Good morning, Charles, and welcome to Commodity Conversations. After an initial experience working in Paris as a broker in the inter-trade physical sugar market, you moved to Durban as the South African Sugar Association’s export manager. SASA was, and I believe still is, the central selling desk for South Africa’s sugar industry. What did the job entail?

It entailed selling about one and a half million tonnes a year of raw and refined sugar to the world markets. We had close relations with some Far East raw sugar refiners, and we gradually built up a white sugar sales book to East Africa, particularly in containers.

It was an exciting role because it combined both futures and physicals. Those are the best roles for a trader because you see how the two interact, giving you a good insight into price discovery. During my three years at SASA, we exported almost five million tonnes. It was fascinating developing new markets and new relationships with the trade and with the destination.

Cargill headhunted you, and you moved, I think, to the Philippines. Is that right?

Yes, I did – as a physical sugar merchandiser and to manage the company’s sugar business there. Cargill wanted to develop their sugar operations in the Philippines with domestic distribution, imports (when the country needed them), and to be involved in some of the US Quota exports. I was there about a year and a half before Cargill brought me back to Geneva as their Structured Trading Manager.

What is structured trading, and how did you manage it?

Cargill had sugar terminal facilities and elevation in Brazil. My job was to develop a downstream sales book through long-term structured contracts to provide the material for the trading team to leverage between origin and destination. Most contracts had quite a bit of optionality on both physical and futures. It’s an extended value chain with plenty of risks to manage.

It was a fascinating job because it linked origin to destination. We had some great customers; visiting their countries was an authentic cultural experience – and insightful into doing business the right way.

Was it more of a merchandising role or more of a customer relations role?

It was both. You must open doors to be able to trade. You need customer skills to develop credibility with customers for them to say, “Yes, let’s become trading partners.” The first cargo is often the hardest. It’s about getting your foot in the door with that first cargo, creating the access and then bringing in the trading cavalry.

My role for the first year and a half initially focused on opening doors and developing longstanding relationships. The subsequent years were more focused on trading around the contracts. It was the best role I could wish to have because it combined the people contact with some good usage of trading skills. Structuring a contract took time and energy, but it was exciting.

How long was an average long-term contract?

It could vary between one year to three years, primarily for three.

Cargill is famous for training their traders. What did you learn from Cargill?

I came to Cargill at a slightly later stage than most. I had done a reasonable amount of trading at SASA. I honed those skills at Cargill. Improving my trading skills and learning new ones was the best part of Cargill.

Cargill taught me the value of optionality. It taught me to always look at a trade from a risk-reward perspective, to take out the emotion, and to seek out value.

I sold to many end users – some of them wealthy families or family-owned companies – who didn’t have to trade. As a trade house, you must trade to exist. It makes a trade house creative in a positive way, seeking out trades that have an optimal risk-reward profile and then following through on the opportunities. Developing the proper risk-reward mentality was crucial to being successful.

After seven years with Cargill, you joined Aisling, one of the most significant and successful commodity hedge funds at that time. What was it like moving from a trade house to a hedge fund?

You can apply the skills you learn in a trade house to a fundamental hedge fund. Most of the people at Aisling were from Cargill, so we shared the same language and way of looking at markets.

At a trade house, you have long-term contracts and a physical flow. You arrive on day one at a hedge fund with a blank paper. You don’t have assets, so you can’t trade around them. You must create value in your own space, which for me was soft commodities, specifically sugar.

I was fortunate in that I moved there in 2009, the start of a bull run. Sugar had been flatlining between twelve and fourteen cents per pound (c/lb). Between 2009 and 2011, the price rallied to 30 c/lb, fell to 14 c/lb, climbed to 36 c/lb, crashed to 20 c/lb, and then retraced to 30 c/lb.

At a hedge fund, you must do your analysis. You must have contacts and put on risk, even though you could be wrong and lose a chunk of money. Once you’ve put your pillars in place, put on that risk, and made a positive PNL, you gain confidence. A hedge fund allows you to do things you wouldn’t be able to do in a trade house. You’re given a lot more risk to manage.

Some top traders from Cargill and elsewhere have recently moved to hedge funds. Would you recommend a physical trader move to a hedge fund?

I would recommend it on two conditions. First, they have at least 15 years of experience in a trade house where they have learned the ins and outs of trading. You don’t want to go to a hedge fund at 25.

The second element is that you must put on risk. Doing that in a trade house is usually a team decision, and you get pulled along. If you put on risk in a hedge fund, it’s all on your shoulders. You must accept that level of responsibility where it can go wrong, and it can go right, and it may be a volatile ride.

You must have a significant risk appetite and sense of independence to be the right fit for a hedge fund. Someone once asked if I could ever relax, to which I replied that it was only stressful when the markets were open. I always slept well at night!

Your next move was to Dubai to head up risk management at Savola. Could you tell our readers about Savola and what commodities you managed?

Savola is the largest food company in the Middle East. It is a Saudi company, well organised and well-established in its markets, particularly in Saudi Arabia and Egypt. Savola buys about two million tonnes of sugar annually for their refineries and about a million and a half tonnes of edible oilseeds. My role in Dubai was to manage the price risks in those flows.

Were you responsible for procuring those two commodities, or did you oversee the hedging and risk management?

Savola has a professional procurement team. I was involved in procurement, but we didn’t do it directly. I managed a separate risk management team.

You stayed in Dubai for a year and a half before returning to Switzerland. Was that move back a personal or professional decision?

It was a bit of both. Savola decided to close the Dubai office and move everything back to Jeddah. I liked Dubai, but in my mind, it always had a time limit to it. It’s a fun place, but I missed Switzerland.

Would you recommend young people to move to Dubai for part of their trading career?

I would, and the younger, the better. It’s a young person’s town like Paris is a young person’s town. Dubai is suited to a sort of 25 to 40 period in your life. It’s a place where you have fun and work hard.

Dubai is a meeting point between East and West, and culturally, it’s fascinating. There are different nationalities, different things going on, and different ways of doing business.

In August 2014, you moved to Schaffhausen in the German-speaking part of Switzerland as director of Commodity Risk Management at Unilever. It must have been quite a cultural shock moving from Dubai to Schaffhausen and from a trading to a risk management role in a Fast-Moving Consumer Goods (FMCG) company. How did that move go?

It went very smoothly. Schaffhausen is a lovely place to live and work. Commodity markets are stressful, but Switzerland allows you to have stress in the day and a more relaxed environment in the evening. It is an excellent combination.

Moving to Schaffhausen and a large multinational suited me well. Unilever has less trading appetite than a company like Cargill but is close to commodity markets.

I enjoyed the broader range of commodities. Until then, I’d done sugar and edible oilseeds, but I handled other things like dairy, cocoa, and some metals at Unilever. It was intellectually stimulating to learn new commodities and meet new people. I managed about eight or nine commodities for the company globally.

Which was your favourite commodity?

Sugar is my favourite commodity, partly because of the people. You might be surprised to hear that the dairy sector is my second. It is fragmented and global, with various international exchanges. It’s a lovely industry with great people, and so quite like sugar. You can also have lots of fun in cocoa if you pick the market right.

What is the difference between a trader and a risk manager?

For me, a trader and a risk manager are similar; if you trade, you must know how to manage risk. Risk is at the heart of it all. You start with risk, and then off you go. To be a successful trader, you must understand and appreciate risk to create a positive and consistent PNL by mitigating the bad trades and maximising the good ones. It uses a more offensive approach.

As a risk manager, you also focus on risk and reward either for hedging decisions or putting on a trading position. It is more of an approach to assess what can go wrong with either decision and put a plan in place to limit losses and capture gains. As a risk manager, I would say you have a broader appreciation of market risk, which in today’s volatile environment, is a more suitable way to approach trading. It uses a more defensive approach.

Okay, what’s the difference between procurement and risk management?

There’s a big difference. The risk manager knows the commodity markets and appreciates risk. The procurement manager knows the process but often has no notion or appreciation of risk.

At Unilever, the risk management team were part of procurement, but the company separated purchasing procurement from risk management. It was sometimes difficult for a procurement manager to understand the risk manager.

To be clear, when you’re talking about risk management here, Charles, you’re talking about commodity price risk management.

Yes. We weren’t responsible for other risks, such as counterparty risk. That was the procurement manager’s job.

FMCG companies are structurally short of commodities. Are the FMCG companies forced to trade the markets?

As a risk manager in an FMCG company, you look for price certainty and to mitigate price volatility. It is a very different mindset from a trader in a trade house who seeks out risk in price volatility for profit maximisation.

The objective of a risk manager in an FMCG company is to provide as flat a price line as possible, so the business can lock in margins over the medium and long term while at the same time using the volatility in the market to make the company more competitive.

An FMCG company wants you to flat line, but to be competitive, it needs the bumps – the ups and downs of volatility – to pick the right timing to cover hedges. It’s a delicate balancing act.

Commodity risk management isn’t just about beating an internal forecast. Nor is it about ensuring there’s no inflation from last year’s cost price. Inflation is the same for everybody. If wheat or sugar prices have gone up from last year, they have gone up for everyone.

To look at it from a pure procurement mindset is missing the point that it’s crucial to mitigate costs by buying at an opportune time, irrespective of inflation.

Consumer companies must have a strategy and build governance around it. They must have a mindset as to what is making them competitive. Beating last year’s price or the end-month forecasts is insufficient.

How do FMCG companies trade the market? If they thought, for example, that the wheat or sugar price would go up, do they buy further forward than they would otherwise do? And if they thought the prices would fall, they would buy more hand-to-mouth. Is that how it works?

Yes.

I suspect FMCG companies are not as fast-moving as the name implies. How quickly could you get your senior management to take the trading decisions?

It would be quicker and easier to get approval when prices are low. It is difficult to convince senior management to put on hedges when the market is rising. It’s challenging for FMCG companies to understand why they need to pay up – and why the price might not revert to mean. It can cause delay, and a delay in an upward-trending market will mean additional costs. It can be challenging, but people trust you once you have a good track record. It speeds up the decision-making process.

The challenge is often with the structure itself. FMCG companies are heavy on people. It can take time to get everybody’s buy-in.

Companies must trust their risk management teams as they trust their finance teams. It’s an area of development in many FMCG companies.

How do you know when a price risk manager is doing well? What are the benchmarks?

It’s easy if you are a risk manager in a trading company – you look at the P&L.

A risk manager in a procurement function doesn’t have a clear PNL. You can look at it in various ways, but you typically base it off a market average versus where you hedge. You can also look at it versus the cost of the additional inflation or deflation that occurred because you made those decisions.

In all honesty, the area is ill-defined. We looked at it from different angles over the years, but there’s no correct method because there’s no P&L per se. You’re trying to beat the market and to keep it all as flatlined as possible for the business.

The rest is about whether you communicated well and involved the right people in the decision process.

What was the most challenging part of your role at an FMCG? Was it getting the markets right or explaining how commodity markets work to your colleagues?

Considering their volatility, we had a good run on most commodities, particularly dairy, cocoa and sugar. The challenge was more the education process, getting the teams to understand the markets.

In most FMCG companies, people move around every three or four years, so you start again each time someone new comes along. It can be frustrating to rinse and repeat, having built up a certain amount of knowledge and buy-in. FMCG companies like to move their employees between different roles and geographies. Traders tend to stay in their markets for many years. I think FMCG companies should look at more longevity in specific positions.

After over seven years with Unilever, you established your own consultancy company – CFCommodities – in January 2022. Could you tell me a little bit about that?

I had wanted to do it for a while, and I had the backing of some long-time customers. There are three aspects to what the company does today.

The first is to offer a boutique risk management advisory to industrial clients in sugar, grains and dairy. I provide insights into managing risk, pricing, and physical flows. Not all commodities trade the same way, so understanding the dynamics of each (volatility, liquidity, fundamentals) is essential to provide insightful advice.

Second, I offer a consulting service to some large management consultancies who want to understand how commodity price risk management works in the consumer segment.

Third, the company trades on the markets and provides a trading service to customers. It’s been a busy and active time, and the commodity markets have provided plenty of volatility and opportunity in the last 15 months.

So, the company takes positions on the market? Doesn’t it take away your independence as an advisor?

I don’t think it does. As Scott Irwin mentioned in your recent conversation, you must have some skin in the game to be a good advisor – but not enough to get flayed. I tell my clients what positions I take, my rationality for taking them, and my estimated risk reward. As Ralph Potter emphasised in his comments, trading is risk management. It is my speciality, and I don’t see any conflict of interest—quite the reverse.

Isn’t it difficult to follow multiple markets and be an expert in everything?

The best traders and risk managers know how little they know. As Socrates, one of history’s greatest philosophers, famously said, “All I know is that I know nothing”.

I like to think that I understand markets. I also have hands-on experience in the physical flows of the commodities I follow. There are some excellent, expert market analysts out there, and I buy in their services. I like the structure I have. It works.

To sum up, you started as a broker in Paris but moved on to become a sugar exporter in Durban and a merchant in Manila. You were a structured trade manager and a hedge fund trader in Geneva before becoming a commodity risk manager, first in Dubai and then Schaffhausen. You now have your own company. Which part of your career did you most enjoy?

There were three roles I particularly enjoyed before starting my company.

I liked my experience in South Africa. I was young to have that responsibility and exposure to the markets and combine futures and physicals. It was nice having a good industry behind you.

The second role I liked was being the structured trade guy at Cargill. It had everything I would want in a job: customer contact, analysis, and trading. I also loved learning more about managing risk and optionality. It ticked all the boxes and was in Geneva, a lovely city.

Finally, the hedge fund was challenging, exciting, and rewarding. A thrill a minute, and we even took delivery off the exchange twice!

Right up there is what I do now, running my own company. I can decide what to do and how and where to do it. I felt positive and happy from the day I started. It links everything I enjoy: trading, some excellent and reliable long-term customers, advice, analysis, and travel. I couldn’t ask for a better job.

I talked with Jeremy Reynolds a while back. He recently set up a shared-service company offering trade operations and contract execution. It seems you are doing the same but with a price risk management service. Is this move to shared services a coincidence, or is it a general trend?

It makes sense for some companies to outsource rather than hire. Using shared services, you access experienced and credible people. It is perhaps something the large consumer companies should use more, particularly in today’s environment where the markets are getting more volatile. It could be in their interest to buy in some of this off-the-shelf expertise.

Thank you, Charles. I wish you every success with your company.

© Commodity Conversations® 2023

This is part of a series Commodity Professionals – The People Behind The Trade.

Scott Irwin is the Laurence J. Norton Chair of Agricultural Marketing, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign. He is one of – if not the – most respected agricultural commodity academics globally.

Scott, could you tell me briefly about your new book, Back to the Futures and what prompted you to write it?

The book’s purpose is to be an entertaining way to learn about commodity futures markets, emphasising the fun part. It has a serious teaching purpose, but it’s wrapped in, hopefully, entertainment that keeps the reader moving along.

Why did I write it? I have been teaching, writing, and researching commodity markets since I was a senior in high school. My interest in the markets goes way back. I’ve been involved in them as an academic my whole adult life.

Most people don’t understand how markets work. I wanted to write something to explain how commodity markets work, but I didn’t want to do another academic project or write a textbook.

It’s also my professional DNA. Every ten or fifteen years, I need to do something that challenges me and keeps me interested and energetic. Writing this book was one of those challenges.

Would you describe the book as a biography?

It has a memoir or autobiographical component, but it’s neither an autobiography nor a memoir.

I included the memoir material to make the book fun. I wanted to make it entertaining to entice the reader to learn about futures markets.

As a good friend told me, each memoir story is designed to be a market parable. Each one is intended to illustrate some part of the operation or functioning of commodity futures markets.

I introduce my childhood friend, Jack Hunter, and his daredevil, reckless behaviour early in the book. I’m as equally guilty as Jack was, but I use Jack as my stand-in for a speculator, taking unreasonable risks. A few chapters later, I introduce my father, a farmer, to explain the concept of hedging. He struggled with that aspect of his farm business; his personal stories illustrate that.

You co-authored the book with Doug Peterson.

Doug is a close friend and a professional author with over 70 books to his credit.

About five or six years ago, I discussed the idea for this book with him. He loved drawing on my large inventory of crazy, insane stories growing up in rural Iowa. I would not have had the courage to write the book without Doug.

I knew that I needed Doug to achieve my objective of a fun way to teach people about the futures markets. After nearly 40 years of writing for an academic audience, I knew I didn’t have the skills to write the book I envisaged.

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Did you have a target audience in mind when you were writing it?

My target audience was anyone interested in learning about commodity markets – someone with some knowledge and experience who would like to develop a deeper understanding of the markets. I view my core audience as farmers, hedgers, merchandisers, and agricultural commodity traders. I aimed the book at someone who would never read a textbook but wanted to learn.

Let’s talk now a little bit about you. You had two attempts to trade on the grain futures markets. The first was in August 1981 when you were a graduate student, and you thought that the market was overestimating yields. The second was more recently when you believed the market was overestimating acreage. You lost money on both occasions. What did you learn from those experiences?

The first was hair raising, a near-death for my graduate school experience. It taught me that I didn’t have the nerves to be a trader.

I was stupid to take those kinds of risks as a graduate student – it was insane. But it was a good lesson to learn without getting bounced out of graduate school. It taught me to stick to what I’m good at. I am pretty good at academics and research, but I don’t have the stomach to carry that financial risk. I’m just not built that way.

If you’d made money on that first trade, would you have persevered and tried to become a trader?

That’s an interesting question.

It was the classic newbie trader story. I made enough money in the first few months to be dangerous. I got blown out. I had considered buying a seat on the old Mid-America Commodity Exchange. Had I not been blown out, I may have done that. However, the odds of that happening were low.

Traders typically experience enormous volatility in their fortunes. I always like to tell people that if they want to understand what the trading process is like, go read Jack Schweiger’s first book, Market Wizards. You will shake your head at the financial calamity that most traders experienced before becoming successful. I don’t think I had the fortitude to push through that. I didn’t love it that much.

 I started trading again in 2010. First, I became a principal in a small firm providing real-time yield forecasts for US corn and soybeans. I believed it could give me the edge a trader must have to succeed.

Second, my father passed away in 2009. Our family still had a substantial farm operation, and I inherited the corn and soybean marketing for our farms back in Iowa, working with my mother. It forced me to be closer to the markets on a day-to-day basis.

Third, I believe that trading makes me a better teacher and a better researcher. It gives me a quicker awareness of emerging issues in the markets. My motivation was to have skin in the game, but not so much that you get flayed!

So, yes, I trade now a little, but only options.

Your book describes how your father repeatedly tried to beat the markets but failed. What was he doing wrong?

I believe he made a series of errors that most farmers repeat.

The fundamental purpose of hedging is to manage your risk, to reduce the fluctuations in your revenue over time. However, most hedgers work their positions selectively, looking to pick up some gain and extra return. Farmers aren’t unusual in this regard. They want to manage the risk exposure of their crops and livestock, but they don’t understand that you must have an edge to be successful.

It’s hard for farmers psychically because they’re so connected to their crops. They have an intimate knowledge of what’s going on in their fields in their area. It leads them to believe they have an edge about what will happen with supply. There is a maxim: don’t get caught looking out your back door. It was always a big problem for my dad.

As a farmer, you compete in an incredibly sophisticated, billion-dollar business where your opponents are more sophisticated than you. You must understand who you’re trying to beat.

If you’re going to play the game, you must be prepared for the ups and downs. Even if you’re beating the market on average over time, you will have significant drawdowns and big gains. Hopefully, a few big gains offset your losses.

I don’t think my father had the mindset to understand the overall purpose of what he was doing and how difficult it was to win the game of selective hedging.

Since my dad died in 2009, I do the marketing with my mom, who will be 88 in a few days. She would have made one heck of a good trader. Her instincts about the markets are better than mine. A good trader has an intuition that I can’t describe and a personality that can deal with the ups and downs. She has both.

You must also have a short memory to survive if you are speculating or selectively hedging. We’ve made some big mistakes in our marketing, but my mom always moves quickly onto the next opportunity.

 My dad wanted so badly to hit the highs. It’s a terrible mentality to win in this game. If we do a great job marketing our corn, we’ll get a better price of 20 or 25 cents a bushel than our neighbours. It doesn’t sound much, but if you do that for 20 years, man, it adds up.

Your mother was a better trader than your dad. It raises the question: why there aren’t there more women traders in the market?

Almost all US universities are now majority female, but, as far as agricultural commodities are concerned, I’m lucky if I get 25 per cent females. It is a puzzle to me that I do not understand. I see it changing, though, slowly. More and more females are going into grain merchandising, but it’s still not the 50 per cent it should be.

You mentioned that you need an edge to be a successful trader. What else do you need?

You must have an above-average ability to collect and process information.

Equally important is the right kind of psychological makeup. Probably the best typology for a trader I’ve ever seen is in the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner. It is one of my favourite books of the last decade. Being a trader is not necessarily the same as being a forecaster, but this book is about people who make predictions. A trader constantly makes predictions.

A good trader must have a Sherlock Holmes brain – an insatiable curiosity to dig into the facts and understand relationships – and not necessarily believe what everybody else thinks. It’s not a normal personality, the ability to believe in your own skills and attributes. But to be a great trader, you must have that kind of Sherlock Holmes personality.

Great traders must have a nimbleness of mind to know when they’re wrong and change their positions. I don’t think there’s any way to teach that.

Great traders are super intelligent people, but they also have the drive and psychology to take that cognitive frame of mind and implement it into trading.

The Super Forecasters Project suggests that maybe only one to two per cent of people line up with the potential to be a super forecaster or a super trader. It’s a rare set of skills.

At one stage in your career, you tracked market advisors and found that, except for Dan Basse, they added little value to the market. Why do you think that is?

First, let me say that even though they didn’t necessarily beat the market, it didn’t mean they didn’t provide value to their farmer subscribers. We believe that many farmers underperform in the markets. If you faithfully follow the advice of these services, at least you’d be average, which would be an improvement. As you can imagine, that was a challenging message to sell.

So why did these firms not consistently deliver value? I think it’s because they tended to be boutique shops without the resources to be competitive with the big grain trading companies.

You’re famous for solving what has been called the crime of the century in the grain markets. During the 2000s, wheat futures didn’t converge with the physicals at expiry. Most observers at the time blamed excessive speculation, particularly by the index funds. You found that it was a technical issue regarding exchange-stipulated storage fees: traders saw that the futures were worth more than the physicals because they had a cheaper cost of storage to carry them. My question is, why couldn’t you have asked one of the trade houses? After all, the trade houses were taking delivery of the futures.

We did try to talk to the big grain companies, but they weren’t talking. They’re highly jealous of protecting any perceived edge because they know how hard it is to win, even for them. They’ve got the other majors wanting to crush them all the time. Nobody would say, okay, Professor, I will sit you down and explain this to you.

They also had agendas regarding what they perceived as their commercial advantage in the delivery process. They maybe wanted to use the issue to drive significant changes in the contracts that they felt would have benefited them commercially.

The other thing is that this had never happened to anything remotely this magnitude or length of time. So even the big grain traders were slightly taken aback and unsure how to explain it.

I understand that you have a second book coming out soon on the role of index funds and speculators. Throughout your career, you have relentlessly tried to explain that speculators add value to the markets. Why is it so hard to get that message across?

Whenever fluctuations in commodity prices cause economic pain, there’s a natural, psychological reaction to look for a scapegoat. It’s a human emotion, and it’s repeated over and over.

There is also a fallacious belief that if you’re not engaged in the physical side of the market, for example, processing or growing corn, you are somehow a parasite in the economic system. It is the belief that you can only contribute if you’re actively involved in the physical side of the production and consumption of goods.

On top of that, there are spectacular stories historically – and they’re still sometimes occurring today – of attempts at market manipulation. It feeds into that anti-speculation mentality.

Now I have a question about high-frequency trading (HFT). You write in your book about the FBI investigations into the floor locals in the 1980s. The agency fined locals millions of dollars for front-running orders. Some in the physical trade argue that HFT funds have replaced locals in front running orders and spoofing the market by placing and cancelling large orders. Do you have a view on high-frequency trading? Do they add or distract value?

I don’t think that there’s any doubt that they add value. I covered the issue in a 2022 paper in my second book. It’s one of my favourites because we accidentally discovered something very significant. We examined how much commodity index investors paid for the monthly role in order execution costs.  We measured it back to the early 1990s for the GSCI (Goldman Sachs Commodity Index).

What we found was astonishing. Until 2007, index investors paid through the nose to roll their positions, but the cost fell significantly after 2007.

How do you explain that?

We don’t have a formal model to prove it, but it’s evident that it was the move to electronic trade. It was an 80 per cent drop in their order execution costs. Electronic trading with high-frequency traders is a vastly cheaper way to trade than open outcry.

We must learn what guardrails we need in this new world of high-frequency trading and electronic markets. It is a learning process. For the past five years, it has been our top research priority for my group here at the University of Illinois. It’s a big economic question.

You mentioned in your book that you are possibly better known now for your work on biofuels than on the futures markets. In 2007, a UN spokesman called biofuels a crime against humanity. The UN later withdrew that statement, but some still argue that biofuels are unethical because they raise food prices and cause hunger among the poor. What would you say to that?

Economically, it’s not a simple question to answer. It’s complicated on both the supply and the demand side.

Let me start on the supply side. The growth of biofuels has certainly raised prices, principally corn and soybean prices. I don’t think anyone can deny that, but by how much is a great debate among economists. And it matters. My view is it’s substantial for corn prices.

But what’s interesting on that supply side is that ethanol can now stand on its own two feet without mandates or tax credits. It’s competitive as a blending component in gasoline blends in the US. We wouldn’t use one gallon less if you removed the mandates. It’s not true for renewable diesel and biodiesel; both are wildly expensive relative to the diesel they replace.

The intriguing part of this – why it is so complex – is that many poor people in the world are subsistence or small-scale farmers who benefit from higher agricultural prices. High food prices hurt the urban poor – and there’s where the rioting and political problems occur. Out in the countryside, farmers quietly benefit from higher prices.

It’s not as simple to say higher prices hurt the global poor. It is a false statement on the surface. I’ve read country studies that suggest higher agricultural prices benefit some less developed countries, particularly those with extensive crop agriculture. Unfortunately, it’s a perspective few people want to hear, particularly in Europe.

I recognise that food price spikes hurt billions of people in less developed urban settings. Still, perhaps a more significant issue is that beggar thy neighbour export restrictions aggravate their suffering. When a country bans food exports to protect its domestic consumers, it transfers the price volatility to importing countries. It is a big problem.

Do you think biofuels have a role to play in the decarbonisation of the economy, or do you see the car fleet becoming exclusively electric?

I’ve been public in my views about the transition that we’re in, and I’m not particularly popular among farm groups and the biofuels industry. But you are not paying attention if you don’t believe that most of our surface transportation fleet will become electric. It’s coming. EVs are vastly better consumer products.

However, I believe the EV evangelists portray a faster transition than will happen. In the US, we have nearly 280 million internal combustion engines that we must depreciate. It is going to take decades.

Tractors began coming to the US in the late 1910s and early 1920s. It wasn’t until after World War II that tractors and not horses provided more than half of the power in US agriculture. There was a lot of horse agriculture in the 1950s in the United States. The market for ethanol and gasoline will eventually peak, but these transitions take a long time at this societal scale.

The decline in diesel usage will probably be slower, but it will eventually go down. However, biofuels have an ace in the hole in sustainable air fuel (SAF). It’s a vast global fuel market. We will need liquid jet fuel for the foreseeable future, and biofuels will play an essential role in decarbonising aviation. They may also have a role in maritime shipping.

What about renewable diesel? The US has some massive plans, but does it have enough vegetable oil? And can trucks be electrified?

Let’s start with the last one. Can trucks be electrified? Probably, but I’m guessing it’ll be slower because the amount of power you need will make the batteries so heavy they’d be inefficient, at least for a while. Short-haul delivery trucks will be electrified sooner; long-haul trucks and trains will take longer.

Regarding your question about renewable diesel, there is enough feedstock for the renewable diesel plants we’re building. If they all get built, we can supply them. But can we do it at a price that won’t cause a huge political controversy? We may price ourselves out of the exports of fats and oils.

I’m writing a lot about it now in my research. I’m sceptical that all the announced capacity will come online. I don’t think we will mandate enough demand through the RFS to justify all the plants we’re building.

I wanted to ask you about the courses your university offers in agricultural marketing.

We offer three courses at the undergraduate level.

The first is a popular freshman-sophomore course on agricultural marketing. We also provide junior-senior classes on commodity price analysis and commodity futures markets. And then we have the commodity futures markets course, looking at the markets and how you hedge and speculate in them.

We also offer three courses at the graduate level. One covers time series econometrics applications in commodity futures markets. We have a second one that covers traditional supply and demand and trade policy in agricultural markets.

And then, we have a unique and fantastic course in our PhD program, a one-semester seminar course where students read as much cutting-edge literature as they can in a semester. It’s kind of the jumping-off point for students doing dissertation research.

Last question. What advice would you give a young person looking for a career in agricultural marketing?

First, get as much academic training as you can. We have recruiters constantly engaging with the students at the undergraduate level. We never have enough Master students for the market demand.

Second, while you’re getting that training, do as many internships with grain and trading companies as possible to find out if you have the profile for the business.

Third, I tell my students to start following the markets and the daily market narrative. Get engaged in what I call the everyday market conversation.

Fourth, read as much as you can. I tell my students to start with your book, Commodity Conversations. I then ask them to read The Economics of Futures Trading by Thomas A. Hieronymus, followed by The World for Sale by Javier Blas and Jack Farchy.

I’m honoured to be in the top three. Thank you, Scott, for your time and input. It has been a fascinating conversation, and I have greatly enjoyed talking with you.

© Commodity Conversations ® 2023

Ralph Potter is an ex-Green Beret, the American equivalent of the British Special Forces. For the past forty years, he has been an active trader and broker on the world sugar market and has mentored many of the sugar market’s most successful traders.

I met Ralph at his local pub in Surrey, England and asked him how he got into the sugar business.

I got into the sugar club by accident. I had returned from the Vietnam War and was attending the University of Illinois. I had some money to invest. My grandfather was a farmer, and when I was a boy, I used to go with him to talk to farmers about the price of corn. I learned at an early age that the price would go up and down.

While at university, I seconded myself to a small grain and feed merchant. I first noticed them because their parking lot was full of Cadillacs, Mercedes, and Porches – and even an AC Cobra. That was in 1971, a very auspicious time to learn to trade grains. They paid me something but not much. I worked with a rag in one hand and some chalk in the other: a girl would call out the prices from the telex ticker tape, and I would erase the old price and mark up the new price on the board.

The room was half the size of a tennis court with eight desks. At each desk was a grain merchant with an assistant, all on several phones to various clients, farmers, elevator operators, chick feed buyers, that sort of stuff. It was mainly for corn, soymeal, and beans. They taught me a method I have used for 44 years, with a few improvements. The heart of the method is technical analysis and management of the position.

After a few months, I was short of two soybean oil contracts. At the weekend, I went out to play soccer, and frost was all over the ground – it was 9^th September. That cost me half of my trading account. It was an expensive lesson.

I met a guy in a bar who had inherited $8,000 from his grandmother. He bought copper. His trading account went from $8,000 to $60,000. Remember that at that time, you could buy a house for $14,000. He ended up with a debit of $4,000. He had no system of money management. That was a lesson I learned from someone else’s bad habit.

When I left College, I ended up at Merrill Lynch as a registered commodity broker, but I struggled to get clients in the grains. I was too young; it felt that you had to be at least ninety to be respected in the grain markets!

By some accident, I ended up with ADM’s sugar account; no one else in the office wanted it. I knew nothing about sugar, but ADM gave me a chance. Once I had one sugar client, I concentrated on the sugar market and found it easier to win other big sugar clients.

What lessons did you learn at that time?

Being in the military taught me two things. First, a bad plan poorly executed is better than no plan. Second, you should only commit reserves to exploit and consolidate victory, never to salvage defeat. Another way of saying that is, “Don’t throw good money after bad.”

I once asked a friend how he traded. He replied that he tossed a coin to decide whether to buy or sell.

“That’s it?” I asked. “That’s your trading system?”

“Yes,” he replied, “but I also have a rule never to take a losing position home overnight.”

It’s not the trigger that gets you into the market that’s important. It’s about managing that position once you have put it on.

There is a famous story about a speculator at EF Hutton who got his trading recommendations through a Coke bottle wrapped in tin foil; a coat hanger acted as an aerial that he claimed picked up trading recommendations from outer space. Of course, everyone ridiculed him.

At that time, people didn’t have screens, so they would come to their broker’s office and sit and watch the prices on the clacking electronic quote boards at the front of the room. When they wanted to trade, they would walk up to the order clerk and hand them their order on a slip of paper.

Most of these people lost money, but this guy had been trading for several years and was a rare success. He would receive a signal from his Coke bottle to, say, buy corn. He would lord it over everyone else if he were winning on his position. He enjoyed that. The net result was that he would let his profits run and not snatch them. But when he was losing, the others ridiculed him so much that he quickly exited any losing positions.

When a winning position gave back a certain percentage, he would quickly get out for the same reasons. So, money management worked even for a crazy person – someone who received trading signals from outer space.

Can you briefly explain how you trade?

I don’t want to explain it in detail, but it is all about managing the position and taking the whipsaws. A whipsaw is when the market moves through a specific price point. You put on a trade, but the market reverses again, and you must reverse that position. It is the way floor traders used to trade.

Most people try to trade in a way to avoid whipsaws. The average trader would rather lose money than get whipsawed. I embrace whipsaws. It is like trying to be a boxer without getting punched. No one likes getting hit, but you must let your opponent strike you on your forearms, shoulders, or gloves – a glancing blow. You avoid being smacked on the head but take the more minor hits.

What is the biggest mistake that traders make?

The biggest mistake traders make is snatching profits. There is a saying that no one ever went broke taking a profit, but that is a lie; people go broke snatching small profits that don’t offset their losses. People often grab profits expecting to return to the market again at a better price. They may do, but usually, the market runs away, and they either must chase it, or they don’t get back in.

The best thing to do if you have a winning position in the commodity markets is to take partial profits in a non-emotional manner. You reduce the size of your position, but you hold on to the core. Trimming, or reducing a position, provides you with a psychological way of holding on to your core trade.

What is a trader’s greatest enemy?

A trader’s greatest enemy is lack of discipline and succumbing to hubris – when you think you know more than the market because you have been lucky or succeeded in using your trading method.

The worst thing that can happen is when a trader thinks he knows something and disregards his rules. It can be when he has invested so much of his credibility – and so much of his personality – into putting on a trade, it makes it hard to exit. It’s hard to change your mind. That’s why you must have a risk point.

What makes a good trader?

The best traders are the ones who have unconventional vision and self-belief: to stick your neck out and have the guts to say, “I am going to commit my company’s money – or my investors’ money – to make this trade. It takes someone with exceptional self-belief. Most traders on a desk just want to keep their heads down.

But you must take the risk. You must have the guts to trade. You also must have an absolute disdain for the opinions of other people. You don’t have to tell everybody you think they are full of it; other people’s views mustn’t sway you.

To succeed in the markets, you must have a well-developed sense of fear: it will keep you in business longer than brilliance. Brilliance can desert you in critical moments. Some traders are naturals, but if nobody trains them properly, they blow themselves up and take everyone else with them.

You talk about risk management, but don’t you think that most companies have taken risk management too far?

No, I don’t. But I do think some companies have taken the process too far. Over recent years some of the more prominent trading companies have cashed in and gone public. As public companies, they find that they must comply with thousands of new regulations which can swamp the management.

Unfortunately, some companies no longer view a good trader as an asset. They consider them more as a liability – a risk. The creative guys get swamped with compliance, process, and management issues.

I could never work for a big company these days; I would be sacked within a year. There is a joke about an old trader interviewing for a job. “What do you think is your greatest weakness?” he was asked. “I’m too honest,” he answered. “I don’t think honesty is a weakness,” the interviewer replied. “I don’t give a damn what you think,” replied the unsuccessful candidate.

So, you have been happier as a sole trader?

I have traded significant positions for big trade houses and a couple of hedge funds, but I never aspired to be a multimillionaire. I don’t have the temperament or the drive. Every time I wanted something like a car or a yacht, I got it, but then I was happy with that.

The excess money I made I gave away to people who needed it more than me. I have enough money, even if my wife disagrees. I like being part of the sugar club, part of the team. That was – and is – more important to me.

What I enjoy now is teaching. I am happy to give something back to the sugar business; to teach young people about markets. I try to show them how to use technical tools and position management in combination with their fundamental trading strategies.

Remember, the trade houses’ primary role is efficiently moving food around.   If I can help them to do that profitably, then I am happy.

Do traders manipulate markets?

Good traders don’t need to manipulate markets; they can make money on their abilities. Weak traders may try to manipulate markets, but it seldom ever works, or if it works, it only works for a limited time. The ceiling quickly falls in on them.

But what if traders get together – could that give them the market power to do it?

Maybe for a while, but the price has a habit of going where it wants. You may stop it for a time, but you will never stop it for long. If you push prices up, extra supply will come out. If you push prices down, supply will dry up. Traders invariably lose money if they try and push prices away from where they should be. I have seen some big companies try and fail spectacularly.

It is difficult to manipulate a market. It is much easier to manipulate a government, but then you don’t have to be a trader to do that. Everyone can manipulate a government; it’s called democracy.

Thank you, Ralph, for your time and comments.

© Commodity Conversations® 2023

This interview is part of an occasional series I call “Classic Conversations” which was first published in my book The Sugar Casino, available on Amazon.

Good morning, Jerome, and welcome to Commodity Conversations. Could you please tell me about yourself and your career so far?

I am Swiss and grew up in a little village in the Swiss Alps. My mother would probably tell you that when I was growing up, I spent more time on the ski slopes or the hockey rink than in the classroom. However, I was good with numbers and decided to go into accountancy, joining KPMG. I then joined PWC, where I passed my accountancy qualifications.

One of my main audit clients was an oil trading company, and I spent a lot of time in their offices. I quickly became interested in supply chains and trading. I found it fascinating to be able to put together the global news that I was reading in the newspapers with my day job. Geopolitics has always interested me. It was fascinating to me.

There was someone from Cargill on my accountancy course, and he suggested that I apply for a position with the company. I went through a round of interviews, and Cargill gave me a job. It was not in Geneva as I had expected, but in an animal feed nutrition mill that Cargill had recently bought in Switzerland. It was a family business that had to be integrated – financially, system-wise, and culturally – into a big multinational. It was a fabulous experience. I learned agribusiness there, stocks, shrink, and cash flow – all pragmatic and tangible activities.

After spending two years with the feed mill, I moved to Geneva, where I became the controller for their energy business. Cargill then sent me to Minneapolis to work as a financial controller in their North American energy business. I spent four years there.

After deciding to focus more on its core agribusiness, Cargill sold their energy business to Macquarie Bank. I was involved in the transaction, and headhunters began to call me, offering me various positions. One of those positions was as a financial controller for ADM’s grains business out of Hamburg, Germany. I talked it over with my wife, and we decided to take the offer and move to Germany, where I spent three years.

I then moved back to Switzerland with ADM to be the divisional CFO (Chief Financial Officer) of Global Trade – – ADM’s international distribution and marketing arm.

Just last week, ADM also made me CFO of their International Corn Milling business – starch and sweeteners.

Was it easy for your family to follow you to Minneapolis and Hamburg?

There is a saying that you cry twice when your company transfers you to Minneapolis – once when you arrive and once when you leave. It was initially complicated. My wife worked for Nestlé and had to quit her job when we moved to Minneapolis. Nestlé contacted her after we had been there for a couple of months and offered her a position.

As for my two daughters, they quickly made new friends within the French-speaking community. It is easier to create bonds with people who speak the same language. It was a fantastic time for the whole family – and we visited 28 states in our four years in the US!

Is your wife also in finance?

No, she is head of procurement for Nespresso. ADM doesn’t trade coffee, so there is no conflict of interest.

Could you tell me a little about the role of the CFO in an organisation like ADM?

I see my principal role as the glue between trading, execution, and the other functions within the company. I act as a chief of staff, supporting the BU (Business Unit) presidents in their roles and providing the financial information they need to make the best possible decisions. I work with them to develop and implement the strategy.

I play a coordinating role in liaising with corporate headquarters and the group CFO, making sure that we are in tune with corporate strategy.

I am overall in charge of the contract execution function and have a role in seeking efficiencies and increasing productivity. Trading is a high-volume, low-margin business, so productivity gains are always welcome.

Lastly, I have a fiduciary responsibility to ensure our financial accounts and reporting are timely. ADM is a publicly listed company.

What is the difference between a CFO and a Financial Controller? I see you were both during your career.

The role of a financial controller is to ensure that accounting and reporting align with US GAAP (Generally Accepted Accounting Principles).

In addition to a fiduciary role, financial controllers ensure that internal controls are respected and follow up on internal audits. Financial controllers report to the CFO.

So financial controllers have more of an audit, compliance, and accountancy role than a CFO?

They ensure that the company respects internal and external financial controls and complies with international accounting standards. This is a critical role as the last thing a listed company wants is to restate their historical financials for misstatement or error under the governance of the SEC (US Securities and Exchange Commission)

Besides controlling, another important part of the finance function is FP&A (Financial Planning and Analysis); each BU has a yearly plan, and we have a monthly meeting to ensure everything is on track. Part of my job is forecasting future earnings and capital requirements and updating those forecasts in line with any market changes or events.

I work with the BU president to ensure that the BU’s plans respect the company’s capital limits. I also look at the expected returns of new investments.

Is it fair to say that a financial controller would focus more on the past while a CFO would look more to the future?

I think that is a fair way to put it.

What are the biggest challenges in your role as CFO of a major trade house?

It is probably managing the information flow. We have a fantastic bunch of people here at ADM, and they constantly come up with ideas for new businesses or how to develop our existing businesses.

It can be challenging to separate the great ideas from the good ones – to decide where to allocate our resources and ensure that we have covered all the risks and business implications, such as tax.

It can sometimes be frustrating for team members when their ideas are turned down or shelved for later, but we all understand that we must prioritise the best ideas.

I don’t work on my own. We have a finance team, a controller team, a financial analysis team, and a business development team. Together we ensure we continue to invest and that our existing businesses operate profitably.

How closely do you work with your risk managers?

Very closely.

What are your most significant risks?

Credit and counterparty risk is one – the risk of a client or supplier defaulting on a contract.

When I spoke with Greg Morris for my book The New Merchants of Grain, he mentioned that ADM operates from origin to end destination and that this mitigates much of the counterparty risk. Is that still true?

Operating along the supply chain and sourcing commodities from local ADM companies reduces counterparty risk.

People in the energy markets often trade ten years forward. We don’t deal that far ahead in agriculture, and that reduces our performance risk. We trade this crop year and the next one, so the mark-to-market risk is less than in the energy markets.

What are the other risks?

Operational risk – a boat stuck somewhere that could lead to a vessel arriving late and being out of contract – so default risk.

There is weather risk, for example, a hurricane in the US or a drought in Argentina. We have an advantage because we are a global company with a geographically diverse portfolio. It reduces our market risk compared to local players. If there is a drought in Argentina, we can source soybean meal from Brazil or the US.

There is also a risk of having a rogue trade somewhere. I experienced it earlier in my career, and it’s not nice. One of the worst nightmares for a financial controller is to have “bottom drawer contracts,” transactions that traders don’t put into the system.

I am fortunate to work with great leaders who set the environment – the tone – from the top. They acknowledge that traders can make mistakes and that errors happen. If the trader declares it immediately, they know they will be treated fairly. However, they will be harshly treated if they try and hide it.

Do you have trouble sleeping?

I am cheerful and optimistic, and business problems don’t keep me awake at night. A big part of our job is to deal with these issues and find mitigation strategies and solutions when they pop up.

However, as I mentioned earlier, I do have two teenage daughters. They can sometimes be more challenging than a ship that is running late.

Moving on to the finance function, please explain the difference between transactional or cargo-by-cargo finance and overall finance.

Big companies can issue bonds and syndicate bank loans. We don’t have to worry too much about financing our treasury operations.

Smaller companies are in a less fortunate position and often struggle to obtain the financing they need. Banks will often only finance them on a cargo-by-cargo basis.

In 2019 I interviewed Karel Valken, the head of CTF at Rabobank. He told me that the bank only wanted to finance the big trade houses because the due diligence made it unprofitable to fund the smaller trade houses. How easy is it for small trading companies to obtain commodity trade finance?

Funding can be challenging for smaller companies, but it shouldn’t be a problem if the margins are there. A trading company will get financing if it is making profitable deals.

CFOs in small companies will spend more of their time obtaining financing than allocating it internally. I spend most of my time not raising funds but ensuring we allocate them efficiently.

McKinsey recently wrote that the commodity trading sector would need an extra $300- $500 billion in trade finance. Do you agree, and if so, is it a problem?

The world trade in agricultural commodities will not grind to a halt for lack of finance. I am a great believer in markets. If the margins are there, the finance will be available. The margins will adjust to enable the sector to finance its activities.

Why do banks come in and out of trade finance – do the risks of a blow-up offset the margins on regular business?

Sometimes, a bank might come into commodity trade financing without understanding how trading works and how traders manage the risks. It eventually leads to problems, and the bank will exit the sector. We work closely with our banking partners to ensure they understand our business and we understand theirs.

Do you have to compete internally for funds?

Yes, we compete internally for capital. Most big companies set thresholds below which a BU president can take investment decisions. Above those thresholds, they would have to take the plan to HQ and compete for internal funds.

But before doing that, we must ask, “Is the projected investment a good strategic fit?” For example, we would not invest today in a banana plantation, even if the expected returns were good.

Second, we must evaluate expected returns. We have a weighted-average cost of capital and need to beat that by a certain percentage.

Compared to our processing businesses, we don’t have significant CAPEX requirements in our trading business. The capital we employ is mainly working capital. If we get a decent return on our working capital, we don’t have to worry too much – but we must ensure that we get the returns!

Would rising interest rates affect your plans and strategies?

Absolutely. As the cost of capital increases, so too must our expected returns. However, with the current market volatility, our expected return is robust.

Higher interest rates mean we are getting more requests to extend credit to our clients. Risk management is vital in a more volatile market.

Do you lend money to your clients?

There is sometimes a spread – a margin – between our internal cost of capital and our client’s cost. Some companies may look to capture that margin, but it is not something we do. We are physical commodity traders. We are not a financial institution. I would not use the company’s balance sheet to play the role of a bank. We may offer credit line financing to a client, but only if that client is strategic to our business.

Commodity prices rose dramatically in 2022, and although they have since fallen, some smaller companies must have found it challenging to finance their margin calls on the futures exchanges.

It was challenging for some smaller companies, especially those specialising in origination. They buy the commodities at their origin and then hedge them by selling futures. When prices rise, they must pay variation margins on their short futures positions even though they have offsetting positions in the physicals. Even if a company is hedged, it will still have to pay variation margins on its futures positions. Of course, if futures prices fall, the exchanges credit their account with the money against variation margins.

I didn’t hear companies failing to make margin calls when futures prices rose. It shows that the system works and that the necessary finance is there. Remember that the trading companies were more profitable during this period, and I imagine that this gave the banks more confidence in supplying finance.

At ADM, we had no problem financing our trading during this period.

A financial controller must evaluate the prices of some difficult-to-price commodities. Is that an issue?

No, it’s not an issue. The markets we trade are liquid, and it is relatively easy to value our open contracts. In some cases, we look at the last trade or use external evaluations from brokers.

It was different when I was in energy, where some contracts were less liquid and difficult to mark-to-market – especially for the far-forward positions.

Do you have daily or real-time P&Ls (Profit and Losses)?

I am not a big fan of real-time P&Ls. Traders should focus on the markets and information flow and not on their P&L constantly.

Real-time P&Ls can be helpful in risk management, but I believe daily P&Ls do the job perfectly well.

Also, we are physical traders. Our function is to move products from areas of supply to areas of need to serve our customers, meaning there is a basis component in the price of the products (difference in value between the physicals and the futures). We can get real-time futures prices but can’t get a real-time basis. That reduces the value of a real-time P&L.

You are the CFO of a major trade house – how could your career develop from here?

I have no plan. I enjoy what I do today and get involved in new businesses. I am constantly learning. For example, I am involved in a new distribution business in Pakistan. I am on the board of this new venture. I meet new people, get to know a new culture and country and face new challenges. I told my boss to keep offering me new challenges.

What advice would you give to a) a young trader and b) someone considering getting into the business?

I would tell a young trader to spend time – at least six months – with your finance and operations teams. It will make you a better trader. It will also help you realise that you can have a great career and a lot of fun in a support function. You don’t have to be a trader to enjoy a fantastic career in commodities. Other jobs within a trade house can be just as satisfying as trading.

I would tell a young person thinking of joining the business that they must be passionate about the job. All the people here are driven. They think and breathe commodity trading all day long.

Thank you, Jerome, for your time and input.

© Commodity Conversations® 2023

This conversation is part of my upcoming book, “Commodity Professions – The people behind the trade”, due out at the end of this year.

 

 

Good morning, Alex. Could you please tell me a little about you and HC Group?

Hi Jonathan. I joined HC Group in 2012 in our London office before moving to America to help grow our global agribusiness practice. The practice is focused on leadership assignments across agriculture, animal nutrition and health and food ingredients.

We help companies that feed the world. Playing a small role in that mission keeps me passionate and excited about the industry’s future.

HC Group was established in 2003. We identify business-critical talent for organizations across the global energy, metals and agricultural value chains. We also provide data-informed talent advisory around organizational structure, strategy, and compensation.

How important are ags for HC Group?

HC Group works across the commodities value chain. Ags is one of the three pillars of our business, alongside energy and metals.

Today, the war for biofuel talent has never been fiercer. As energy companies seek to decarbonize their platforms, the demand for vegetable oil procurement, analytics, and trading professionals outweighs the supply. This talent pool is highly specialized and relatively sparse. It is now being recruited by both the agriculture and energy industries, leading to an unprecedented level of competition between these two sectors.

Given the strength of our network in the energy and agriculture market, we have a unique position in the industry. It has helped our contacts and clients pivot from the agriculture to the energy industry.

What are the challenges in getting people to move from ags to energy?

I would say location is often the challenge. In the US this talent pool is primarily located in the US Midwest. People are often reluctant to relocate away from the Midwest to traditional energy trading hubs in the US Southeast or East Coast. Energy companies with flexibility around location will be the best positioned to secure the talent.

How is the ag-employment market now? What sectors are hot – what types of companies are recruiting?

 During 2022, US energy trading firms, refiners, and producers were hiring commercial heads for their biofuel platforms. We worked with them to identify individuals capable of creating the strategy to build the business. It is not as easy as it sounds; it can be challenging to source the necessary feedstocks. These individuals often must educate the energy majors about the ags markets. Oil traders might ask, “What do you mean you’ve lost the crop – where has it gone!” You must explain that growing crops is different from drilling for oil!

This year, in the US, these firms are building their teams and hiring contributor personnel, such as biofuel feedstock procurement specialists – the rung below the commercial head. The demand for biofuel expertise has cooled off relative to traditional vegetable oil feedstocks, with the focus now on advanced feedstocks experience with products such as UCO and tallow.

In the past year, the energy-trading houses have been looking to diversify their revenue schemes by going into ags. The energy trading companies have been relatively agnostic as to the agri-product line.

Energy trading houses such as Gunvor, Hartree Partners and Vitol hired new agricultural trading talent to their platform. Existing hedge funds such as Citadel and Millennium expanded their teams, while more recent entrants such as LMR Partners, Qube and Squarepoint have entered the market.

The significant hedge funds are also looking to diversify into commodities, agriculture included. Millennium is an example. The company recently hired Todd Thul, ex-head of Cargill’s corn desk.

In previous commodity bull markets, hedge funds have hired successful traders only for the traders to crash and burn. How can a hedge fund ensure that a physical trader will be profitable independent of the physical flows and assets and without access to information and analysis?

It is the million-dollar question!

While past performance does not guarantee future returns, it’s arguably the most valuable measurable when hiring talent. The number of individuals the hedge funds are genuinely courting remains relatively small, given how challenging it is to consistently return steady P&L numbers, year in and year out, without having an asset infrastructure behind you.

The hedge funds have more interest in talent that has already left a trading house and proved themselves in an asset-light environment without the information flow and support system to help them make trading decisions. Industry reputation and referencing talent within their peer group is one way we look to understand past performance, which in turn gives a good idea of the top percentile of successful prop traders.

I hear that the market for traders is so hot that hiring firms offer multi-million dollar signing fees. Is that true?

Yes. While some rumours are hearsay from traders, and numbers get inflated, some individuals are receiving million-dollar signing-up fees to move. But that’s also the compensation for the opportunity cost of leaving a safer environment in an ABCD. It’s a risk-reward decision. There is a high demand for agri-prop talent, and traders will look to capitalize on their market worth.

I sometimes wonder why a high-performing leader would leave a trading leadership role to move to a hedge fund. Typically, the number two and number three trader on the desk will make that move. (1)

What advice would you give to a traditional trading house in this environment – how can they keep their teams together?

 Trading companies must expect a certain level of attrition as they cannot compete with hedge funds and energy trading houses in terms of potential bonus upside. If individuals leave the business purely for compensation, that’s not something I would spend time worrying about.

High-performing organizations require people strategies. Engagement, retention, and growth are all intertwined and should be essential business strategies. Ultimately, engagement is about employee discretionary effort; they can give or withhold it at any time. Leaders need to know their employees well and react to their needs.

Communication is vital in any organization, and it is what underpins everything. To retain talent, focus on skillset development and leadership development. Better leaders create better teams, which creates higher retention. Focus on employee development. It’s a manager’s responsibility to grow your team’s skillsets and help them achieve their goals individually and as a whole.

If you are a big trade house, you must ask yourself why other people who are not necessarily or exclusively motivated by money are leaving. Maybe you don’t have clear succession plans in place.

The line manager should not underestimate the importance of one-to-one meetings to engage and retain employees. They give line managers a clear line of sight about what the employee needs to do and where they are going. They enable the line manager to have individual time with the employee, understand if they are OK, and detect any early signs of any changes that need to happen. Do they know their future career path and the succession plan for their leaders?

Succession planning is a serious issue for the industry. The ag industry is cyclical, and you see that in hiring and firing. Four or five years ago, the ag sector was depressing – the margins weren’t there, and companies were laying off traders. The problem was that they let go of the mid-career traders – the 25- to 35-year-olds. The trading houses have gaps in their succession plans. In addition, structures flattened during the lean years, and people don’t now have the rungs to move up the ladder.

Ask yourself how you engage with your traders on their career plans. How often do you sit down with them and map out their future? What are their pain points – their frustrations? The talent pool is in tight supply at C Suite succession planning and for mid-level bench strength. There is a missing generation of 40-55-year-olds, and everyone is struggling to fund succession planning solutions. The reality is young talent earlier will be pushed up faster into leadership roles than ever before. (2)

Looking at the other side of the coin, what advice would you give someone approached by a hedge fund employer?

 First, you must ask yourself where you want to be long term. Some people like to stay in an individual contributor role – to stay as a trader on a desk, and some want to move into leadership positions. These are two different paths. If the latter, you should probably stay.

Second, you should do your due diligence on the platform you are joining. You must understand their mindset and their expectations – are their expectations realistic? You know the returns you can achieve – would the new platform be comfortable with those returns? You must also evaluate their risk appetite. Traders must take risks to make money, but some employers may not be comfortable with those risks.

Third, you must also ask yourself to what extent the new platform understands commodity markets – particularly the ag markets. It may be riskier if you join an equity hedge fund with no experience in commodities.

Fourth, you must ask to what extent the new platform is investing in building its commodity trading capacity. For example, Citadel has built a first-class commodity research team that will help traders analyze their markets, but it also shows that they are investing in the sector long term.

Fifth, you must balance the risk and reward because a fund will pay you more than a trade house when you get the market right but will fire you quicker when you get it wrong. And traders always get markets wrong at some stage in their careers.

Last, you must ask yourself, what if they fire me within two years? Have I burnt my bridges? Is the risk worth it?

Hedge funds are fantastic places to make money as a trader if you are successful, but it is a challenging environment if you have a bad run. An equities hedge fund may not understand the commodity business. I would feel more comfortable recommending someone to join an energy trading house that understands physical flows and how the commodity markets work. There are tremendous opportunities, but you must be selective.

Commodities have a reputation for being male-dominated and macho. To what extent is that reputation warranted?

 That is a fair assessment, but it is starting to change. It’s changing at the junior level as organizations now hire different profiles out of college. The biggest challenge lies in middle and senior leadership because all the companies have the same profile. We recently ran a position for a senior economic analyst for the global ags landscape, and only eight per cent of the candidates were female.

HC Group has launched a Diversity Champions series for its content hub, HC Insider. The series will feature senior-level talent representing various backgrounds and experiences to promote and drive inclusion in the commodity markets. Most recently, we interviewed Jaime Goehner, Commercial Manager at ADM, about her career journey, what has been critical to her success, and how she is helping to develop talent.

If you would like to be interviewed in the Diversity Champions series, please contact Heather Falgout to discuss.

Suppose your best friend’s daughter wanted to get into commodities – would you advise her to go into energy, metals or ags? Do the different sectors require different profiles?

The skillsets you acquire are transferable between the three sectors, but I recommend agriculture. I love the industry and its people, so that is probably a biased answer!

And education levels – Bachelor, Masters, MBA, PhD? When I began in the business, the big companies liked to recruit people after a BA degree and train them themselves. Is that still the case?

 Yes, graduate development programmes are a must. However, companies need to be aware of changing desires of the next generation, particularly around energy transition and sustainability. Companies need to engage in how they are part of the solution.

That said, and why HC Group exists, companies always need external talent to take on new markets and regions. The same applies to building a vision for these individuals, given the increased opportunities out there. That messaging is critical and a significant part of our work for client partners.

Do you see a change in capabilities required to be a successful trader?

Much remains the same. Curiosity, commerciality, and relationship building, but added to the mix now is the need to be technologically savvy. Digitization and the velocity of the market mean traders need to understand risk management much more and be literate when it comes to developments in analytics and modelling. We recommend everyone tries to get a basic understanding of coding and statistics.

How do you imagine AI will change future trading desks?

 The most significant advancements are taking place in the pre-trade space for AI. Companies are increasingly looking at more advanced ways to analyze and interpret the vast quantities of structured and unstructured data aggregators provide.

 What advice would you give young people thinking of getting into the sector?

First, invest in yourself. Your only competitive advantage is your ability to learn faster than your competition. What are you doing to support your career? Investing in yourself is the best investment you can make.

Second, build relationships within the industry. The people we hire are typically the ones recommended to us by their peers, their managers from years ago, or their competitors with whom they trade. Build networks.

Thank you, Alex, for your time and input.

(1) I may be able to add a little to that. Many successful traders don’t know if they are only successful because they work for an ABCD+ company. You sometimes see top traders moving from the big trade houses to test themselves – to find their true worth.

You also have top traders who feel too restricted by their VAR limits. Their companies may have stopped them from a position, only for the market to turn and move in their favour. Fausto Felice – the ex-head of Cargill’s wheat desk – mentioned this when I interviewed him for my book Commodity Crops – And The Merchants Who Trade Them.

(2) In The New Merchants of Grain, I asked CJ Van den Akker, then head of Cargill’s trading activities, how he felt about people leaving. He replied:

I have mixed feelings about that. In one sense, it bothers me. Through our training, we’re feeding our competitors with talent. But at the same time, I’m proud that we recruit and train people so well. That tells you a lot about this company and how we invest in our people. I think that’s a good thing.

But frankly, there is no choice at the end of the day. We’re a pyramidal structure. People are promoted on merit and will fall out of that system. Our objective is to maintain our strongest talent. We don’t always succeed. But not everyone can reach the top, so people will always seek other opportunities. I think that’s OK. It’s the way the system works; it’s inevitable.

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