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Good morning, Petya, and welcome to Commodity Conversations. Could you please tell me a little about yourself?

I was born and raised in Sofia, Bulgaria. After earning my bachelor’s degree, I completed an MBA with SDA Bocconi in Milan, focusing on international business. I then moved to Belgium, beginning my career with DHL, working in logistics.

In 2009, I joined Cargill in Belgium as a trade execution operator – what people used to call forwarding. Operators ensure the correct execution of contracts. The function involves coordinating the various links in the supply chain from vessel nominations, supervision etc. and ensuring that the documents are in order.

Remember that commodity traders don’t trade commodities; they trade documents! Buyers pay for their goods before they receive them – often weeks before they receive them!

In 2010 I relocated to Geneva, Switzerland. In 2011, Cargill acquired the Australian Wheat Board, and I moved to Melbourne, Australia, where I spent two years working on merging the trade execution functions for the two companies.

I returned to Geneva in 2013, where I worked myself up to become the global head of execution for the Cargill agricultural supply chain.

How did Covantis come about?

As I moved into management positions, I found that my biggest challenge was to attract and retain talent. People would join the team and quickly master and manage the routine work. They got bored and moved on to more exciting parts of the business, like trading, analytics, or IT.

I increasingly tried to digitalize the trade execution function. I became passionate about the potential for new technologies, such as Blockchain or Artificial Intelligence, to take over the routine part of trade execution. I knew we had to modernize the sector and make it more attractive to the younger generation.

I also knew we couldn’t just do it on our own. Digitalization had to be a cross-industry initiative, pulling together like-minded professionals from other trading organizations.

All trading companies are spending a lot of effort and investments in innovation and IT – but we knew we couldn’t do the job alone. The industry is interconnected. It is a complex ecosystem that includes banks, supervision companies, agents, vessel owners, governmental organizations, and chambers of commerce. These participants work together to ensure that the supply chain operates smoothly and efficiently.

We wanted to create a project that was “by the industry, for the industry.” So, in 2018, we joined forces with ADM, Bunge, and Louis Dreyfus Company to start working on the project. COFCO and Viterra (then Glencore Agri) joined shortly afterwards, and Marubeni joined in 2022.

Our initial challenge was deciding on which sections of the value chain to focus. Should we start with farming and move through to retail, or should we narrow the scope? Should we concentrate on grains and oilseeds or broaden the range of commodities? Should we focus on origination – and if so, in what geographies?

As you can imagine, setting up an organization that at that time brought together six of the world’s largest agricultural trading companies, we had to ensure that we would be 100 per cent compliant with international anti-trust legislation.

We worked this all out, and, in 2020 – in the middle of Covid – we set up Covantis SA as a legal entity in Geneva, co-owned by its six founding members. It was effectively a technology start-up.

As I mentioned, I was part of the project team from day one and one of the initiators of the idea. I applied for the position of CEO, and I was selected.

I am excited and passionate about both my role and the company. I have a fabulous board of directors, including G-J van den Akker, an Independent Board Advisor.

Could you give me your Covantis elevator pitch – how would you explain what you do in a few sentences?

Covantis aims to accelerate global trade transformation by solving industry challenges through technology. Our vision is to create a fair, trusted platform that brings better efficiency, transparency, and information exchange for everyone working to feed the world.

How many employees do you have?

We partnered with  Consensys, an external supplier who initially developed the software for our network platform. Our original idea was to have a relatively small in-house team. In 2020, there were 18 of us: the leadership team, product development, commercial, training and onboarding. We were a core group of experts, setting the direction for our vision, strategy, and scope.

We always knew that we would gradually move our software development in-house. To be a high-performing tech company, you must build the bench and knowledge inside the company to create a legacy and leverage these capabilities to expand to new processes and scope.

We started working with our partner Consensys in 2021 to see how we could develop the necessary capabilities in-house, and we are now pretty much an entirely in-house organization.

We are a team of sixty people, although we plan to increase that number by a little, perhaps to seventy.

Covantis is incorporated in Geneva, where we have considerable commodity trading talent locally, but it is challenging to find software engineers or specific product design and development roles here.

In 2022 we established a wholly-owned subsidiary in Bulgaria. We have an engaged team in Ukraine who continues to deliver high-quality work despite the war. We have people in Romania, Poland, Germany, Spain, the UK, the Netherlands, Malta, Italy, and Brazil.

We partner with an outside organization to provide global customer support to our users, and we have service providers who help us adjust to the workload.

What is the most challenging part of managing your teams?

We are a remote organization that has been scaling up very fast. We have attracted fantastic talent, but the commodity trading industry knowledge and challenges are new to most newcomers. We need to constantly invest our time in learning and development and stay up to date on the latest industry trends.

What about managing the different geographies and cultures?

It has been challenging, particularly with Covid. We recently held our first face-to-face meeting since 2020, where an important discussion point was how to build a high-performance organization when everyone works remotely. It is standard in the IT sector for people to work from home or shared offices, but they must be connected, collaborate and be up to date on the product direction and strategy.

 In preparation for this conversation, I watched a webinar from this time last year. At that time, you said that your biggest challenge was to choose whether to concentrate on building the network or the platform. How did you resolve that?

We are still working on it. It is a well-known complex problem for early-day network start-ups, with no easy solution.

Can you explain that?

Our value depends on our network. We lose value if participants are absent from our platform. We have spent a significant amount of our time and energy building the network. A trade house cannot use the platform to execute a trade if its counterparty is not on it. Successful networks are considered those that have at least 80 per cent of the market participants using the platform.

It will be challenging to get to 100 per cent. Some people will always want to continue doing things as they have done in the past, but we have successfully onboarded most of the trading companies in the markets where we are live.

You cannot build a network if you offer a limited scope of capabilities. You must start with a minimum viable product, get feedback, and then consistently, quickly, and incrementally improve the value proposition. It is what we call continuous delivery or continuous iterations. We must be careful not to spend time building something our clients don’t need or want. It is why continual feedback is essential.

Building the network goes hand in hand with building the capabilities.

At the same time, we must plan our product roadmap and backlog well. Each time we introduce new functionality, our clients want more. They say, “What you are doing is great, but I also want this and this – and I want it now!”

Can you give an example?

To increase the value for our clients and enable them to communicate and exchange information with companies that are not on the platform, we developed a capability that allows traders to communicate, send and receive data, documents, and instructions in a structured way to non-platform participants. It was complex to develop, but it added considerable value. We are consistently working to improve its functionality.

I saw on your website that the number of legal entities and teams active in the Covantis platform grew by 73 per cent in 2022 and now totals 130. Where are they mainly based?

In 2021, we launched our service in Brazil, focussing on the export market from Brazil. Most of those initial participants were in Brazil.

In 2022, we launched our services in the USA and Canada, onboarding exporters and charterers from those countries.

Now our network consists of entities from all over the world acting in different roles – Fob exporters, Fob/Fob traders, Charterers, and CFR Buyers. Covid has slowed our network expansion, but we are now also focussing on building capabilities for CFR (Cost and Freight) buyers, many of whom are in Asia.

Covantis executed 519 million mt on the platform in 2022, its second year of operation – an increase of 246 per cent versus 2021. What has driven this increase?

As I mentioned, when we first started, we were only active in the export of soybeans from Brazil. We now cover grain and oilseed exports from Brazil, US, and Canada. It has significantly increased our volumes. We will soon be launching Argentina, our fourth origin.

The 519 million mt figure includes the exported cargoes plus the FOB/FOB (Free on Board) inter-trade transactions before the cargo was loaded onto a vessel.

Your website says that your platform executed 74 per cent of Brazilian and 50 per cent of US bulk exports of grain and oilseeds in 2022. Those are significant percentages. How do you calculate them?

We look at how much each country exports and then calculate what percentage of those exports went through our platform. We call this an “adoption share.”

It is indeed a significant adoption number.

How do you define “executed”?

“Executed” refers to the contractual volume nominated to be shipped on a vessel. The ship’s charterer typically sends the nomination to the seller. In some situations, there may be multiple commodity forward purchases and sales where goods are bought for forward delivery and sold through a series of subsequent buyers. It is what we call “strings”. As the network of Covantis continuously expands, many of these contracts can be executed from start to end, i.e. from the first seller/shipper in the chain to the end buyer at the destination.

Why have you not included sugar or palm oil so far – and when will you add them?

We are working with the major players to launch bulk sugar exports from Brazil, hopefully in the second quarter of this year. Palm oil involves an entirely different network of participants which we hope to start covering in 2024-2025.

We aim to cover all bulk agricultural commodities within the next three years. Once we have succeeded, we will look at non-agricultural commodities, not necessarily in bulk.

What are your most significant identified risks? What keeps you awake at night?

The first is the risk of cyberattacks to which any tech company is exposed. We must be exigent and put a lot of effort into security. The first question anyone asks is, “How can I be sure that you will protect my data from other platform users and from outside the platform?”

The second is reliability. There are financial and legal implications if our system goes down if, for example, a Notice of Readiness goes missing. Our platform must be 100 per cent reliable.

Can Covantis add value in terms of traceability?

We can add value by making the document flow more transparent. It helps visibility regarding environmental and social sustainability certificates.

However, most end-buyers want to trace their agricultural inputs back to the farm while our system starts at the loading port. One possible solution might be to partner with someone who already covers the flow from farm to port.

Does Covantis have a role in finance and payments? Does its transparency facilitate commodity trade finance?

Absolutely, yes – and that role will grow!

Most of the international trade in agricultural commodities is conducted under UK law. In October last year, the UK officially introduced into parliament “The Electronic Trade Documents Bill”, which enshrines the idea that electronic trade documents such as bills of lading, warehouse receipts, and promissory notes are capable of being “possessed” and exchanged. Once passed, the bill will provide the legal basis to transition to a digital trade document environment and will likely provoke other jurisdictions to follow suit. We are considering allowing our clients to present electronic documents to the banks for payment and discharge the cargo.

How does Covantis generate revenue – and how do you measure the return on investment for your shareholders?

We charge all participants – including our shareholders – a fee for using our platform depending on their role, the volumes they transact and the value they can extract.

We have been modest in our pricing to encourage adoption. We want to make Covantis the industry standard, but that will take time.

The investment to date has been significant, and our revenues are not yet providing a return on that investment. Building the infrastructure and the network is a front-end load investment that will pay off over the next few years. We believe that our shareholders will see a good return on their investments in terms of money and cost reduction (from using the platform).

ADM, Bunge, Cargill, COFCO, Louis Dreyfus Company, and Viterra are founding members. Marubeni joined in 2022. Have other companies asked to become shareholders – and how would you react if they did?

We are not exclusive to having discussions with other interested investors, especially if there is a strategic fit.

I know that competition is ferocious between the big trading companies, but this is not the general belief among the public. How do you manage the optics of having seven trade houses “controlling” the food supply chain through Covantis?

“Controlling” is not the right word. We use “equal ownership” instead. Covantis is independent of its shareholders, with its own governance, organization and decision-making structure. Covantis is established on a type of governance known as a “shifting alliance model”, where no shareholder can veto strategic business decisions. Our mission is to build a fair and trusted platform.

Covantis was never intended for the exclusive benefit of the large commodity trading houses. It is for all the actors in the value chain, no matter their size or geographic location.

One of the main reasons why the competition and anti-trust authorities gave us approval was that no one has access to data other than their own. There is no sharing of information stored on Covantis, nor can Covantis JV be used as a forum for the prohibited information exchange between shareholders.

We do not favour – or privilege – shareholders above other users, including in our pricing approach.

That’s it, Petya! Thank you for your time and input!

© Commodity Conversations® 2023

Good afternoon, Jeremy. Could you tell me a little about yourself and your career so far?

I am from Richmond, North Yorkshire, in the UK. I studied business at Nottingham Trent University. When I finished my course, I stayed in Nottingham and answered an advertisement from a company I had never heard of: Cargill.

The job sounded interesting – we called it “forwarding” at that time. I had the interview, and I got the job. Thirty years later, here I am in Geneva.

I started in 1993 in grains and oilseeds – supply chain, plant logistics, off-farm collections, and raw materials planning for the UK crush plants. I also worked on the transportation, distribution, and supply chain management of NGFI (Non-Grain Feed Ingredients).

In 1997, Cargill asked me to come to Geneva for three months to work with the sugar team. The following year, the sugar department asked me to go to Moscow for a three-month assignment. I stayed there for nearly four years working on the supply chain, trade execution, warehousing, and distribution.

From Moscow, I moved to the Philippines for eighteen months to help build out the company’s sugar business. I then returned to Geneva to head up the global sugar operations.

In 2010, I took over responsibility for regional trade execution for Cargill International, which included grains and oilseeds, sugar, coal, metals, and energy, for five years. I then spent four years with Alvean, Cargill’s joint venture with Copersucar, before joining Tereos in 2019.

I am now setting up a new business around consultancy and managed services in trading and shipping.

Would you call yourself a forwarder, logistics manager, or trade execution specialist?

Now, that is a great question. We used to call it “forwarding” – dating back to the eighteenth century in the UK when innkeepers forwarded goods to the next inn. Most companies now call the role “trade execution coordinator”, but that is a bit long, so we tend to use the term “operator”.

It is a difficult job to categorise as it covers so much. Still, the role coordinates all the actors in the supply chain: buyers, sellers, freight suppliers, brokers, agents, document services, and supervision. It is an open system in which the trade execution coordinator manages and coordinates all those different parties to ensure that the right actions are taken at the right time to execute the contract.

The job differs from supply chain management, where you manage supply to meet expected demand. Supply chain management is not the same as contract management.

You have travelled extensively in your role as a trade execution coordinator. Is that usual?

I wouldn’t say so, but the big trade houses often view relocation as talent development opportunities. It can involve working on new projects or covering short-term assignments. These opportunities help an individual understand the activities from origination to destination.

The big trading houses have a pipeline to fill future leadership needs, and travel and overseas assignments are part of that process. My moves to Moscow, The Philippines and then Geneva were pivotal and allowed my career to progress much faster than if I had remained in the UK. I don’t think there’s anything stopping anyone from moving. You need to have the aptitude, and you need to ask.

There are also opportunities if you work for a smaller company, whether in Dubai or Singapore, or the US. However, you must move as an individual rather than relocate with your company.

You’re a Yorkshire boy who worked in the UK, Switzerland, Russia, and the Philippines. Did you find the cultural differences challenging?

Yes, but you must embrace those differences. When I moved to Moscow in 1998, few people spoke English. My Russian wasn’t good enough to hold business conversations, but I soon learned enough to get around and live in the city. And then you turn these obstacles into opportunities. It’s fun. There is something to learn from every culture.

The Philippines was challenging from a cultural and business aspect, but Switzerland was the hardest, possibly because I expected it to be more like the UK. But now my partner and our children are Swiss, so you adapt. You need to approach everything with an open mind and treat relocation as an opportunity.

Where does trade execution sit within a trading organisation?

There are three broad buckets of functions within a trading organisation.

The first is value creation, which is the role of traders. The second is value measurement – a financial and risk process. The third is value capture. Our role in trade execution is to capture the value traders believe they have realised on paper.

If the mark-to-market is $10 per mt, good contract execution can ensure that the company captures $10 per mt. We ensure that every party, including ourselves, meets the contract’s obligations. We can sometimes add incremental value through good execution. However, our primary role is to capture the existing value rather than add additional value.

Could you talk me through the various functions?

Before a trader makes a trade, we will discuss document requirements and payment instruments. We will also discuss any optionality contained within the contract, including origin, quantity, quality, packing, load, or destination port. We will discuss deadlines for when we must declare those options.

As a trade execution coordinator in a smaller organisation, you may need to book the freight and negotiate the charter party. In organisations of all sizes, you must understand the vessel’s location and when it will arrive. You must appoint surveyors to ensure that the ship is in the proper condition to load with the holds clean and the hatches watertight. You also must know what to do if they aren’t.

You must give the correct nominations to your suppliers at the right time so that they can get the goods in the required quality and quantity to meet the vessel.

If you are the vessel charterer, you must coordinate with local vessel agents and the port elevation operators, ensuring that everything is in place for the vessel to arrive and load and that all parties know their obligations.

Once the vessel is loaded, you must manage the documentation. Most people believe that commodity traders trade commodities. They don’t; they trade documents. Buyers pay against documents, usually without seeing the goods, so those documents must be accurate and in accordance with the contract. You must ensure that the documents are in order and you can get paid. It sounds simple, but it’s not!

There is an old rule that 80 per cent of trades go smoothly – and take 20 per cent of your time, while 20 per cent of your transactions require more attention and take 80 per cent of your time. The quality may be off; the vessel may be late; the vessel master may want to clause the Bill of Lading etc. – all great opportunities for learning the business!

You will then present the documents through the agreed channels and coordinate payment. After the buyer pays, you must finalise matters such as laytime, quality premiums and any open claims.

What happens when things don’t go well?

As a trade execution coordinator, you are part of a team that would typically include a trader, controller, legal and compliance. Together you work on a solution.

I always tell my teams that we seek a pragmatic, not perfect, solution to problems.

What do you mean by that?

Everybody wants to achieve the same goals. The seller wants to be paid, and the receiver wants to be happy with the goods they receive. We can spend days trying to find a perfect solution, but it may cost you hundreds of thousands of dollars in demurrage. Instead, we look for a pragmatic solution where parties say, “Well, that’s not ideal, but let’s mitigate the costs and get things moving.” No one wants to let a ten-thousand-dollar problem become a hundred-thousand-dollar problem.

What makes a good operator?

You must have a good knowledge of UK law in contracts and understand the function of a Bill of Lading or a Letter of Credit, for example. However, it is the application of that knowledge that is the real skill.

You take decisions contextually. Applying your knowledge to the business in different contexts makes you a great operator.

What do you mean by “contextually”?

How you approach a problem may depend, for example, on your contract price and whether it is lower or higher than the market.

It may also depend on whether the customer is strategic to your business or a “price buyer”. You may treat each differently. That ambiguity may sometimes be challenging to accept. You must be good at dealing with ambiguity. The pure ‘contractual’ approach or solution may lead to a short-term benefit but not be best for the business long term.

Remember, one of the critical roles of a trade execution specialist is to anticipate where issues might arise so that they don’t happen.

Could you give an example of that?

Suppose you sold a vessel for March arrival, and you realise it will arrive in April. The earlier you start working with your buyer, the better. You don’t wait until the vessel arrives at the discharge port before talking to your buyer.

The same applies to quality issues, particularly around the condition of the cargo. The vessel master may sometimes seek to clause a mate’s receipt or B/L (to note that the goods are damaged). The earlier all parties get together and resolve the issue, the better. It may make sense to pause the load and clean the cargo load belts or to offload the portion of the cargo that is in question. Again, it is a question of pragmatism, moving things along to protect your company’s interest and reduce its risk.

How important is trade execution to a trade?

A customer may not buy from you because of your company’s trade execution, but they will certainly not buy from you if your trade execution is terrible. There is a base level of expectations. If you exceed them, you won’t always get plaudits, but your customer will think twice about trading with you again if your execution is terrible.

What’s the most challenging thing about being a trade execution specialist?

The sheer quantity of information that comes across your desk can be challenging. I have seen organisations where people get 20,000 emails a month. You can’t control what people send you, but you can control what you choose to read. You must distinguish between what is and is not important and act accordingly.

It’s not abnormal in our industry to have 120 people on copy of an email about a vessel’s arrival date or a contract performance issue to be resolved. You can’t act with speed and agility when 120 people think they have a voice.

The best organisations will have procedures as to who is involved in what. The execution coordinator, the trader, the trading manager, and the controller may need to be part of a decision-making process – that’s four people, not 120!

It sounds as if there are inefficiencies in many companies’ systems.

I have been in managerial roles for the past few years and concentrated on organisational transformation – leveraging scale. When you look across an organisation, you see silos of operations which duplicate tasks three, four, five, and six times. There is a lot of productivity to be gained and value extracted.

If you improve productivity, you reduce costs and improve team engagement.

In 1999, Cargill bought Continental’s grain trading operations, and you were responsible for merging their trade execution operations in Russia. Were they very different?

The skillsets were the same, with highly skilled individuals in both teams, but the two groups worked differently and had different systems, processes, and procedures. It was the same when Cargill Sugar merged with Copersucar to form Alvean.

You have the organisational context, but you also have the cultural context when integrating two teams. The Cargill internal culture is strong and can often transcend national culture in some workplace contexts. From that perspective, Continental’s Moscow operations could be said to be culturally more ‘Russian’ than Cargill’s – and Copersucar’s operations more ‘Brazilian’ than Cargill’s.

Some conflict is inevitable in these situations as the change can impact individuals directly and bring additional stress. The challenge is making people feel comfortable and part of the team. It’s not a question of who is taking over whom but of getting the job done smoothly and efficiently.

Relationships will build if you create the right environment and culture. They don’t happen overnight. There’s often a feeling that if you put two teams together, they should be perfect from day one, but it takes time.

Traditionally, the front office is glamorous and highly paid with large bonuses, while the back office is less glamorous, less well-paid and with fewer bonuses. Is that an old-fashioned view, or is it still the case?

It is still the case, but although it pains me to say it, I think it is probably justified.

Physical commodity merchandisers drive a trading company’s profitability. They bring the clients to the table, negotiate the deals, and manage the price risk. They get paid more because they create more value. It’s as simple as that. If they create value, they get well rewarded. If they don’t, they get fired. It comes with the territory.

We’re not taking risk in the back office. We work with the traders to help them manage their risk.

Trading companies do recognise the value that good execution brings and reward trade execution operators well. They have traditionally viewed it as a differentiator in terms of their business.

However, I don’t know whether that will continue to be the case with the major trade houses joining a consortium to digitalise their operations and pool their trade execution knowledge.

You’ve managed several trade execution teams. What profiles would you look for when hiring somebody for one of your teams?

Good communication skills: People don’t need to be extroverts, but they need to be able to communicate what is required when it’s needed and be willing to share knowledge and information.

Determination and resilience: Things don’t always go your way. Executing a contract has its frustrations, and you need to be able to manage that.

Intelligence: The ability to absorb, process and apply information in different contexts.

Curiosity: You need to be curious to learn and ask questions.

Adaptability: The world is changing, and you can’t assume that something you knew yesterday will still apply tomorrow.

Proactivity: The ability and willingness to grab opportunities. Don’t sit back and wait for things to happen. An operator needs to know when to let things happen and when to make things happen.

What is one piece of advice you would give to someone starting as a trade execution specialist?

Others (involved in a transaction) will try and put their operational problems onto you, but you don’t have to take them on. Their problem is not your problem.

Now we’re going on to the elephant in the room – digitalisation. To what extent can trade execution be digitalised?

It depends on the context. FMCG – Fast Moving Consumer Goods – companies have successfully digitalised their supply chains. Also, look at Amazon or DHL – their digitalised logistics are superb.

Can you expect the same when you ship a cargo of soybeans from Brazil to China? Yes, you can create value in tracking and visibility, but documentation is more challenging.

The more vertically integrated you are, the more digitalisation can add value. Digitalisation can add significant value to the ABCD++ group of traders (ADM, Bunge, Cargill, Louis Dreyfus, COFCO, Wilmar, Viterra, Olam).

However, the agricultural commodity trade has multiple actors along the supply chain, from the farmer to the distributor. Getting them all on the same platform and following the same processes is challenging. It applies particularly to containerisation.

Digitalisation is easier in origination and transport, but you must get the buyers on board. It may add more value on the sell side than the buy side.

I believe that trade finance will be the next catalyst to drive trade digitalisation. When trade financiers fully buy into digitalisation, everyone else must follow. But it will require a common platform. The banks now each run their proprietary systems. Trade execution will digitalise when the banks and non-bank financiers align on data standards, and inter-operability between different systems and platforms is more broadly achievable.

There is a tremendous amount of productivity to be gained, but it will be a long and expensive process.

Given digitalisation, would you recommend a young person to take up a career in trade execution?

Oh yeah! Even if digitalisation becomes a driver for shared services and takes 80 per cent of the work out of trade execution, most of that work is the routine, less-interesting stuff. It will leave the remaining 20 per cent – the challenging, exciting stuff. The industry is too complex to be digitalised entirely, but digitalisation will take the pain out of that 80 per cent.

Remember also that trade execution is not just about passing documents down a string. Traders will always need operators, not just for execution but also for advice.

If you’re pushing outside the boundaries the right way, people will help you. If you’re working for a smaller organisation, you may have to become a specialist in areas outside of pure trade execution.

If you like problem-solving, if you like logistics and if you want to work in a dynamic and international industry, then absolutely I would recommend a young person to take it up as a career. It’s a great place to be. I have loved my career so far – and I still love it!

Could you tell me what you are doing now?

I consult for various companies and am setting up a managed services operation – Crest Trade Services – for companies to outsource their trade execution operations in addition to consulting and training. It will be a similar model to how companies now outsource their IT or HR processes. We hope to launch in the second quarter of 2023.

Crest will primarily target SMEs –Small and Medium Enterprises – who don’t have access to the same resources and capabilities as the major trade houses. The goal is twofold. First, to provide clients with a level of expertise to which they currently don’t have access. Second, to reduce the cost of their operations through economies of scale and digitalisation.

In addition, by doing this, SMEs can mitigate their business-continuity risks. If a small company loses an operator, they are dead in the water – it must pass on opportunities or, worst case, can’t trade. Outsourcing removes that risk. Attracting and keeping talent is a challenge for smaller trading companies. There is a lot of demand out there for operators.

Thank you, Jeremy, for your time and input! I wish you every success with your new venture!

© Commodity Conversations ® 2023

This conversation is part of a series I call “Commodity Professions – The people behind the trade.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will you charge a transaction fee on trades?

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

So, how will you make money?

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

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

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

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

Will you have to register as an exchange?

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

Where are you now?

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

Is the paper market cash settled?

Yes, but with a possibility for physical delivery.

How does Vosbor work – is it Blockchain based?

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

How does it work?

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

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

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

How else do you build trust?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To what extent are you competing with Covantis?

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

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

Do you handle payments?

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

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

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

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

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

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

© Commodity Conversations ® 2023

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

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

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

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

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

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

An unexpectedly sustained demand

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

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

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

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

A series of Black Swan events

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

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

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

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

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

2022 – the expected market rebalancing was disappointing

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

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

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

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

What to expect for 2023?

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

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

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

 Main “known unknown”

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

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

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

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

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

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

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

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

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

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

How do you spend your time now?

I now divide my professional life into three:

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

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

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

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

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

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

Is that the case for all commodities?

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

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

So, no correlation at all?

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

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

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

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

Did you look at gold and Bitcoin?

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

Why do you think that is?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do you arrive at those estimates?

They are more guesstimates than estimates!

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

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

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

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

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

How do you incorporate exchange rates into your analysis? 

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

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

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

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

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

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

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

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

And what did you find?

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

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

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

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

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

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

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

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

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

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

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

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

Did you enjoy writing the book?

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

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

When will you write the next one?

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

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

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

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

© Commodity Conversations ® 2023