 10 per cent, losing money in real terms. The entry exit point is critical.

If commodities aren’t a good inflation hedge, why do financial advisors and banks promote them as such?

I don’t know. Maybe they are stuck in the 1970s.

Your message is that you shouldn’t invest in commodities; you should trade them.

You can invest in commodities, but the best way to do it is through a hedge fund with a manager you trust – someone with an active strategy that profits from both falling and rising prices.

If you trade in commodities, you must understand the specifics and dynamics of each market. Commodity trading offers many opportunities, both on the long and the short side. And you need to be aware that not all commodity families behave similarly. So, choosing the right product or sector is crucial.

Is there a hedge against inflation? Is it property, equities, or what?

Perhaps inflation-linked bonds. But you must be careful, too, because once interest rates start to increase, their market value will be affected.

How easy is your book to read? Did you write it for students of economics and professional investors, or is it for a wider audience?

We wrote it for a broad audience – for anyone worried about inflation eroding their savings. You can follow the book’s logic without delving deeply into mathematics.

Did you enjoy writing the book?

Yes, I enjoyed working on it. It was an excellent experience.

Alan and I finished the first draft in the last quarter of 2021. We were lucky with the timing, as inflation started to kick in at the same time. We spent the summer of 2022 polishing and editing the draft.

When will you write the next one?

I need to think about that. I have lots of ideas.

Which do you prefer – being a trader or a writer/academic?

I am grateful that I have been able to do both. When I was younger, I began a PhD in economics at NYU but had to abandon it for personal reasons. After 30 years of trading, it is time to complete the circle. I find joy in teaching and writing.

Thank you, Ivo, and congratulations on an excellent book.

© Commodity Conversations ® 2023

Good morning, Luis. Thank you for taking part in this project. First off, who are you, and what do you do?

I am a vessel agent based in Santos, Brazil, representing the Unimar Shipping Agency.

Could you explain the role of a vessel agent?

Before a vessel arrives in a port to load or discharge cargo, the owner or operator must nominate a vessel agent to take care of all the formalities while the ship is in port.

The agency is usually a full agency where the agent looks after the interests of both the vessel owner and the charterer. From time to time, the ship owner will not be comfortable using the charterer’s agent and will appoint a protective agent to look after his interests. We call this a “protecting agent.”

Vessel agents are responsible for handling all the vessel’s necessary documentation for the health authorities, the federal police, and customs. The port or local authorities have no direct contact with the vessel owner or operator. Everything must go through the agent.

Vessel agents also look after the embarkation and disembarkation of the crew. Everything related to the vessel comes under the agent’s umbrella.

The agent is legally responsible for the vessel while it is in the port or on the roads. If, for example, the ship leaks oil into the port, the agent is legally responsible for the damage. I have known cases where vessel agents are fined or arrested for problems with ships.

The vessel agent is an essential part of the chain. A ship that sits in port makes no money, and there must be no delays. We must handle everything quickly and efficiently.

Do you have to provide food for the crew and fuel for the vessel?

The vessel owners usually have their preferred suppliers, but the suppliers need to go through the vessel agent. The same applies to cargo supervision companies. Everything related to the vessel passes through the agent, including cargo loading, supervision, and documentation.

What’s the difference between a vessel agent and a port agent?

It’s the same thing, but with two different names.

You mentioned that a vessel agent is legally responsible for the vessel while it is in port. Can you get liability insurance?

Yes, we are members of ITIC. They are a mutual insurer with over 3,300 members who provide professional indemnity policies at cost. We are also members of WWSA, The Worldwide Ship Agents Association.

How many vessel agents operate in Brazil or Santos? Is there a lot of competition?

Yes, there is a lot of competition. I don’t have the exact number, but there are many, both big and small.

Why would a client choose you rather than another? What are the differentiators?

Information is one differentiator. We provide statistics and market-relevant information, such as vessel line-ups. Traders and analysts use them to track fundamental flows around the world.

Service quality is another differentiator. We try to provide our clients with the best service possible – consider it the difference between flying Ryan Air and Swiss. Remember, time is money, and efficiency is everything.

And then, we build personal relationships with our clients over the years. These relationships are based on trust – trust that we will do an excellent job for our clients.

Do agents compete on cost, or is there a standard cost per vessel?

There is a standard cost, but some agents might offer discounts or rebates to loyal clients or tempt clients to try out their service. We don’t do that as we prefer to differentiate ourselves on quality rather than price. You usually get what you pay for in life.

You mentioned vessel line-ups. How do you put those together?

A vessel line-up is a list of the vessels nominated to load or already loading in the port. It includes the type of commodity, the name of the shipper – the trader – and the declared destination for that cargo. We don’t have any information as to the sales price of the shipment.

Analysts find line-ups helpful in tracking the quantity of a commodity that exporting country ships – and hence, how much is left to ship from the harvest – and the amount a destination country imports.

Of course, the vessel may not end up in the declared destination and might be resold or traded to another destination once it has left the load port, but traders can track the vessel using various tracking services.

We put the line-ups together from both public and private information. Whenever a vessel is nominated to a port, it is declared to the authorities. That information is in the public domain.

The Santos vessel agents meet regularly to coordinate the vessels they manage, and we often share information about where our ships are going. Not everyone wants to share. In addition to our weekly meetings, we also share information electronically.

You live and work in Santos, the biggest commodity port in Brazil, in terms of volume.

Santos started as a coffee port. It is the biggest port in Latin America. Brazil has about 35 sugar and grains terminals; twelve are in Santos.

From January to November this year (2022), Santos exported 81 mln mt of beans, 30.8 mln mt of corn, and 21.9 mln mt of sugar. Santos shipped 131 mln mt of beans, corn, wheat, rice, and sugar in eleven months.

Does that include containers?

No, it is just bulk.

Container shipments have declined since the pandemic hit. Container rates skyrocketed during Covid with a lot of boxes stuck in ports. Shippers responded to these higher rates by moving from containers to breakbulk shipments – bagged commodities transported in bulk vessels. Even coffee exporters began shipping in small breakbulk vessels. In the past, they transported coffee in containers.

Markets are constantly changing. Container rates fell in the 2000s, and sugar exporters shifted massively from breakbulk to containers. They closed or dismantled their bag-loading terminals. This situation has now reversed.

I have read about drug traffickers breaking into containers at Santos and putting drugs in them. Is that an issue?

It is a problem, not just in Santos but in all ports worldwide. Exporters now use dogs to search for drugs in containers before they load them onto vessels. It should alleviate the problem.

What is it like being a vessel agent?

Hard work! Except for 1^st January each year, ports never stop. Ports work 24/7, and so do we.

Our senior controllers work regular office hours from eight to six, but we also have a night shift when junior staff man the phones and emails.

We usually handle more than one vessel at a time, which can sometimes be quite stressful. Technology has made our lives easier. Everything is linked electronically to the Brazilian health, police, port, and customs systems. In the past, we physically had to go to the various authority buildings with the paper documents, but now we file everything electronically.

There are heavy fines if we do not complete the information correctly or on time.

What is your biggest challenge as an agent?

The big trading companies are setting up or acquiring vessel agents to handle their business. ADM, Cargill, and Bunge have their own agency companies, leaving less for independent agencies like us. We must compete hard for business.

How did you get into the business?

I started with a container shipping company and worked in London for a long time. In 1994, Wilson & Sons approached me to build an agency business around sugar. I travelled back and forth to Europe, particularly London, commercializing the service. I knew we had to provide a better service than our competitors. It wasn’t easy, but we quickly built the business. I joined Unimar in 2009.

You are a native of Santos. Was your family involved in shipping?

No, my family had nothing to do with shipping or commodities. I was the only one.

You had just completed an endurance event in the Amazon jungle when I first met you.

Yes, I participated in the Adventure Races endurance events for three years before I injured myself. The longest I did was 300km – a mixture of cycling, running, hiking, and canoeing – often over 48 hours. We competed in a team of either two or four people. We had to be self-supporting. Things began to get serious when our team won a 220km event. We also did 260km in 36 hours, which was fast.

It was my way to boost adrenaline as you must push yourself. I love being in nature. Competing in these events was an excellent way to be outside. I found it relaxing.

Did you ever get lost?

Yes. I was lost in the jungle for more than a day. I was in a team of two, and we eventually stumbled on a highway and got out. It was interesting.

Did you panic?

No, I was more frustrated that we were out of the race. We had trained so hard for it. We had enough food and water. We were well equipped. In the end, I lost the race but not my integrity.

When I first met you, you also worked with the local schools.

I still do. I started a social project in Santos in 2008, teaching English to underprivileged children. I also teach classes on the environment and biodiversity.

In 2012, I purchased six cameras on a trip to Japan and began teaching photography to 15–18-year-olds on Saturday mornings. We had to stop it during the pandemic, but we are now preparing to restart the classes. It is a great programme – a big success. Some of the kids I taught now work as photographers.

In 2016, a contact at National Geographic asked me to extend the programme to Mozambique. I went there with my six cameras and two of my former students. We taught 24 kids over two weeks, each week with twelve kids with one camera for two kids. A Geneva company sponsored the cost.

Last July, one of my former students in Mozambique messaged me to tell me he now works as a photographer and is training to be a tracker for National Geographic. He sent me some of his photographs. It made me cry with happiness.

National Geographic has published your photographs. How did that come about?

I attended a National Geographic seminar in Portugal, where I talked to one of their editors and showed her my work. She asked me to upload some of my African pictures to their photo bank, and they published some in their magazine. They only pay you if they publish the photo. You don’t get paid for contributing pictures to their photo bank.

In 2019, I went to Mongolia for a solo photo expedition, and they published some photos I took there. They have also published some photos I took in the Brazilian jungle during Covid when I couldn’t travel abroad. I haven’t been to Africa since pre-Covid, but I will soon go back.

I hear you also organize group tours.

Yes, but only private groups of three to six people. Everyone must help with the cooking and the tents and follow the “no-talking” rule. It is for people that want the experience.

What is the secret behind a good photo? Is it patience, light, luck, or equipment?

 It is a mixture of all four, but patience is the key to wildlife photography. When you do photography in a studio, you can do it repeatedly until you get it right. When you are in the bush, you often only get one shot. Some things can help, like not taking showers or wearing perfume – and not talking!

The first photo of mine that National Geographic published was of a leopard in Namibia. I stayed two days under a tree with that leopard – two days with only the food and water I had. She was a young female who had killed a springbok and hauled the carcass into a tree. I named her Kika.

Have you ever had a frightening moment on a photo safari – attacked by lions or elephants?

A lion passed close behind me once when I was in Botswana. I didn’t move. Bad things can happen, and you must respect certain limits and rules.

OK, that’s all the questions I have about you and the business of being a vessel agent. Is there any message you would like to give a young person thinking about a career in our industry?

Am I allowed four messages?

Yes!

I think these four messages apply to all young people regardless.

First and most important: never stop dreaming.

Second: whatever you do, do it with passion.

Third: constantly reinvent yourself and adapt as the world changes around you.

Fourth: always look for ways to grow personally and professionally.

I love what I do, even in difficult moments.

Thank you, Luiz!

This conversation is part of the Commodity Professions – The People Behind the Trade series.

© Commodity Conversations ® 2022