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A conversation with Ivo Sarjanovic

Could you please tell me a little about career?

I joined Cargill in July 1989, and after working in Buenos Aires and Sao Paulo, I was transferred to Geneva in 1993 as a wheat trader. In late 1994 Cargill asked me to join the soybean desk. I started as a junior trader and worked my way up to become head of the desk, a position I kept from 2001 to 2011.

I was in charge of Cargill’s worldwide activities in soybeans, including the coordination of crushing activities. It was a role that combined international trading with the strategic side of the business, so it was super interesting. I loved it!

So you were head of the bean desk through the whole of the super cycle?

I first visited China in 1997 at a time when they were buying almost no beans at all. Twenty years later they are importing 85 to 90 million tonnes each year, which is roughly 60 percent of the world total.

This created tremendous opportunities for the desk. I was lucky to be there at that time—and to have had the right experience and the right team to be able to enjoy it. For me it was like playing football for Barcelona in La Liga.

What was Cargill’s share of the world soybean trade at that time?

We had maybe 15 percent. The business was extremely competitive, but not only among the big trading houses. Chinese companies soon started to buy soybeans directly from the origins and trade them to destination.

In 2011 you moved within Cargill from beans to sugar. What prompted that move?

I had been in soybeans for almost 20 years, and I wanted a change. I also wanted to have a position that was more managerial, more asset-based and less trading-orientated. Becoming head of Cargill’s Sugar Division was a perfect opportunity for me. I jumped at the chance.

What are the main differences between the sugar and the soybean markets?

The biggest difference is the delivery mechanism. Sugar trading revolves around the delivery process against the futures market, especially the optionality that you have between the different origins.

What was a surprise was that physical margins were even worse in sugar than they were in beans. Traders are even more willing to discount physical prices to put on a short sales book to end destination.

After a few years of running Cargill’s Sugar Division you merged it into Alvean, a joint venture with Copersucar.

Alvean was probably the best idea I have ever had professionally, combining what at that time were the two biggest traders in a market that was desperate for consolidation. Cargill had the global trading expertise while Copersucar had the origination infrastructure in Brazil. The combination was very strong.

Moving on to your current position, you now act as an advisor to trading companies on risk management.

Risk management is a journey. We can only try for continual incremental improvements. Also, I don’t think there is a definitive way to manage risk; different companies have different methods.

Thirty years ago we managed risk in terms of the size of the position measured in tonnes. We then moved on to looking at the risk in monetary terms, the value. We then began to incorporate tools that were developed by the financial industry such as ‘Daily Value at Risk or DVAR”, “Drawdowns” and ‘Stress’. We combine all these tools into what we call a ‘Dashboard’ and then we try to find a balance, a way to combine each of the various legs such as flat price, spreads, premiums and freight positions within limits.

It was challenging at the beginning, but most people now realise that you can’t trade if you don’t use those tools. Without them you may overtrade relative to your equity and run the risk of ‘blowing up’.

In addition to my advisory work I give courses on agricultural commodities at the Masters level at the University of Geneva, as well as at the Universities of Buenos Aires and Rosario in Argentina. I love teaching young people about our business, and sharing my enthusiasm for the business with them.

Thank you Ivo for your time and input!

© Commodity Conversations ®

This is a short extract of a conversation that will be published in full in my new book due out in November.

A conversation with Riccardo and Emanuele Ravano, respectively President and CEO of IFCHOR

IFCHOR is an international shipbroking company based in Lausanne, Switzerland with a network of 12 offices in Asia-Pacific, Europe, Middle East and the USA. I asked Riccardo, the founder of the company, how it had all begun.

I come from a ship owning family. I started in the shipping business in 1964 at the age of 20, in Genoa, Italy. In the 1970s, politics in Italy began to get really bad, even dangerous. Many of my clients began to move abroad, and in 1976 I decided to follow them. I looked originally at Monaco and then at Geneva. I had a friend who told me that there was a one-room office for rent in his building in Lausanne. I took it.

I started on my own at first with a secretary—who by the way is still with the company 42 years later! Over the years we expanded from one room to two floors…but we remained in the same building!

And Manu, when did you join?

Ours is a family business, so I joined when I was born! I officially started working in 2002, just before the freight super-cycle, which lasted about five years between 2003 and 2008.

How big is the company today?

Today we are about 180 people around the world. I would say we do between 3,000 and 4,000 transactions a year throughout our various offices and segments. We have never calculated the amount of tonnes that equates to, but perhaps we should. It could be good marketing!

Do the big trade houses each have a shipping department?

All of them do. Over the years they have developed bigger and bigger departments. Forty years ago they might have had one guy chartering vessels on a voyage basis, but now they all have separate departments with P&Ls that can reach tens of millions of dollars.

Manu, that’s one big change in the past 40 years. Are there others?

The most important change in the past 40 years has been the development of the market in Forward Freight Agreements, FFAs. These now trade every day in thousands of lots, allowing operators to hedge their freight needs. The FFA market has traditionally been an OTC (Over The Counter) market, where counterparties enter into direct agreements with each other. It is still an OTC market, but since the crash of 2008 all FFAs are cleared either in London or Singapore.

FFAs are closely linked to the physical shipping business. It is the physical shipping market that determines the FFA prices, not the other way around.

Any other changes?

Shipping transports 90 percent of the goods in the world. At the same time, the sector burns only 7 percent of global oil consumption. Shipping globally contributes only 3 percent of the GHG emissions in the world.

Recently, the IMO took a major step to implement—as of January 2020—new regulations to ensure a targeted 20 to 30 percent reduction in GHG emissions, to be achieved principally through the use of low sulphur fuel.

Could LNG be used as an alternative low emission fuel?

There is a currently lot of discussion around LNG fuelled ships, but for the moment the technology is pricey and it is difficult to justify economically. Some charterers may be willing to pay more to charter LNG fuelled ships for environmental reasons, but trading margins are currently so thin that it is unlikely that trading companies could do so and remain competitive. There is also a question of LNG supply at the ports. It is not easy to organize globally. There is a risk of having LNG fuelled ships being stranded.

So how could the industry reduce emissions further?

I think it will be a contribution of many things. There might be some sails that work. There might be some solar power as well. There might be some electric contribution to the engine. It will be an evolution that will take another 10 to15 years before we reach a point of having the right mixture of technology.

What’s the average lifespan of a ship?

That is another thing that has changed significantly over the past 40 years. When my father started in the business, the average lifespan of a cargo vessel was 25-30 years. Today, it is more like 15 years, especially when you look at all the new regulations coming.

Remember though, that some ships are well maintained and safe for carrying grain, even at 25 years old. Others are less well maintained and are a problem at 12 years old. We know which ships are well maintained, and which ones aren’t.

Where is innovation likely to come from in the future in the industry?

Shipping is facing the same challenges as those faced by commodities. Technology has made communication fast and seamless in both chartering and trading. This has led to thinner margins. As a result, traders are seeking economies of scale and shipping is evolving with bigger and bigger ships. Port infrastructure is also adapting to accommodate these bigger ships.

I wouldn’t say it’s a challenge. It’s a reality. We have to adapt to a world that is faster and bigger.

Thank you Riccardo and Emanuele for your time and input.

© Commodity Conversations ®

This is a short extract of the conversation that will be published this autumn in my new book on the grain business.

A conversation with Karel W. Valken, Global Head Trade & Commodity Finance (“TCF”) Agri for Rabobank

Good morning Karel, could you tell me a little bit about Rabobank and it’s involvement in agriculture?

Rabobank is cooperative bank that emerged from small agricultural cooperative banks founded by Dutch farmers. We have Members but no shareholders.

Agriculture is our backbone. We understand the seasonality and the complexity of farming. As a cooperative it can be a challenge to raise enough capital, and for that reason we tend to be conservative. But the advantage of not being listed is that we can take a longer-term view of the business; we can be more patient. We are perhaps more focused than other banks on contributing to the wellbeing of society.

I saw from your website that your mission statement is “Growing a better world together.”

I recently did a presentation to the bank’s executive board where I looked at the mission statements of the ABCD+ group. They all had similar statements. We are aligned.

“Growing” stands for sustainable, healthy growth, development and progress. “A Better World” goes beyond our clients, employees, and members and includes our communities and our associations. “Together” is important because, as a cooperative bank, we believe in the power of coalitions. Our strength lies in connecting people and knowledge. It is much more than an empty slogan!

This mission is part of our Banking for Food (“B4F”) strategy. It entails the meaningful role we want to play in food transition, and how we can help feed the 9 billion people that will be on this planet in 2050, while respecting planetary boundaries.

In terms of sustainable financing, which commodity presents the greatest challenges?

If you look at my area of responsibility, most challenges are in cocoa and coffee, simply because of their level of complexity and the need to improve the livelihood for smallholders. We spend a lot of time on those two commodities, even though they are much smaller in terms of volume than grains and oilseeds.

Our challenge is to stop deforestation and prevent climate change, while at the same time feed the world: how can those two objectives coexist? We have to embed sustainability in the business and our daily thinking. Our “sustainable toolkit” includes services & financing from Rabo Foundation/Rural Fund but also the Fund we established with United Nations called “Agri3” to combat deforestation and enhance livelihood of smallholder farmers.

Do you think a time will come when Rabobank will only finance commodities that are certified as sustainable?

This year we were the sustainability coordinator of a $2.5 billion Revolving Credit Facility with green features. Customers are getting discounts on the interest rates they pay as long as they meet certain sustainability criteria. I would not be surprised going forward if companies that are not green, or less green, they will still get financing, but they will have to pay a premium.

It is different for palm oil. The consumer pressure is different. We do not finance companies that are not RSPO members. We may sometimes make an exception if a company is not RSPO certified as long as it is committed to become RSPO certified, and has put the correct milestones in place. We can help them on that journey.

Could you describe a typical TCF finance?

TCF has traditionally meant, “transactional financing,” where we would finance, say, a Ukrainian wheat exporter to purchase wheat from farmers and to export it. We can finance the wheat from the moment it is in an upcountry silo though until the importer’s Letter of Credit is opened and cashed.

We make an important distinction for the ABCD+ group—the seven companies covered by your book. The ABCD+s each have individual credit ratings within the bank, which allows for unsecured financing. We provide them with anything up to $1.5 billion in working capital that they can use throughout the globe for different purposes. We do not finance them on a transactional basis. That is why the distinction between ABCD+ companies and non-ABCD+ companies is so important.

How do you see your business evolving in the future?

There are two strategic drivers for our agri-clients: sustainability and innovation.

We divide innovation into two categories: food and feed innovation and digital innovation. The first is to meet changing consumer demands. For example, Dreyfus recently invested in a company producing fake blood from beet for vegetarian burgers. We help our clients with this type of innovation through our franchise. We have a platform called FoodBytes, headquartered in California, which looks at the innovation needed to meet changing consumer demands. We help our clients with start-ups and their incubation to take them to the next step.

On the technical/digital innovation side, we have embedded in our teams a number of people who are looking at, say, Blockchain or robotics. If you look at Dreyfus again, they recently signed a joint partnership with a big e-commerce platform in China, which they will use to sell their brand of soybean oil.

Traditional TCF is changing. The amount of due diligence that we now have to do is such that smaller merchants will have increasing difficulty in obtaining financing. We do not have the mandate to do business with companies with a capital below $25 million, simply because the income we can create from this kind of client is too small—and the risk is too big.

The world’s population is growing and international trade will have to play an increasing role in keeping people fed. International traders will continue to have a role despite disintermediation and the democratisation of information. Their role will be in logistics and risk management, and having a large global footprint will allow them to maintain optionality in the chain.

Thank you Karel for taking the time to share your experience with us!

© Commodity Conversations ®

This is a short extract of an interview to be published in my upcoming book.