Category: Blog

You’ve had an exceptional career as a trader: twenty-one years with Cargill, eleven with Louis Dreyfus, and two with Solaris, all in senior trading or management positions. Do any highlights come to mind out of that wide and long career?

I was the first member of my family who did not join the family agricultural business, which was already a century-old business. Cargill gave me a tremendous foundation in the commodity trading business. Dreyfus allowed me to be more of a manager and a business builder. Solaris allowed me to be entrepreneurial, taking advantage of my previous experiences and trying to visualise the future of the business.

Which did you enjoy the most?

I have lived in five countries and enjoyed every one of them! I have worked for three different companies and enjoyed every one of them!

Cargill was a period of discovery during which I developed the skills I needed for trading and discovered a new world. After Cargill, it was more about developing executive skills and finding a vision. However, the deep learning experience and the people I met in all three companies were unforgettable. Without Cargill, I would not have been able to do the others, but I enjoyed the journey in the following steps as well.

What different commodities have you traded, and which was the most challenging?

I have mainly traded grains and oilseeds, but also fertilisers and molasses. Right. There are all kinds of vegetable oils and seeds in veg oils. Intellectually speaking, oilseeds are the most complex, but complexity is always an opportunity to make things simple. It was the most challenging for me.

Which commodity do you prefer?

My background and fascination with geopolitical issues make me feel attached to wheat. Fragmentation in the world wheat trade has led to two tiers of trading: the global traders and the regional champions. The international trading companies have lost market share in wheat to smaller specialised companies in different origins and destinations.

Russia accounts for almost 30 percent of the total world wheat exports. The country has a tremendous influence in the market, but international players cannot participate in that flow. I expect this situation will endure. This fragmentation is even growing. We’ve had decades of globalisation, and now we’re getting fragmented, if that’s the correct word. It has consequences on trading and shipping, behaviours, and even ethics. It is continuing to have a significant impact.

But it’s not just Russia. China is buying more beans from Brazil and less from the US and is worried about tariffs and export bans. Are politics shaping the global agricultural trade more than in the past?

Yes, the world has split into two blocks. Some talk about the South versus the North, while others talk about the East versus the West. I favour the differentiation between a Western mentality and a BRIC+ mentality. We are in a new world order.

You’ve had a fantastic career. Would you expect a young person joining the business now to have a similar career?

There are tremendous opportunities for the new generation in our sector, but it depends on their attitude. We in the northern hemisphere mostly live within our comfort zone, while those in the southern hemisphere are more ambitious. Attitude is going to make the difference.

You mention attitude. What other factors, characteristics, or character traits make a good trader: ambition, risk appetite, and curiosity?

Common sense is essential, and by that, I mean asking, “Does this make sense?” Don’t take things at face value or fall prey to conventional thinking. Always ask that next question.

Other critical pillars include curiosity, respect for others, and a periscopic holistic view from different angles. Don’t stay deep and comfortable in your submarine. Raise the periscope and look all around.

What about relationship skills? Communication skills have always been essential for merchants and traders, but we’re entering a world of AI and platforms. Are relationship skills still critical?

They are fundamental if you want to understand and communicate with other people. Most successful people are good communicators – and not just in our sector.

How would a young person reading this know if they have what it takes to be a good trader?

I have hired many people in my life with many different characteristics. There is no one model. When I interviewed a candidate, I always tried to decide whether they were the type of person who, when watching a football match, would be interested in the coach’s strategy and tactics, not only how beautiful a goal is. Everyone is born with specific skills, but you must develop those skills. Trading is a science but also an art.

How important is an analytical mind?

Essential! Numerical skills are critical, but I encourage people to be interdisciplinary. The best trader that I have ever seen had a history degree. Your background doesn’t matter if you have analytical skills.

Is trading a young person’s game? Are traders like soldiers? And if they are, is it a function of risk assessment and appetite?

No, there is no age for being a trader. However, vision is not enough; you must implement that vision. You are a dreamer if you don’t execute your vision. Perhaps people are less willing to implement their vision as they age.

Let’s move on to what you do now. How do you spend your days?

First, I advise different companies on logistics, distribution and trading. Second, I do business consultancy on specific sectorial issues. Third, and this is what I enjoy the most: I teach. It pays the least, but it doesn’t matter. Money is not the priority on this one. It’s how I can give back to society what I got from society.

I currently lecture in different business schools and lead the agri commodity programme for managers at the Spanish University of IEB in Madrid. I also give tailor-made programmes for specific big companies. I call this the Trading Academy and adapt the programmes to different companies’ requirements and needs.

What do you specialise in when you’re teaching?

We teach people to think like traders regardless of their businesses. For instance, a procurement team in any sector can benefit from thinking like a trader regarding fundamental supply demand and risk, all within the macro environment. We teach people to structure their thinking to identify the indicators that will change the game. A trader’s way of thinking applies to any business in life.

What’s the toughest part about teaching?

There is no tough part of teaching. The only challenge I often face is when people think in black and white. There is frequently no yes or no answer to a question. The answer is usually, “It depends.” The world is not black or white, but it is not grey either. It is glorious technicolour.

The most challenging part of my work is understanding the programme requirements when I tailor-make a program for a specific company. I can build the course structure only when I fully understand a company’s needs.

Do you work alone?

I work with a close-knit group of colleagues and friends. I have the luxury of having these tremendous professionals who help me structure and deliver a programme. Our objective combines academic passion, intellectual curiosity and profound experience. We want to bring value to the participants of our courses.

One thing that bothers me is that I am an old guy who writes about business for young people. How do you and I stay relevant and up-to-date?

It is essential to keep in contact with people. You must talk with them – network with them. You can’t learn everything from the Internet. I learn enormously from my students. That’s the thing about teaching. I learn as much as I teach.

What about employees? How do they stay relevant during their career? Should they take time out for further education, or should companies offer more in-house training?

Both alternatives are valid. However, our mindset must be to learn constantly, not just when we are on an in-house or external course. Learn from your colleagues. Admit your weaknesses and work to improve them.

But don’t concentrate on your weaknesses. Concentrate on your strengths. Successful people leverage and grow their strengths, which differentiates them from less successful people.

Will AI help?

Traders spend 70 per cent of their time collecting and organising information and data and 30 per cent of their time thinking. AI will allow traders to think 70 per cent of the time and collect and organise data and information 30 per cent of the time.

Pablo González, my co-author of ‘Thinking 2020’, often recalls what his father used to tell me, “Pedro, you work so hard you don’t have time to make money.” AI should allow traders to work less hard and hopefully make more money! It is a common problem.

The other common problem is that you don’t have time to sharpen your sword when you’re working so hard. This leads to burnout. I genuinely hope AI will give us all more time to think.

Which university courses would you recommend a person to study to get into commodity trading?

As I mentioned earlier, it is not a critical issue. As a manager, I hired people with different educational backgrounds on purpose, but they all needed to think critically and analytically.

You must find out if trading is your thing. Take your time to look for an internship. If you know someone in the sector, seek them out as a mentor.

What three pieces of advice would you give to a young person on their first day on a trading desk?

• Behind every problem, there are many opportunities.
• Take the time to specialise in something that differentiates you from others.
• You have two ears and one month. Listen twice as much as you talk.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

 

My book, Commodity Crops and The Merchants Who Trade Them, was recently voted one of the top ten commodity books ever.  To celebrate, I asked Google Notebook LM to produce a podcast on the book.

Google described the book as a compilation of interviews with prominent figures in the agricultural commodities trading sector. The author, Jonathan Kingsman, explores the intricacies of this industry through dialogues with individuals representing major companies such as Cargill, Bunge, Olam, and Wilmar. Each interview, organized by commodity (wheat, corn, rice, soybeans, palm oil, sugar, coffee, cocoa, cotton), delves into the history, production, trading dynamics, and challenges specific to each crop.

The book highlights key themes such as the impact of globalization, technological advancements, sustainability concerns, and the changing role of traders in a rapidly evolving market. It provides a comprehensive overview of the agricultural commodities market, emphasizing the interconnectedness of factors such as supply and demand, geopolitical influences, and the increasingly important role of technology. The book aims to shed light on the complex world of agricultural commodities, offering insights into this essential industry’s strategies, challenges, and prospects.

Commodity Crops – And the Merchants Who Trade Them is available on Amazon

1/ Could you share what you do today and your career journey so far?

My first foray into the sugar market was long ago at Louis Dreyfus when they told me to move from the Grain Department to Sugar. I was initially a grain analyst, covering UK wheat and barley. LDC asked me to sit at the sugar desk and learn about sugar. Somebody threw me the Kingsman report to read. It was my first introduction to the sugar market!

I’ve been in sugar analysis for around 30 years, working for various tradehouses and hedge funds. I am now an independent analyst for DNext, a digital platform based in Switzerland. We aim to simplify data collection and provide more efficient ways of analyzing the market. We cover agricultural commodities such as grains, oilseeds, and sugar.

2/ How have information providers evolved over the years regarding what they offer?

Everybody’s always been looking for the basics of crop analysis and trade flow data,

Data providers have moved downstream and now do more crop survey work. Your data provider now has a better handle on crops than in the past when only tradehouses had the complete overview of crop numbers. People can now access crop information more readily than in the past.

The provision of trade flow data has remained relatively unchanged over the last twenty years. In the future, I see room for a digital platform to consolidate trade flow data and make it more straightforward to assemble a consolidated trade flow.

We’re trying to forecast crops, and I’m unsure how big data helps. You’ve got to get your feet dirty, get out on the ground, and try to understand acreage. That’s where errors can occur. You don’t notice the switches from one crop to another if you’re not on the ground. Fundamental analysts have a critical role and will, hopefully, survive!

3/ Did you ever trade sugar?

It’s a difficult question to answer as it depends on what you mean by ‘trade’. If you work for a hedge fund, which I did, you provide trade ideas to a portfolio manager and then to a team of execution traders. There have been brief periods during my career when I have run a small proprietary book. It can be fun, but you can spend too much time screenwatching. So, I’ve always stepped back, providing trade ideas for the execution traders or the portfolio manager. People not involved in the business struggle with the difference between a trader and an analyst. I think the best traders are also analysts. So it’s a merger of the two.

4/ What’s a common mistake people make when analyzing the sugar market?

They are not spending enough time understanding consumption. It’s easier to follow crop numbers. Consumption involves a detailed analysis of monthly stocks, imports, and exports. It’s hard work. The other problem is that people consume white sugar, not raw sugar; monitoring white sugar trade flows is more complicated than monitoring raw sugar trade flows. The key to success is to get to grips with the white sugar balance sheet, which flows back into a raw sugar balance sheet. It’s been a massive issue for the last seven or eight years, with consumption falling in the developed world.

The challenge with consumption data is that an error can multiply through your balance sheet. A considerable demand shock, like COVID-19, can impact the quality of your consumption analysis. Consumption sets a good analyst apart from a bad analyst. The trade house analysts are often the best as they see the white sugar flows.

5/ What advice would you give someone struggling to stay on top of sugar market analysis?

I would advise them to continually seek new information and to stay on top of production, not just in the key countries but in the top twenty producers.

Get out into the field, meet producers, and build relationships. One thing that has benefited me over the years is that the trade houses I’ve worked for have allowed me to travel. To understand production, you must get out there and meet cane and beet producers. The meeting at the mill is vital to understanding the market.

If you are a trader and expect your analysts to build a decent balance sheet, take them with you when you meet your clients in the supply chain.

My daughter Charlotte conducted this interview as part of the ECRUU series of podcasts.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

A Conversation with Eddy Fay – OCP’s representative in Argentina

During my recent discussion with Michael Sebag, I was interested to learn that Morocco has 70 per cent of the world’s phosphate reserves and that OCP, a Moroccan state-owned company, is the country’s sole exporter of phosphate-based fertilizers. I wanted to learn more. My friend and mentor, Ivo Sarjonivic, put me in touch with Eddy Fay, OCP’s representative in Argentina. We set up a Zoom call.

Before speaking with Eddy, I asked Chat GPT about Morocco’s fertilizer exports. After the call, Zoom sent me an AI-generated summary of our conversation.

I am unsure that old folks like me fully understand how AI is revolutionizing every aspect of our lives. I have, therefore, taken the unusual step of sharing with you, with only the most minor edits, the Chat GPT answer to my question and the Zoom summary of my conversation with Eddy.

I have added, in Part Three, a brief note on the Haber-Bosch process.

One of the great things about my life now is that I continually learn new stuff. My conversation with Eddy was doubly fascinating. Not only did I learn more about fertilizers, but I also learned more about the power of AI.

Don’t worry; I will revert to my usual (human-generated) format for future conversations.

Part One: Chat GPT answers my question about Morocco’s fertilizer exports.

Morocco is one of the world’s largest exporters of fertilizers, mainly due to its vast reserves of phosphates, which are essential for fertilizer production. The key types of fertilizers that Morocco exports include:

1. Phosphate-based fertilizers:
   • Monoammonium Phosphate (MAP): Commonly used for crops that require high phosphorus levels.
   • Diammonium Phosphate (DAP): One of the most widely used phosphorus fertilizers, containing phosphorus and nitrogen.
   • Triple Superphosphate (TSP): A concentrated form of phosphate fertilizer.
2. Nitrogen-Phosphate-Potassium (NPK) fertilizers: Morocco also exports NPK fertilizers, which are compound fertilizers that combine nitrogen, phosphorus, and potassium to provide balanced nutrition for crops.
3. Phosphoric acid: Although not a direct fertilizer, Morocco exports large quantities of phosphoric acid, which is used as a raw material for producing phosphate fertilizers.

Morocco’s fertilizer industry is dominated by the state-owned company OCP Group (Office Chérifien des Phosphates), which controls most of the country’s phosphate resources and fertilizer production. OCP exports fertilizers to markets worldwide, including Europe, Latin America, and Africa.

Part Two: Zoom’s AI-generated summary of my conversation with Eddy.

Sugar and Grains Industry Experiences

Jonathan first reminisced about his time at Cargill working in sugar, first in London and then Minneapolis for two years before moving back to London. Eddy discussed starting with Cargill in grains in Buenos Aires before training in Geneva, working in molasses in Minneapolis, and then fertilizer in Tampa.

Fertilizer Industry Merger and Mosaic Formation

Jonathan and Eddy discussed the history of the US fertilizer industry, specifically focusing on the merger between IMC and Cargill Fertilizer in 2004 to form Mosaic. Eddy explained that the merger was driven by Cargill’s need to invest a significant amount of resources to grow, and instead, they chose to form a company with IMC’s assets. This decision proved profitable for Cargill, as 65 per cent of Mosaic’s yearly profits was similar to all of Cargill’s earnings.

Jonathan asked Eddy about Mosaic’s dominance in the US fertilizer market and its domestic production. Eddy clarified that while Mosaic is the largest producer, the market can buy domestic production and imports.

Jonathan then shifted the conversation to OCP, a Moroccan company that produces fertilizers. Eddy explained that OCP mainly produces phosphorus-based fertilizers and has a significant presence in India, Brazil, North America, Europe, and Argentina. He also mentioned that OCP exports fertilizers such as MAP, DAP, and TSP, as well as phosphoric acid, rock phosphate and NPS (new products). Eddy estimated that around 15-20 per cent of OCP’s exports are in raw material form as rock, while the rest are processed fertilizers. He also noted that OCP is a market maker and is careful not to compete against itself in specific markets.

Agricultural Product Pricing and Volatility Discussion

They then discussed the pricing and volatility of agricultural products, particularly fertilizers. Eddy explained that while fertilizers have some form of futures markets via future swaps, they lack the liquidity to be a robust reference market. Prices are determined mainly by current economic and fundamental factors. He noted that nitrogen and potash products have recently calibrated to grain market levels. At the same time, phosphorus prices have increased significantly due to reduced exports from China and stock depletion in India.

Jonathan asked about price volatility, to which Eddy responded that it’s driven by events like the Ukrainian war and climate situations. He also confirmed a correlation between grain and fertilizer prices; not all fertilizers follow oil prices.

Strategies for Selling Product and Industry Dynamics

Eddy and Jonathan discussed strategies for selling their product, emphasizing the importance of long-term contracts and price security through formula contracts tied to published prices. They also discussed the changing dynamics of the value chain in the fertilizer and grain industry, noting that companies are now more focused on buying, supplying, and selling back to back, as opposed to taking positions. Eddy highlighted the challenges in setting up a supermarket or grocery store for farmers due to the grain and fertiliser businesses’ different profit and loss objectives. The distribution model hasn’t been mastered by anyone yet.

Fertilizer Industry in Argentina: Production and Politics

Jonathan and Eddy discussed the fertilizer industry in Argentina, which produces single superphosphate (SSP) while the rest of P products are imported, i.e. monoammonium phosphate (MAP). Eddy explained that Argentina mainly imports rock for production and that Bunge handles most SSP production while ACA, a cooperative, manages the rest. They also touched on the political aspects of the industry, with Eddy noting that Argentina has had populist governments in the past that have caused sudden changes in import quotas and exchange rates. However, Eddy expressed hope that the new government would bring stability and predictability to the economy, including the fertilizer industry.

Argentine Fertilizer Challenges and Brazilian Comparison

Eddy discussed the recent challenges faced by Argentine farmers due to economic and political instability, which led to insufficient fertilizer application and reduced soil nutrient levels. He compared this to Brazil, which has tropical soils and requires more fertilizer for production, with relative economic and exchange stability over the last 20 years. Eddy suggested that Argentina needs to import between 50 to 70 per cent more fertilizer to maximize grain production. Jonathan understood this and noted that Argentine farmers have historically not applied enough fertilizer regardless of the farming intensity that good crop yields bring. Eddy also pointed out that Brazil’s fertilizer consumption is significantly higher than Argentina’s and that Argentina should aim to consume around 6 to 7 million tons of fertilizer annually versus today’s almost 5 million tons.

Fertilizer Industry Dynamics and Import Challenges

Eddy and Jonathan discussed the fertilizer industry, focusing on the role of importers and the challenges faced by farmers. Eddy explained that the distribution industry is cyclical, with three bad years followed by two profitable ones, leading farmers to try to avoid market fluctuations by importing directly. He mentioned that significant players like Bunge, Cargill, COFCO (trading companies), and farming cooperatives are involved in importing. Eddy also highlighted the importance of brands in the industry, with companies like COFCO and Nutrien diversifying into specialized products. Jonathan inquired about the logistics of importing, to which Eddy responded that most imports are in bulk, with only 30 per cent being bagged at ports for distribution. They also touched on the safety precautions needed for bulk logistics, which are comparable to international standards.

Fertilizer Supply and Food Security Concerns

Jonathan and Eddy discussed the importance of fertilizer in agriculture and its potential impact on food security. Eddy clarified that while there are concerns about the supply of fertilizers from certain countries like Russia, international safety standards and country controls mitigate these risks. He also mentioned that some countries, like Brazil, have taken steps to secure their fertilizer supply. Jonathan expressed concern about the potential for a few fertilizer exporters to hold countries to ransom due to their dependence on these exporters. Eddy reassured him that while there have been price spikes and minor supply disruptions, these have not led to significant food security issues.

Part Three: The Haber Bosch process

After my previous conversation with Michael Sebag, some people questioned the importance of the Haber Bosch process in enabling and maintaining current population levels.  This article by Hannah Ritchie explains the arguments behind the assertion.

We often talk about the effect of industry on our health, but the Haber Bosch industrial process has produced half the nitrogen in your body.

According to Chat GPT (again), the human body contains about 3 per cent nitrogen by mass. Nitrogen is a key component of many biological molecules, including amino acids (the building blocks of proteins), nucleic acids (DNA and RNA), and other vital compounds. It is essential for cellular function, growth, and repair, forming the backbone of proteins and genetic material.

For an average adult human weighing around 70 kg (154 lbs), about 2.1 kg (4.6 lbs) of their body mass would be nitrogen. It means your body contains at least one kilo of fossil-fuel-based Haber-Bosch nitrogen.

© Commodity Conversations® 2024My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

 

This week, I talk about fertiliser trading with Michael Sebag, founder and director of Orcom. But first, I wanted to know if fertiliser was a commodity.

“Urea and DAP are commodities,” he told me. “Fertiliser futures trade on the Chicago Mercantile Exchange, with domestic US quotations for various types of fertilisers, including Urea, Diammonium Phosphate (DAP) and Urea Ammonium Nitrate (UAN). But it is not a world market. It is like cotton because you can’t hedge cotton from Burkina Faso on the US futures.”

“What’s the main difference between fertiliser and other commodities?” I asked.

“CME’s fertiliser futures contracts are not traded as actively as other commodities. The trading volume tends to be lower, which can result in less liquidity. Fertiliser is a niche product, with fewer players directly involved compared to more widely traded commodities. Most trading activity comes from industry participants, such as fertiliser producers, distributors, and large agricultural enterprises.

“There have been attempts to launch a world futures market in Chicago. The obstacle is that you cannot get the product delivered. The leading producers sell their production themselves and would not accept to have it delivered against a futures market.

“The lack of a futures quotation makes selling and buying forward or hedge challenging. All the big grain-trading companies traded fertilisers at some stage, but they all gave up partly because of that. Besides, the market is small. The biggest fertiliser trader, Ameropa, possibly trades over 10 million mt annually. Most fertiliser is used where it’s produced and marketed directly by the producers. They don’t need traders.

“Some grain-trading companies still do fertiliser in Latin America for barter trade, giving farmers fertiliser in exchange for crops nine months later. But now the farmers are wealthier and have less need for barter.”

“As there is no hedging mechanism, is the business mainly back-to-back?” I asked.

“I mainly operate back-to-back,” he replied. “I work alone and am not equipped to take too much risk.

“The larger companies take positions, particularly in nitrogen fertiliser. Four or five million tonnes of ammonium sulphate are shipped from China to Brazil annually. Traders go long and pray that the price doesn’t collapse during the 40 days of voyage time. The vessels usually carry 60 – 70,000 mt. If they’re lucky, they sell 20,000 mt in advance and sell the rest on the way.

“Are there payment issues?” I asked

“When I started in the business in 1997, there were 100 importers in Brazil alone. Today, four companies make up 90 per cent of the import market. You have no payment issues.”

“Would a vessel take fertiliser from China to Brazil and then soybeans back?” I asked.

“Yes, they are the same vessels that move soybeans or raw sugar from Brazil. However, a cargo of 70,000 mt is specific to the ammonium sulphate trade in China and Brazil. Most fertiliser is shipped in vessels of between 25 to 50,000 mt. In Europe, 3,000 – 4,000 mt coastal vessels move fertiliser from Russia to North Europe.”

For such a small, niche market, fertilisers are critical in global agriculture. As Michael Pollan explains in his book The Omnivore’s Dilemma – A Natural History of Four Meals, the great turning point in the modern history of agriculture can be dated to 1947 when a vast munitions plant at Muscle Shoals, Alabama, switched from making explosives to making chemical fertiliser. Ammonium nitrate is an excellent source of nitrogen for plants. The chemical fertiliser industry (along with pesticides based on poison gases) was the product of the US government’s effort to convert its war machine to peacetime purposes.

Even though the Earth’s atmosphere is about 80 per cent nitrogen, nitrogen atoms must be split and fixed to hydrogen atoms before making fertiliser or bombs. A German chemist, Fritz Haber, worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on Earth had to be fixed by soil bacteria or electrical lightning, which breaks down nitrogen bonds in the atmosphere.

In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that “there is no way to grow crops and human bodies without nitrogen.”

Without Haber’s invention, life on Earth would have been limited by the small amount of nitrogen that bacteria and lightning alone could release. Mr Smil argues that the Haber-Bosch process for fixing nitrogen (Bosch industrialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 per cent of the population today would not be alive if Haber hadn’t invented it. Without synthetic fertiliser, billions of people would never have been born.

Once humankind had acquired the power to fix nitrogen, the basis of soil fertility shifted from a reliance on the sun’s energy to a new dependency on fossil fuel. More than half of the world’s supply of usable nitrogen is now manufactured—and farmers use more than half of all the synthetic nitrogen to grow corn. *

“We cannot live without fertiliser today,” Michael told me.  “In 2021, the Sri Lankan government banned fertiliser imports to save foreign exchange and demonstrate that the country was green and sustainable. Rice production collapsed by 20-30 per cent, leading to hunger and food riots.

“We do not have an alternative to fertilisers,” he continued. “My friends complain about what I do. They say that fertilisers pollute, and we should be organic. You cannot feed nine billion people with organic. Maybe one day, but not today.”

“But there are some organic fertilisers,” I argued.

“Farmers still use human waste in some parts of the world,” Michael replied. “North Korea is one. In the 19th century, guano, bird excrement, was probably the first fertiliser traded internationally. It is rich in nitrogen, phosphate, and potassium. Farmers still use duck and chicken excrement in the Netherlands and Belgium, but it doesn’t work for all crops.

“Typically, you use NPK triple 15 on coffee, which is 15 per cent nitrogen, 15 per cent phosphate, and 15 per cent potash. The rest is filler. The ratio of duck or chicken waste is not enough. Coffee farmers must use chemical fertilisers.

“Nitrogen, phosphate and potassium are the main fertilisers, but what is DAP?” I asked Michael.

“DAP, diammonium phosphate, is one of the most used phosphate fertilisers. You mine the phosphate and mix it with ammonia to make DAP or MAP, monoammonium phosphate.

“Urea, ammonium nitrate, and ammonium sulphate are nitrogen-based fertilisers. Urea, made from gas, is the main one. You take the gas, process it into liquid ammonia and use that to produce urea. In China, they make it from coal, which is of lower quality. It comes from gas in the Middle East, Egypt, and Russia.

“Potash is a granulated mined product. Among fertilisers, it is the least transformed nutrient.”

“What are the main trade flows in fertiliser?” I asked. “I saw that Trinidad and Tobago is a big exporter of urea. I find that odd.”

“Not really,” Michael replied. “The country is small and has a lot of natural gas, which the industrial sector transforms into ammonia and ships mainly to the US. The nitrogen industries are based where the gas is. You must have a cheap raw material. It makes no sense to produce urea in Europe today. It will cost $500 per mt when the market is $360.

“The big producers have a lot of gas: Russia, the Arab Gulf, Iran, Persian Gulf, Qatar, Egypt, and Indonesia. Venezuela used to be a producer, but you know their situation today.

“Demand for this product is mainly in the US, but the country is nearly self-sufficient with only occasional imports from Canada. Brazil and India are the two biggest importers.

“India is trying to increase its production because it costs them billions in their agriculture budget annually to subsidise these fertilisers. The DAP price CFR India is around $620 per mt, but it trades locally at around $500 per mt. The government pays the difference.

This year, India will import 3 to 4 million mt of urea compared to 12 million mt three to four years ago. But if they don’t import urea, they import the liquid gas to make urea.”

“What about the phosphates? I asked. “I see that Morocco is an exporter.”

“Morocco has the most extensive reserves of rock phosphate in the world. The country has 70 per cent of global reserves, enough to last 2,000 years at current yearly consumption rates.

“There are significant phosphate reserves from Morocco and Algeria to Tunisia and Egypt. Morocco used to export much more rock phosphate as a raw material but is investing in transforming it locally. They want to bring factories and jobs to their country. That brings added value.

“Russia is another significant phosphate producer. Russia is prominent in everything that has to do with fertilisers. They have sulphur, ammonia, cheap gas, rock phosphate reserves and potash.

“The US is also quite significant. When I started 25 years ago, there were ten plants in the US. Today, you have maybe three or four. They all belong to Mosaic, which used to be part of Cargill.

“Sulphur comes from the oil and gas refining industry. That’s why it comes mainly from the Middle East and areas with gas and oil. When you mix rock phosphates with sulfuric acid, you get liquid phosphoric acid, which you mix with ammonia to get finished phosphate fertiliser, DAP and MAP.

“And the potassium – where does that come from?

“It’s also a mined product. There are a few big players: Russia again, Belarus, and Canada. Israel and Jordan are also producers from the Dead Sea area.

“How volatile are prices?” I asked.

“The nitrogen price is the most volatile. Like most commodities, it depends on the S&D, but it also depends on the gas price. In Egypt, you could see the cost of urea go from $300 per mt to $350 per mt in one week. Phosphate prices are more stable. There are fewer producers.

“Potash prices are the most stable. The business is 100 per cent in the hands of the producers, with prices fixed every six months. Canadian exporters will go to China and negotiate with the two or three leading state-owned Chinese importers for the next six months. It doesn’t mean prices don’t go up and down, but it’s super stable.

“Energy prices are an essential price driver, but demand is also significant. Farmers have less money to spend on fertilisers when crop prices are low. Demand fluctuates significantly, which is not the case in most agricultural commodities. Fertiliser demand depends on its price relative to the price farmers receive for their crops.

“Farmers must apply nitrogen each year, but with phosphate and potash, what they use in year one, they can still find some in year two in the soil. It’s not that they can skip it, but they can apply less.

“Fertiliser is one of the inputs that affect the agricultural supply cycle. When crop prices fall, farmers plant less area and use fewer inputs, both area and yield fall. They play a role in balancing agricultural commodity S&Ds.”

• For more on the history of fertilisers, I recommended The Alchemy of Air by Thomas Hager.

© Commodity Conversations® 2024

My new book, Commodity Professionals—The People Behind the Trade, is now available on Amazon.

This week, I chatted with Sameer Soleja, the founder and CEO of Molecule, a provider of CTRM and ETRM systems for the commodity sector.

While ERP (Enterprise Resource Planning) systems broadly focus on overall business operations and management, including finance, procurement, and supply chain management,  CTRM (Commodity Trading Risk Management) and ETRM (Energy Trading and Risk Management) systems are specifically designed for the commodity trading industry, focusing on trade management, risk management, and market data analysis.

Sameer described ETRM and CTRM as “systems of record for a company trading energy or commodity derivatives and physicals.”

“About a hundred software companies are competing in the ETRM space,” Sameer told me. “And the numbers are still growing. However, two companies, Ion Trading and FIS, probably own eight of the top fifteen vendors.  Companies like ours make up the remainder of the top fifteen. There is a long tail of providers who specialize in things from gas accounting to silo management to all sorts of things.

“Consumers have a lot of choices,” Sameer added. “But it’s not a very transparent market. Companies like ours have the incentive to promise the world when you’re jockeying for a chunky contract, of which you might only get a half dozen or less a year. But these chunky contracts typically come with bespoke needs. The software buyer must discern who can provide the services they need.”

I asked Sameer what differentiates his company from others.

“It is the same for any enterprise software provider,” he answered. “We must choose the one or two dimensions in which we will compete and focus our efforts. We concentrate on usability and technology, and our marketing drives that home. You can’t be everything to everyone.

“Even so, focus is our biggest challenge. It should be neither too wide nor too narrow. If it is too wide, we won’t be able to meet a client’s specific needs. If it is too narrow, we would have too little software to sell.”

I told Sameer I had recently heard a story about a new hire at a software company who spent his first morning fixing a bug in the system, sighed, and then resigned. Sameer laughed.

“That’s not what you want happening,” he told me. “You want to create a virtuous cycle between your customers, the use cases you develop your software for, the knowledge your implementation support teams have, and then circle that back up the chain. That way, the customers will be happier, and the software will continuously improve.”

Sameer graduated from the University of Texas at Austin at the end of the dot-com boom and went to work for a company that made custom software for the energy market.

“Over the next eight years,” he told me, “I cycled through some of the places that all the usual suspects cycle through, including Constellation Power in Baltimore where I had my longest stint. I then did my MBA and MPA at the University of Michigan, where I realized that the sector was making terrible software.

“Nobody was ever happy with it. I thought, “Okay, there has to be something better. Let’s bring usability and modern tech into the commodities industry as part of the core platform.”

Sameer founded Molecule in 2012 in Houston and now has a team of around 50 employees, most of whom work remotely in the US, Europe, and South America. The company is opening an office in London for employees in the European area.

“Molecule’s approach has been to sexy up the software and focus on tech and usability,” he told me. “We’ve built our reputation on that. Our brand is sort of outsized in comparison to the size of our company. Our angle is that we understand what our customers do and why.”

The trend in the commodity supply chain is towards outsourcing, whether in operations, compliance or even sustainability. I asked Sameer if risk management and record keeping were going the same way.

“We are a software provider,” he replied. “We don’t install our software on a company’s system; we operate it on our platform. We have two multi-tenant instances, one in Europe and one in the US, and everybody’s on one of those.

“Being in the industry for the last decade, we have got to know other vendors that offer products that a customer might need. We can integrate them into our platform. For example, a customer can benefit from a weather forecasting tool integrated with their compliance system.

“We’re working with a biofuels company that has integrated an environmental auditor. You might not think it would have relevance, but it does when it comes to how you put trades on.”

Molecule recently conducted a survey about sector modernization. I asked Sameer about its conclusions.

“Trading organizations are waking up to the reality that modernization is the key to survival. Interestingly, we found people are not undertaking modernization initiatives to increase their bottom line but to make their businesses more agile. Companies still want their ETRM/CTRM system to be a reliable, fundamental part of their trading organization’s ecosystem, but they want it to support evolving business needs.

“Trading companies want agility and reliability, but they also want better speed and usability and direct access to data. The big ask is to get raw data out of the system. Let’s build a data lake. Let’s extract the data, and we’ll smash it together and do interesting things with machine learning and AI. People want to get their hands on data and do interesting things with it.”

A friend told me that ag tech lags metals and energy. I asked Sameer if it was true.

“Energy is where the money has been,” he replied. “Money brings tech and modernization. The lag is a function of the polarization in the entities involved. You’ve got the ABCD+ group on one side, Farmer Joe on the other, and nothing in between. Ag tech lags unless you’re at one of the ABCD+ companies.

“However, the advent of biofuels at a grand scale offers new opportunities for those in the middle. Producers of crops that become fuels must invest in new technology. If the EPA comes to you and asks you to prove that you earned a credit or certificate, you can’t say, ‘Oh, sorry, my record keeping didn’t work, or you know my compliance system is outdated.’ It could cost you real money.”

“AI is revolutionizing software programming,” I said, “But how is it changing the commodities sector?”

“I believe we are in an experimental stage.

“AI is excellent at summarizing enormous data sets. Agricultural data sets tend to be smaller than electricity data sets, which are huge. Even so, analyzing that amount of data for a community with as limited resources as agricultural can be challenging. The big traders have the resources, but I suspect farms and silos don’t. Their supply chains produce enormous amounts of information. The advent of AI will level the playing field and allow small agricultural players to compete with the ABCD+ group.

“I don’t know whether you are familiar with orange juice, where the big brands use satellites to monitor conditions in the groves. They tell growers when to water, add pesticide, fertilizer, or whatever. They use machine learning. Coca-Cola started doing that ten years ago, but AI may now permit a smaller farmer or firm to do the same.

“AI will re-level the playing field just like the web did 25 years ago,” he concluded. “It is the time to take those bets.”

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

Good morning, Charlotte. Please tell us about ECRUU Sugar Week and your motivations for holding the event.

At ECRUU, we specialise in media monitoring for sugar and ethanol market participants. It’s a pretty niche business, and we’ve been struggling to find an efficient way to get people in these markets to know about our services. Over the years, we’ve been chatting with fellow market information providers, many of whom told us that they’ve been experiencing similar challenges. At the same time, our clients often ask us to recommend companies that provide market analysis.

It became pretty evident that, on the one hand, we had all these companies that provided helpful market information. On the other hand, we had the market participants who needed these services, but there was no efficient way for them to find each other.

That’s how ECRUU Sugar Week was born. We partnered with the market’s best and most prominent information providers to create a free online event where information providers showcase their expertise and participants can easily contact them.

Our objective is to help market information providers – such as ourselves – reach out to the people who need our services and vice versa, for the people who need our services to find us. Ultimately, the aim is to create an efficient and transparent way for market participants to be aware of all the services that can help them stay on top of the sugar market.

Our target audience is anyone involved in the sugar and ethanol markets, whether from near or far. Whether you want to get high-quality market insight or learn more about a particular market information provider – or both – the event is for you.

Why should people sign up?

I have four excellent reasons for people to sign up. First, it’s a unique opportunity to get high-quality content from experts who don’t usually give out free content. Second, it’s entirely online; you can attend from anywhere worldwide. Third, it’s completely free. And four, did I mention it’s free?

We are fortunate to have an excellent lineup with 18 speakers who will present over a week on both the sugar and ethanol markets. We have speakers from the International Sugar Organisation (ISO), Datagro, Green Pool, and Covrig Analytics who will give a global overview. S&P Global Commodity Insights will talk about NAFTA, and we have experts from India, Pakistan, Africa, the CIS and the EU. Marcus Weather will discuss what to look out for weather-wise, and Czarnikow will present on new fuels.

I could go on; you can see the full program is here:

You are based in India. What is happening there in the sugar world?

The sugar market is currently focusing on India. The monsoon has been excellent so far, and we’re looking at a big cane crop in 2024/25 and a probably bigger one in 2025/26. The industry is pushing hard for exports; this could be a game changer for the global S&D, which is otherwise looking balanced. However, the government’s primary focus is the ethanol program, and it wants to ensure sufficient feedstock. India is a tricky one, so we have two experts who will be discussing the subject at our event.

How do you think AI will affect your business and market analytics?

We are keeping a very close eye on AI developments. We’ve identified two main movements. On the one hand, AI has tremendous potential for scraping news and automatically summarising content, which would significantly impact our business. On the other hand, countries are legislating to protect intellectual property rights, making using AI tricky, especially for a company that commercialises its content. So, we aren’t seeing any significant changes at the moment. But as an AI expert once told me, AI won’t steal your job, but the guy using AI will!

There is a lot of talk about AI, but at the end of the day, commodities are a people business. Decades ago, people were convinced that the Internet would kill the brokers’ role, but this hasn’t happened. We’re big proponents of creating relationships among people in the sugar and ethanol markets because we know people want to do business with people, not companies.

That’s why we have a podcast. We invite people who provide information on the sugar market to share who they are, what they do and their journeys so far. Almost no one grew up wanting to work in commodities, yet most of us love what we do. It’s interesting to get to know the people behind the trade. You just wrote a whole book just about that!

You can listen to the podcast here.

You can get your free ticket to ECRUU Sugar Week here.

We also offer a Premium Ticket with added perks. I’d like to extend a special discount to your readers who can use the coupon code COMCONV. You can buy your ticket here.

© Commodity Conversations® 2024

Please tell me a little bit about your career and Kpler.

After completing my education in India, I moved to Singapore in 2011 to join Olam; it was my first job.

I moved to Dubai in 2017, where I ran my research firm, working with grain trading desks worldwide. I joined Kpler in Dubai at the end of 2023, looking after agricultural commodities. One of my responsibilities is to add a layer of opinion-based research to      Kpler’s suite of data products. I work closely with Kpler teams to enhance our coverage across agriculture, grains & oilseeds, veg oils and biofuels.

Kpler was founded in Belgium in 2014. The two co-founders, François Cazor and Jean Maynier, who still control the company today, initially identified a gap in the LNG market.

From there, they expanded to oil and tankers and later dry bulks. In 2023, Kpler acquired the leading ship tracking and maritime analytics providers, MarineTraffic and FleetMon, becoming the number one in vessel tracking with more than 1 billion AIS pings daily.

Kpler is the go-to source for global trade intelligence and the best cargo-tracking platform on the market. Kpler can use its data to aggregate shipments and do all sorts of analyses, including weekly, daily, and monthly volumes between countries by commodities, diversions, commodities on water, ton-miles changes and so on.

Knowing the quantities of the commodities on the water right now gives us significant insights into the market. We call it Kpler Insight. We add to the data product by providing expert analysis and opinion, including news, research reports, price analysis and ad hoc research.

As an analyst, I found that we could track the vessels, but finding out what was on board the ship wasn’t always possible. It was easy from the main ports but challenging for the smaller ones and coastal traffic. How do you get around that problem?

It is challenging in dry bulk, but we can track all vessels over 5,000 t. We use over 250 hard sources, including line-ups, port reports, arrivals and fixtures.

Our process uses rigorous checks for data quality. We have a robust data quality team whose job is to ensure we get the cargo and quantity right. Rigorous back-testing proves our high accuracy in tracking maritime cargo.

Kpler has perfected this process in gas and oil, and we are now applying it to dry shipments. The team has significantly scaled our coverage across ags, major and minor bulks, and commodities such as steel and fertiliser.

It comes with challenges. Recently, we have seen many vessels reporting incorrect AIS positions. Some people don’t want the world to know what they’re up to, particularly in the Black Sea.

They’re turning off their tracking, aren’t they?

For a long time, many vessels showed their position at Moscow’s airport. Now, they’re showing it in more believable places, but a third of all Russian coal exports are loaded with the transponder switched off.

It is similar for wheat and barley in the Black Sea ports and corn out of Caspian ports going to Iran, especially on the southern side, closer to Iran.

Kpler’s risk & compliance product evaluates coverage, projects vessel positions during the AIS gap and qualitatively identifies AIS coverage as low-risk or high-risk.

While AIS is the primary source, we also use other sources to bring depth and colour to our data.

How do you add value to the data Kpler provides you?

I’m an agricultural commodities analyst. My job is to help clients understand and trade agricultural markets. Everything we build and develop is towards this end.

Most companies analyse markets from the supply side, and the big companies spend millions on crop forecasting. We bring something different to the market by focusing on demand and trade.

There are numerous importing countries, and getting accurate and reliable import data is challenging. Kpler’s cargo tracking data gives us an understanding of destination markets. We use it to do bottom-up country-level demand analysis and predict monthly trade flows forward. A good grasp of future flows helps us build quality balance sheets that can be reliably used to trade.

Do you use artificial intelligence?

We have several applications in which AI is bringing efficiency to processes, like automatically assessing anomalies in our data. We have applications of machine learning for processing earth observation data for oil inventories, pattern detection for commodity trading, and forecasting future trades.

Do you make price predictions?

We discuss price direction and share our views on prices. We maintain a view. You can’t have a predictive trade analysis without a view of prices.

Which market do you find the most challenging? 

Russia is the largest wheat exporter but has no established forward market. The global wheat market has become a spot market with little ability to buy down the curve. It has made the market short-term. As a result, you cannot trade an annual balance, only next month’s supply.

Supply is plentiful for this month and the next because the northern hemisphere has just harvested, and Russian and Ukrainian farmers are keen to sell. They have no incentive to carry as they have no certainty over future prices.

This phenomenon has also led to people not investing in storage, making the physical cost of carrying relatively high.

If Egypt and Algeria come in and buy, which happened a couple of weeks ago, the market will rally because they just bought ten days’ worth of production. Once those ten days pass, the exporters start discounting again to get sales. There is no long-term strategic thinking.

Can traders use the Matif to hedge forward?

It is far from a perfect hedge for Russian wheat because of convergence, delivery and quality differences.

What is happening in soybeans, and how will the US election impact the market? 

The US elections and US / China trade relations are the number one factors in the market today. Renewable biodiesel would be second, but that is more for the long term.

The US crushing sector has been running at maximum capacity for several years. It is the bottleneck. They are increasing that capacity, but as far as the soybean balance sheet goes, we assume it will continue to run at maximum capacity. That way, we may not worry about the downstream renewable side, at least for the soybean balance sheet.

China is the elephant in the soybean market. Secrecy has increased, and the market has gone from somewhat transparent to completely opaque, making it harder to predict what China will do.

Using Kpler data, we realised that China will import a record quantity of soybeans in July. Monthly arrivals will be over 11 million tonnes—about 10 per cent from Argentina and the rest from Brazil. This is not because of better margins or a sudden increase in demand. It looks like China is concerned about possible trade issues.

China traditionally imports US beans in October, November, and December and then reverts to Brazilian origin by the end of January.

I believe China wants to avoid being dependent on US beans. Imports from the US will not fall to zero, but China prefers Brazilian origin to US origin. Brazilian beans will go to China, and US beans will have to fight it out to other destinations.

The US is currently growing a considerable crop of soybeans. They are in the ground, and there are no red flags regarding production. We expect the US to have relatively high stocks in 2025 and very high stocks in 2026. This will collapse the structure of the soybean market and increase carries.

Argentina is a factor in soybeans. The country’s farmers are sitting on over 10 million tonnes of stock because it’s a currency for them. It is a dollar-denominated commodity.

Could Argentina change its policy of favouring meal over soybean exports?

The President, Javier Milei, is a libertarian and, ideally, would want to remove all the taxes and export duties, but he just can’t afford to do it. Even if he does, the differential export taxes will remain. The crushing industry is significant and politically influential. It is also a major source of employment and government income.

I’d like to return to something you mentioned about the difficulty of getting reliable information.

A lot of Chinese data around domestic crops and stocks is kept private in view of their food security challenges. This information can be quite valuable to traders. Recently we have started seeing mismatches in customs data as well, which further increases the difficulty of understanding and trading Chinese demand.

I fear that the same thing is starting to happen in Russia. The government tries to maintain an informal price floor on wheat exports and penalises companies that fail to play along. Foreign companies have left, and there has been a consolidation at the export level. So far, there hasn’t been much attempt to control the information flow, but I’m afraid it could be the next step.

After the breakup of the USSR, governments largely left the agricultural commodity trade, but by what you say, they are getting back in.

They are getting involved in the markets in the name of food security. China, Russia, India, Pakistan, and, to some extent, Bangladesh all try to control agricultural markets. Meanwhile, the Egyptian and Saudi governments are the world’s largest grain buyers. Algeria is a big importer; again, it is the government.

Out of the commodities you cover, which one do you prefer?

Although wheat is the most challenging, it is the one I prefer. It has a variety of end-user applications but doesn’t generally go to animal feed or industrial use. It ends up on people’s tables. When I look at pasta, bread, or biscuits, I try to guess the quality and origin of the wheat. It brings tangible meaning to what I do.

© Commodity Conversations® 2024

My new book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

 

Mike works with Sybius, a boutique consultancy firm offering compliance services to the commodity trading and financial sector. Before joining Sybius, Mike worked for 16 years with Cargill, most recently as compliance director for derivatives and commodities.

“My job at Cargill was in the trading compliance areas,” he told me. “I specialised in the intersection between trading in physical commodities and trading in financial instruments on regulated markets.

“The intersection usually occurs when pricing the physical transaction. If you sell wheat and your customer prices it against the Chicago futures, are you acting as a futures broker or providing investment advice?

“No, neither of the two. A commodity trader like Cargill is not a financial institution but must comply with regulations when trading on regulated markets. My role was to ensure that we had internal policies and procedures to comply with these regulations. It included ensuring traders and others do not give the impression of acting as futures broker or providing investment advice.”

Mike told me that he faced three main challenges in that role. The first was that he needed to understand the business. He had people in his group who were fantastic professionals from the world of finance, but they were new to the world of physical commodities. They had to quickly learn how it worked.

His second challenge was translating compliance in a way traders could understand.

His third challenge was the speed at which the regulatory landscape changed. He had been with Cargill for one year when Lehman Brothers collapsed. It was the kick-off for long-term change in the world of finance.

“It is an evolving space,” he told me. “More regulation will come If we as an industry do not operate properly. There are ongoing discussions about how commodity firms should be regulated, particularly in Europe, the US, and elsewhere.

“Are there specific measures legislators are looking to introduce?” I asked.

“Regulation will come into our sector through the financial markets,” he replied. “One suggestion is to introduce capital requirements. If you want to take risks in the market, you need to have the necessary capital resources.

“The US, EU and other jurisdictions already restrict risk-taking by limiting the size of traders’ positions on a futures exchange. The exchanges already impose financing requirements through initial and variation margins.

“Europe is also approaching the question through the lens of market abuse and conduct, looking at how traders hedge their physical transactions. A trading book will have a portfolio of positions without a one-to-one relationship between them. From a regulatory perspective, it has the potential to be vulnerable to abuse.

“Don’t expect compliance to go away,” Mike warned. “The more you embrace it, the easier it will be to deal with.”

“Do you think physical brokers will ever be regulated?” I asked. I had often asked myself this question during my years as a physical broker.

“I believe they could be,” Mike replied. “The regulators are looking at physical brokers in standardised contracts such as sunflower oil in Europe or the Mississippi barge market in the US. They could ask whether they are physical cargoes or standardised financial instruments.”

I have often argued that the agricultural business is largely privatised and has less room for corruption than in the oil and mining industries, where governments grant licences and permits. I asked Mike if he agreed.

“The US and Europe have already imposed massive fines for bribery and corruption,” Mike countered, “albeit in the oil sector and for events many years ago.

“But think about cocoa,” Mike continued. “You’re buying from government entities in both Ghana and Ivory Coast. If you sell soybeans to China, your buyers may be state-owned companies. Countries like Iran, Nigeria, and Algeria also buy through state companies. The magnitude is less than oil’s, but you are still vulnerable in agriculture.”

“Does compliance cover reputation as well?” I asked. “Would that come under your remit?”

“Everybody in a company is responsible for its reputation. A single trader can destroy a hundreds-of-year-old company in a second. As such, senior management, divisional managers, all employees, and even beyond, like contractors—rather than just compliance officers—need to look out for reputational risk. ”

“But what about legal compliance?” I asked. “There seems to be a fuzzy frontier between compliance and legal.”

“Compliance starts where legal compliance ends,” Mike answered. “Legal compliance clearly defines what a company can and can’t do. However, there are grey areas in the legal world, and that’s where compliance starts. Compliance, for me, means managing the grey. We need to figure out the middle. It’s where the problems start and where risk assessment kicks in. It defines how much risk a company may be willing to take.”

“There’s so much legislation, and it’s changing all the time,” I said. “Cargill operates in so many countries; how do they keep up with it all?”

“Large commodity traders clearly define multiple compliance areas such as sanctions, competition, anti-bribery, food safety, etc,” he replied. “You must organise and structure it. And you have priorities within each function. It’s a volume problem and a prioritisation problem.

“You must also do a risk assessment depending on your area of compliance. If it is competition law, you must look in every country where you operate. If it’s futures trading, you look at the countries where you trade the futures and where the futures exchanges are located. You have plenty of people following the rules. However, digesting that information can be a challenge.”

“Doesn’t that make it harder for you, Mike, now that you are in a smaller organisation?” I asked. “How do you track all that information and ensure you’re up to speed?”

“It is a good question,” he replied. “I agree I don’t have the resources I had at Cargill, but information today is much more available than it was twenty years ago. We are linked to a lot of trading organisations and have a network of people with whom we share information

“I’m not advising the Cargills of this world. Smaller organisations have different risk profiles. When you have a specific client, you go through the list of things they’re exposed to and focus on those. It reduces your workload. Besides, I advise more on compliance strategies and structures – how you can practically deal with your risks – than on day-to-day activities.

“There is another element here. You get into a routine working for one company and can become a victim of groupthink, attached to a particular way of seeing and doing things. As a consultant, I am exposed to a variety of views. I am no longer factually and emotionally attached to one pre-determinate view. I believe it is called ‘non-attachment’ in advanced organisational thinking.”

“Where does compliance end and risk management start?” I asked. “Is compliance a subcategory of risk management?”

“Too many people in the commodity world misunderstand risk management,” he replied. “They too often think risk management is market risk management, but there are many other risk areas you need to consider. Risk management is mitigating the risks in your business activity, irrespective of where they’re coming from.

“You have market, compliance, counterparty, funding, and financing risks. People in accounting have to manage risk. There is a whole range of risks in trade execution. You have cyber security and IT risks. You have fraud and payment risks. The people responsible for managing these risks are not necessarily in compliance, but compliance provides a framework and interacts at every level of risk management.

I saw on his LinkedIn profile that Mike had experience in forensic accounting.

“Forensic activities, not forensic accounting,” he corrected me. “Forensic activities are part of the compliance role. I’m not examining a crime and how a person died, but there is a comparison. We try to understand what happened and see if it is still happening. We try to find patterns. It is an intense role, but it is a crucial part of compliance to prevent further damage to the company.

“It may also lead to an improvement in trading activities. Suppose you are not contravening any market regulations but still move the market when you hedge a physical transaction. In that case, our forensic activity can highlight possible ways to improve your hedge execution. It is the advantage of business-oriented compliance.”

“Is this something that artificial intelligence could help with?” I asked. “It seems an obvious candidate for artificial intelligence.”

“Absolutely,” he replied. “It’s an example of where artificial intelligence can help. Regulators already use or at least consider the use of AI extensively.

“The only issue is that AI doesn’t tell you what it did, how it did it, or if it did everything. It can be challenging from a regulatory perspective.

“One downside is that AI can send out too many false positives. As a compliance officer, you must confirm and document that every false positive is false.”

“What are the best and the worst things about being a compliance officer?” I asked

“The best thing is I can look into everything and learn about the business. Today, risk management is natural for me, for example, but I discovered it through the compliance journey.

“The worst thing is that traders often view you as a ‘no-sayer’. I have had to learn not to say ‘no’ too quickly, and I am still learning. Looking back, I have often said ‘no’ too quickly. Traders are not doing things wrong intentionally – some do, but the vast majority don’t.

“Even so, it takes courage and resilience to say ‘no’ when everyone wants you to say ‘yes’.”

“Are you a policeman or a detective?” I asked.

“I am neither,” Mike replied. “People often think of us as the police, but if we do our role correctly, we are more of a business enabler. We ensure the business can continue to operate and has the license to operate. In one sense, we are policemen who protect that licence to operate. In another sense, we set up the processes that facilitate business. We are an enabler.

“I like to think of myself as more of a harbour pilot,” he continued. “If I were a policeman, I would keep the vessel miles from the coast. A pilot’s role is to navigate the ship through the rocks and keep the business safe. If you need to slow down, you slow down but speed up when you can.

“People in the trading world should see their compliance people as partners, not policemen. They’re there to help you, keep the business functioning, and keep you out of jail.”

© Commodity Conversations® 2024

Commodity Professionals – The People Behind the Trade is available on Amazon.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Don’t always rely on the financial reporting.

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

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

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

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

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

Is reputation risk a factor for the banks?

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

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

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

© Commodity Conversations ® 2024

Commodity Professionals – The People Behind the Trade is available on Amazon.