Category: Blog

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

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

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

Could you explain the role of a vessel agent?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does that include containers?

No, it is just bulk.

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

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

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

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

What is it like being a vessel agent?

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

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

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

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

What is your biggest challenge as an agent?

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

How did you get into the business?

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

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

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

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

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

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

Did you ever get lost?

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

Did you panic?

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

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

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

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

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

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

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

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

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

I hear you also organize group tours.

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

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

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

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

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

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

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

Am I allowed four messages?

Yes!

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

First and most important: never stop dreaming.

Second: whatever you do, do it with passion.

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

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

I love what I do, even in difficult moments.

Thank you, Luiz!

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

© Commodity Conversations ® 2022

Good afternoon, Jules. I believe that your father was a freight broker; did you get into the commodity business because of him?

Well remembered; my father was indeed a shipbroker and a director of the Baltic Exchange. The only career advice he gave me was to not go into shipbroking. For once, I followed his advice. I still focused on the city, sending over 300 application letters to various banks and brokerages in the hope of becoming a foreign exchange trader. I found a copy of one of the letters the other day. I was shocked at how punchy, pushy, aggressive, and arrogant I was at 21!

Goldman Sachs invited me for an interview (which didn’t translate into a job offer). While in their office, I met their one and only commodity trader (at that time). It sparked my interest in commodities. My father was friendly with the CEO of ED&F Man, and I had been at school with his son, Andrew. I applied to EDF Man as a sugar trader, but they turned me down because of my lack of language skills.

My brother-in-law told me that Czarnikow was looking for trainee sugar traders. I applied, and they gave me the job. They also gave me responsibility right from the first day. I loved it. I stayed with them for ten years.

After an initial period in London, Czarnikow sent me to Singapore, where their office handled Queensland’s sugar exports. There were only four of us in the office, and one of those other three, Peggy, still works there. She just celebrated her 50^th year with the company.

After a few years in Singapore, I moved back to London, where I looked after Czarnikow’s Moscow office, but from London.

A few years later, ED&F Man offered me a job to return to Singapore to manage their Asian trading book. I had just turned thirty and viewed it as an opportunity that I couldn’t turn down.

As a company, Czarnikow prioritized client relationships; they always put their clients first. EDF Man were pure traders, and it was, I felt, a more transactional environment. I wasn’t entirely comfortable with their approach, and during the four years I was with them, I slowly fell out of love with physical trading.

In 2008, Barclays Capital offered me a derivative-trading position in Singapore and then London. I took it and stayed with them for about four great years before the bank ran into difficulties in copper and wound down the commodities business. I jumped across to Standard Chartered. They had about five traders on their commodities desk, but facing regulatory headwinds, they, too, wound down the size of their trading business after three years.

I found a position with Oak Capital in the City. They were market makers in oil, looking to expand into agricultural markets. They liked to move quickly, jobbing in and out of the market. I was more of a long-term trader who entered the market based on my perception of market fundamentals – and I held a position even if the market went against me in the short term. They weren’t comfortable with that. Our trading philosophies were a mismatch.

While at Oak Capital, I began to take an interest in quantitative trading. Quant trading involves using computer algorithms and programs—based on mathematical models—to identify and capitalize on trading opportunities. It consists of researching historical data to identify patterns and profit opportunities.

I felt that I was too emotional as a trader. I loved the idea of taking emotion out of my trading and trusting the algorithms. I started off down the rabbit hole!

Seasonality is a big part of agriculture, which is a natural fit with algorithms – and I did a lot of work on calendar spreads and relative value. I set up my own business running and designing systematic trading strategies for small hedge funds. The systems struggled during the Trump years when many historical patterns broke down. I then ran into Covid and lockdown.

I had a long hard think about what I wanted to do. I was in my late forties and realized I didn’t want to trade anymore. I think it is an age thing. Trading is a stressful business, but you only realize just how stressful when you stop.

A headhunter friend asked me what I enjoyed about trading – what excited me. I was shocked to realize that I couldn’t think of anything!

As we talked, I realized that the time I most enjoyed in my career was when I was at Czarnikow, building relationships and finding solutions for our clients. You don’t have that on the derivative side of the business.

My friend suggested that my interpersonal skills and experience would be well suited to headhunting, and I sought out the advice of Jakob Bloch at Commodity Appointments who I had been in a process with some years back. He confirmed that view and invited me to join him at CA – and here I am!

Commodity traders are primarily young. They have a limited shelf-life. You reinvented yourself as a headhunter, but what do you recommend other traders do when they get too old to trade?

I consider myself very lucky to have somehow solved that puzzle. I have just turned 50, and I am now seeing CVs from friends and former colleagues my age. The funnel narrows as you swim towards the top.

I think older traders need to identify which aspect of their job they genuinely enjoy and then orientate themselves in that direction. If like me, they decide that they don’t want to do it anymore, I suggest they consider moving on to something else.

It might sound negative, but it isn’t. It is incredibly positive. Traders, particularly physical traders, are great entrepreneurs. Trading is an entrepreneurial business that you must look at holistically. Every time you do something, you must ask what effect it will have on other parts of the supply chain.

So, my advice would be to see what business you want to be involved in and start it! You have the skills you need, so decide which niche interests you.

Are you a headhunter or a recruitment consultant?

I am a headhunter. As with any business, there is a spectrum. At one end, you have the uber-high-end individuals. On the other, you may be placing temps.

Commodity Appointments is a relatively boutique firm where we concentrate on the higher end of the spectrum. It is more of a numbers game if you come into recruiting straight out of university. In my situation, I try to utilize the network I developed in my earlier career. My edge is that I have sat in the seats of the clients and the candidates. It helps the conversation.

We are a commodity-specialist firm, and we only operate within commodities. We specialize in the front office, typically traders – especially physical traders. We have strong power, gas, and utilities networks, and I bring experience from agriculture and financial institutions. If you are a senior trader, you would probably want someone with similar experience to represent you. If you are a 25-year-old making your first job move, you would probably want someone of a similar age and understanding who is more relatable and relevant to you.

Apart from experience, what skills do you need as a headhunter?

Emotional Intelligence and the ability to empathize – to listen and not just hear what people tell you. You can never have a bad conversation, even if it eventually comes to nothing. The more data points you have, the better. Each talk is a data point. A big part of headhunting is joining those dots.

We are all different, so it is a matter of making the most of your skill sets. I am quite an affable guy, and I enjoy chatting with people. That’s my thing. Other headhunters may be more quantitative and analytical. You don’t have to be a particular person, but it is a people business. You can’t rub people up the wrong way – you wouldn’t last long!

Talk me through the process.

Most people misunderstand what a headhunter does. They look at it from the candidate’s point of view and think that a headhunter can magic them up a job. But that’s not how it works. It is the opposite.

The hiring clients drive the process. They contract us on a retained or contingency/success basis. If a client doesn’t retain us, we will at least want exclusivity. It doesn’t look good on me if I am the fifth headhunter to call a candidate about the same position.

We will sit with the client to work out what skills and experience they are seeking. There will sometimes be a job description, but the HR department often writes job descriptions with only an arm’s length idea of what is needed.

I prefer to sit with the head of the desk or with the person to whom the candidate will ultimately report. I need to understand the firm’s culture, the team dynamics, the essential skills, and the nice-to-haves. We will then put together a list of candidates and approach them to see if they are willing to move.

Being prepared to move is an important issue, particularly with senior people. They will be reluctant to move to a firm that might not have a long-term commitment to the business. A bird-in-the-hand is worth two in the bush.

I think of a candidate list as a colouring book that hasn’t been coloured in. My job is to colour it in –  to provide the information that you don’t see on a cv and which might not naturally come out in an interview. I sometimes feel a bit like a priest. Candidates tell me stuff they wouldn’t tell colleagues or competitors, and I must treat that in confidence. It adds colour and detail to a profile, and my job is to try and impart that as successfully as possible to the client.

Is headhunting a competitive business?

Yes and no. The advent of LinkedIn has made some aspects of the job more straightforward and, therefore, more competitive. There are few barriers to entry in headhunting.  Over the past few years, some large companies have employed people from headhunting firms to do in-house recruitment, but as far as I can see, many still engage headhunters anyway.

Some hedge funds don’t care whether everyone knows if they are looking for people and will simultaneously give the task to half a dozen headhunters and post the vacancy on LinkedIn and their website. However, the less transactional clients will generally only work through one headhunter they trust. It brings it all back to the essence of the job, which is the power of personal relationships. You may have 10,000 connections on LinkedIn, but it doesn’t mean anything unless you have at least some degree of connection on a personal level.

Your description sounds like what I used to do when I was broking physical cargoes. You broker people – but it is the same. I tend to avoid conflict and prefer physical broking to trading. With broking, you look for a win-win situation where everyone is happy – like what you were doing at Czarnikow – while as a physical trader, you ultimately have winners and losers. It makes me wonder whether you would have been better as a broker than as a trader – and that you may have missed your true vocation.

Your analogy of a broker is a good one. I happily chat with people all day long with no objective other than to try and find out what the employment market is doing – who is moving where, which firms are doing well – that sort of thing. When you were a broker, and someone came to you with a cargo to sell, you would already have a short list of potential buyers. The same applies to me. When a client approaches me with an open position, I already know who might fill it.

Have I been in the wrong job? It is almost too depressing to think about it, but I don’t think so. I enjoyed my experience as a physical trader, working with clients to get the most out of the market. I don’t think trading has to be transactional. I moved on to derivatives and loved it, perhaps because the market, not a particular client, was on the other side of the trade. There is no conflict when the market is your counterparty.

Was I any good as a derivatives trader? I was good enough to last as long as I did. If you are bad at it, you don’t stay more than a few months. But, on the other hand, if I had been excellent at it, I would have retired by now.

I feel lucky to have come into headhunting. I don’t think I should have transitioned into it sooner, as that would have meant missing out on something else. I am unusual to have come out of trading into headhunting. My experience as a trader helps me enormously in my current role. I think I am a better headhunter for having been a trader.

So, if you are a trader wondering whether to shift across to headhunting, I would advise looking at it closely. You would likely have a lot to offer.

 How does a headhunter get paid?

It varies between firms, but the employer generally pays a percentage of the first-year compensation package, including a signing-on fee if there is one. We prefer to concentrate on a few high-paying positions and do them well rather than doing many smaller ones.

 Could you describe a typical day?

I never looked at my diary when trading unless I was travelling somewhere. I knew when the market opened and closed, and that was enough. My working life now is divided into half-hour chunks. I spend most of my day speaking to people via video conference or telephone. I don’t know what life was like before Zoom and Microsoft Teams, but I suspect you just picked up the phone and called people. Now, I schedule most of my conversations.

Technology has set me free as I can now work between home and the office, but it is easy to get holed up and become a technology prisoner. It is essential to meet people in person, even without a specific reason. The best conversations I have are with people I meet for a coffee where there is no agenda. There is no substitute for face-to-face discussions.

I spend a couple of hours daily on video calls, but I haven’t swapped my trading screen for a video one. As a trader, you are a slave to your screen. I am glad to have left that behind.

I do my research. I constantly work to broaden my network, turn my second-level contacts into first-level ones, and learn about new markets like energy, power, and gas.

 Your company handles recruitment across metals, energy and ags. Are ag traders different from metals and energy traders?

I prefer to divide the market between derivative traders and physical traders. I think that physical agricultural commodity people are a breed apart. Energy guys have a confident swagger – and more of a dangerous look behind their eyes!

Most physical traders are social. They must be to get business done with their clients – real people. Most derivative traders don’t deal with people, just their market screens or OTC brokers. And any OTC broker will tell you they don’t get treated like real people!

What positions are employers looking to fill now – data scientists, programmers, sustainability professionals?

I see a great deal of interest in quants and data scientists. Commodity markets are booming while investors are looking to diversify their portfolios – the two are interrelated. Some funds are struggling to deploy some of their inflows and looking to diversify into commodities and agriculture.

We see a lot of demand, but it is a small talent pool. When a hedge wants an agri-commodities quant, there aren’t many people to choose from simply because it’s such a young sector.

The funds do realize that commodity markets are different. There is no point in taking a quant off, say, crypto and asking them to build a model around cocoa. They need someone who understands the underlying nature of the agricultural markets. It is a challenge to find that talent.

The commodity business has – or had – a reputation for being male-dominated – is that changing?

Yes, it is. First, companies are under pressure to employ more women. Second, women look at commodities differently than in the past. It is a bit of a snowball effect. More women are applying to the sector because it is becoming less male-dominated. The more women join, the more women want to join. It is self-reinforcing.

There are three “buts”.

The first is that the process will take time. Finding women with the required experience to fill senior roles is sometimes challenging. It will change as women work their way up the ranks.

The second is that women are sometimes less flexible geographically than men. We still have some way to go before it becomes the norm for men to give up a job to follow their partners to another country. Some women may be more reluctant to move countries if it means their children must change schools. It is becoming less so, but men may prioritize their careers while women may prioritize stable family life. Geographic flexibility is essential in our business.

The third follows from the second – women may be more risk averse than men when changing jobs. We had a recent search where a woman was the best candidate by far, but she decided not to take the risk of jumping.

When I joined the business thirty years ago, there were few female traders. That is no longer the case.

What advice would you give to a young person thinking of getting into the agricultural supply chain business – not just trading?

It follows my previous remarks. I would advise them to take every opportunity they get! If you are unsure about taking a new position – for example, if it means moving – do it! If it feels like an opportunity, take it. Nothing is forever. You can usually find your way back if it doesn’t work.

It doesn’t necessarily mean changing companies. If your boss is looking for volunteers for a new position or venture, stick your hand up!

And for someone already in the sector looking to change jobs?

First, identify what makes you stand out and then capitalize on it. Ask yourself what your edge is.

Second, identify any areas of weakness and take measures to improve them, for example, by taking night classes. Never stop learning and never stop asking questions. Continually improve your skills.

What would your 21-year-old self think about what you have done and who you are now?

When I was 21, I never really looked that far ahead. When I started in the business, I never asked myself where I would be in ten years, let alone thirty!

Another way of looking at the question is to ask, “Knowing what I know now, would I have done anything differently?” The answer to that is a solid “No.” I have enjoyed every bit of my career – admittedly, some more than others. Each experience has given me a different point of view and insight. I am lucky.

I have friends who joined Czarnikow at the same time as I did and are still there. They have had fantastic careers and are probably financially better off than me. I could have stayed at Czarnikow, and I would have been happy. But I am glad I didn’t. I liked the variety and the challenges that my career has offered me.

I am not one for looking back and wishing I wish I had done something differently. It’s gone. It’s happened. Move on.

In saying that, I realize I am more of a trader than I thought. Don’t beat yourself up over past mistakes. Learn from them and look ahead for new opportunities.

Thank you, Jules, for your time and input.

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

© Commodity Conversations ® 2022

 A conversation with Kiran Wadhwana

 Good morning, Kiran. How would you describe what you do?

 I am an origin broker active in the Indian export market for physical sugar. I act as a middleman between a mill wanting to sell physical sugar for exports and a trader looking to export that sugar. I earn a commission on any trades that I put together.

 Why do traders need origin brokers in addition to their own local offices?

When you have your own office, people move in and out, getting promoted or changing firms. It means that most relationships are with the company and not with the individual – and they could be weaker as a result. An origin broker builds up personal relationships with suppliers over a long period.

Origin brokers will have a detailed understanding of what is happening in their procurement areas regarding crop prospects and industrial processing capacity. For example, have any mills increased capacity or added a refining end?

As an origin broker, I keep my ear to the ground, and with my long-term relationships, I can get a good feel of the moves and trends in the local market – perhaps better than if a company has its own office.

There is also the issue of counterparty risk. As an origin broker, I must know the financial condition of clients. I must evaluate the risk that they may default on a contract if the market moves against them.

Do traders pay for you to bring the offers and put the trade together, or do they pay you for your market information?

It is a good question. The answer is probably ‘both’. In addition to broking, I also double up as a consultant for both local mills and international trading companies. Some take me on a retainer. I help domestic mills understand the world market and help international traders understand the local market.

I send out a weekly report that covers crop progress, government policy, industrial capacities, and trading issues. I also cover ethanol policy; it is critical to the sugar market.

Government policy is probably the toughest. It is also critical. India’s government can’t just look at one commodity. It must look at the total domestic food supply. We have such a vast population it would be impossible for other countries to supply our needs.

You could say that I am a bridge between the domestic and international markets, with information flowing in both directions.

Who pays you on a brokerage deal?

I structure my business such that the sellers, rather than the buyers, pay the commission. That may or not be the same for other brokers.

I usually charge 50 rupees per tonne, but some brokers charge double that.

Are there lots of origin brokers in India for sugar?

Yes. India has a large domestic sugar market. Last year we exported about 12 million tonnes, while the domestic market is 27 million. Most brokers only work in the domestic market, although some double up and do exports. A domestic broker may not understand the export market. I am probably one of the few who works exclusively in the export market. I don’t do any domestic broking.

There are probably 15-20 brokers active in the export market.

There is a thin line in India between a broker and a trader. One day someone may be broking, and the subsequent day trading. I think I am the only one who only does broking. I do not trade.

Could you describe a typical day?

I am lucky to have worked from home for the past 20 years, and there is no distinction between home and office life. It may sound good – and it is – even if it means that I work all the time!

I get up at around 5 am, do my morning exercises, and then read the overnight futures, physical market, and analytical reports. I use this quiet time to check recent trades’ logistical and execution details. I also do any administrative tasks that need to be done.

At around 8 am, I receive the overnight reports from New York. By then, my Indian clients have begun to contact me on WhatsApp, asking questions, exchanging market information, looking to buy or sell physical sugar, or checking on execution issues. I used to do everything by telephone, but it has now moved to WhatsApp.

European clients wake up at around 2 pm my time. It starts to get busy as they are either looking for sugar or trying to keep abreast of any policy developments that may have occurred overnight in India. That goes on until around 7 pm, when the New York futures market becomes more active. I advise some Indian clients on pricing their export sales on the futures exchange. The moves in flat price can also generate new physical business.

My day ends around 8.30 pm. It sounds like a long day, but I don’t have to commute. The line between home and office is, well, thin. I am a few years from retirement, and I don’t have to put as much effort into my business to get the same result as I used to. I like that.

What skills and experience do you need to be an origin broker?

An essential skill is getting on with people and managing relationships with clients. To do that I think that you must like people and social interaction. You must also be prepared to accept ‘no’ as an answer and realise that markets can be calm for extended periods.

Working in India, I must keep a keen eye on government policy. We have a new policy every year. I try to understand the workings of domestic politics and anticipate what policy may be and how it might affect the markets.

Perhaps experience is more important than any skill set. Over my career, I have been a farmer, a miller, a trader, a futures broker, and a consultant. It has allowed me to understand both domestic and international markets.

My grandfather started the family in the sugar business and founded the company ITC – International Trading Company – under which I still operate. He was a trader, but now I only do broking and consulting.

Tell me about your time as a farmer and mill owner.

When I finished my MBA in the US in 1985, my father said, “Well, you have been educated in the best universities in the world. I will buy a sugar mill, and you will run it for me!”

The mill came with the 4,000-acre farm, and I became one of India’s largest sugarcane growers. I learned the business from the ground up, even if I was a gentleman farmer.

So, you were not in the field with a machete cutting the cane?

I went to the fields in a jeep but didn’t have a machete!

Out of all the hats you have worn, which is the one that has taught you the most?

 My time as a gentleman farmer and miller helped me enormously. If I had not had that experience, I would not have such a good understanding of the underlying issues in the market – nor would I have been able to have such a good relationship with the mills. You can only understand the psychology of a farmer if you have been a farmer. The same applies to milling. I did both for more than 20 years.

What happened to the farm?

It is still there but under litigation with the government. The Urban Land Ceiling Act, passed in 1976, limits the amount of land a farmer can hold is 75 acres unless the farm is mechanised. Our farm is mechanised, but we are still fighting the issue in the courts. Local people have encroached on the land. It is still in our name, but local people live there and farm it.

The farm has an issue with water. The local government has diverted the farm’s water supply to urban areas as the population has grown.

The farm has become more of a liability than anything else.

What about the mill?

It is still there, but it has been closed for 20 years. We built a school in the factory area that we run along with two other schools we opened in local villages – a total of 1,400 students from nursery to year twelve.

We also built a religious temple on the mill site for the local population.

Which is the hardest job in your supply chain?

Farming is by far the hardest. It is the most complex and risky part of the sugar supply chain. Although Indian farmers receive a fixed price for their cane, many other factors can affect their crops: climate, weather, and insect infestations (sometimes from neighbouring farms).

New technology may make farming more accessible, but it remains risky and complex. Sitting here in an air-conditioned office is far easier than being out there in the fields.

What is the worst thing about your job?

When people default on a contract.

There are two types of defaults. The first can result from an adverse market move; for example, if a mill sells you sugar at one price, the market price increases, and the mill sells the same sugar at a higher price to another buyer. Knowing your client and helping them manage their sales can reduce counterparty risk from adverse market moves.

The second type of default can occur because of a change in government policy, for example, if the government restricts exports.

I find the second the most stressful. It can result in huge losses for both millers and traders.

Is government policy – and changes in government policy – the biggest challenge you face?

Government policy is OK. Policy changes – or the delays in announcing policy – cause problems. Mills need to sell their sugar three months in advance, but the government thinks that once they reveal the policy, the mills can export the next day. It doesn’t work like that. Mills are industrial units that must plan at least six months ahead.

Do you need different skills as a broker compared to being a trader?

The trader looks at a deal in terms of what it means for his bottom line – how he can make money from it. A broker aims for a win-win for both sides. When I sell sugar for a mill, I need to understand the miller’s costs, their concerns and what other options they have. But I also know that the trader must make money, or they won’t do the business. I tell the trader he must leave some money on the table for the mill, or he won’t return to you next time – and vice versa.

I am constantly looking to achieve a balance – that’s what makes you a proper independent broker.

When I was broking, I found that I was always trying to keep people happy. Broking suited my personality as I tend to avoid conflict. Traders often find themselves in a conflictual situation where they must fight for their margin. Does that apply to you as well?

Very much so! I work to bring people together. I avoid conflict.

Conflict avoidance is not just a question of personality. It makes sense from a business perspective. The only raw material I have is my time. I must use it wisely. If you get into a conflict, you waste too much time trying to solve a problem rather than doing any productive work. So, if you can nip a conflict in the bud – not let it develop – you will have more time to do more deals while keeping your existing customers happy.

Your brother works as a trader for a trade house. It is interesting that in the same family, we have two brothers, one a trader and the other a broker. How does your brother’s character differ from yours – and how do your skillsets compare?

 My brother is more of a risk-taker than I am. He has a higher appetite for risk.

As a trader, he may do business with a financially weak mill and take a chance on the counterparty to get a good deal. That is something I would fear doing. I prefer to have a financially strong counterparty and not get into a conflict over contract performance.

My brother doesn’t look at the physical volume of the business he does but rather the profitability of each trade he does. I have a fixed commission per tonne, and I will try to maximise volume while simultaneously ensuring that the counterparties are strong and that there is no risk of default.

Is your brother braver than you?

He takes risks that I wouldn’t be willing to take. It is also a question of age. As you grow older, you become more risk averse. I am 5-6 years older than him.

How does that affect your ego?

Markets have a way of beating the ego out of you, whether you are a broker, analyst, or trader! We can all get things wrong. Humility is an asset. No one is always correct, and, in your career, you will get things wrong.

What is your favourite thing about what you do?

Making money!

And your second favourite thing?

I am constantly learning. I learn something new every day. I learn from my clients and from people who ask me questions. My clients teach me everything.

I love to train younger people. When I teach them, I learn from them.

What advice would you give to a young person starting in the business?

Understand what drives production! If you don’t understand production, you will never understand your market.

Last question – what would your 20-year-old self think of you now?

Funnily enough, I recently asked myself that same question.

My 20-year-old-self would never have imagined the path I followed. I was in the US when I was twenty, finishing my undergraduate course in Houston, Texas, and applying for an MBA at the University of Michigan, ANN ARBOR.

There were six of us from India on the MBA course. Four stayed in the US and two, including me, came back to India. I keep in touch with the four who remained in the US. They are all successful and certainly have more money than I have. So, if you judge success purely on money, they are all more successful than me.

Religion plays an integral part in my life. As I mentioned, we built a temple on the site of our mill, and I am a trustee of the Akshardham temple in Delphi – the biggest Hindu temple in the world.

The guru who built the temple, Pramukh Swami Maharaj, always said, “In the joy of others, I find my own.” I have applied that motto in both my private and business life.

So, when it comes to life quality and philosophy, I am satisfied with – and proud of – the life I have led. I think my 20-year-old-self would be too!

Thank you, Kiran, for your time and input.

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

© Commodity Conversations ® 2022

Could you please tell me a little about yourself and your company Best Weather Inc?

The weather has fascinated me since I was a boy growing up in New Jersey. I studied at a small college in Vermont, where my professor started the Weather Channel. I had long hair, and my professor felt that my hippy look – combined with my strong New Jersey accent – would limit my TV career. He suggested I do something else.

In 1982, I drove my beat-up VW bus 2,000 miles to Iowa, where I worked for many years for a small firm called Freese-Notis Weather. I joined the company knowing nothing about farming, but by the time I left ten to fifteen years later, I had the equivalent of a PhD in agriculture! While there, we built up their commodity advisory business with significant agricultural and food companies as clients. I learned about the importance of weather in the commodity sector.

I intended to return to school to study agricultural meteorology but decided to start managing some discretionary money, trading in the markets for clients. I didn’t have the personality for it and couldn’t handle the stress. I earned enough to send my sister through law school but decided that my real forte was in client advisory. I started Best Weather Inc in 1999 and became chief meteorologist for Blenheim Capital Management and other hedge funds.

In recent years, I have shifted focus to smaller clients – particularly in the farming community – and launched a couple of newsletters with trade recommendations. In addition to the weather, I look at climate change and produce long-range forecasts on yields etc.

They say that weather is the most critical driver of agricultural commodities, but politics currently has a firm grip on the steering wheel. Is the weather going to soon get back into the driving seat?

The weather has taken a bit of a back seat since the Russians invaded Ukraine, but agricultural commodity prices were already rising long before the war. There are some serious weather concerns out there.

South America has seen their worst drought in 35 years, which has significantly impacted soybean prices. It was too hot and dry in December and January, and although the situation is improving, it is a little late for the soybean crop. Soybeans pollinate and develop from December through February in South America. Recent rains may even negatively impact yields if they delay or slow the  Argentina grain harvest.  A wet spring in the U.S. could also delay Midwest corn and soybean planting for the next crop.

Last year, much of central and eastern Russia saw one of its worst droughts in 15-20 years.

Drought also hit the northern US plains and parts of Canada. We could see an easing of the drought in the Western Plains this year, but the moisture deficit is still severe from Colorado to West Texas and the Southwest. Water levels in the Colorado River have fallen significantly over the past few years.

China had a dry winter, but we expect to see more moisture during the April / July period. It could improve things pre-harvest.

Flooding in central and eastern Australia impacted their wheat harvest, but overall, this moisture is probably beneficial for Australian agriculture. The only concern is the far southwestern parts of the country.

Reading between the lines, you sound bullish corn and beans and bearish wheat?

As you said, politics and not weather currently drive the markets. Wheat depends on the Ukraine war, and that is tough to predict.

Also, wheat is grown in five of six countries, and you must get the weather right in all of them to get the market right. It is not easy to do.

The developing La Nina could be beneficial to many crops and take some of the sting from food inflation. Last year we had a whole series of weather problems. We are expecting fewer this year.

Compared to last year, I am more optimistic about most agricultural commodity yields for this harvest. Things could change going into the Northern Hemisphere summer, but for the moment, I am more bearish than bullish on the agricultural complex. Politics aside.

What about coffee?

Last year, Brazil’s coffee areas had their worst freeze in thirty years. Coming on top of the drought, coffee prices doubled.

There was also a drought in NE Brazil. Part of that might result from deforestation. It is hard to quantify the effect that deforestation has on local weather. Still, the data suggest that deforestation leads to more frequent and more severe droughts in northern Brazil.

La Nina could bring wet weather to Colombia and may delay the coffee harvest, negatively impacting coffee production. While prospects for Brazilian coffee production are improving, I would flag Colombia as a risk. However, I am bearish on coffee longer-term and have advised my Weather Wealth newsletter clients about selling call options.

I hadn’t thought of the effect of deforestation on local weather.

It is not just local weather. The smog from the Amazon fires goes into the stratosphere and can change the weather thousands of miles away.

To what extent is climate change already affecting the weather?

Climate change is undoubtedly making it harder to predict the weather. You may see variables coming together as in the past, but climate change changes how those factors play out.

We can put the pieces of the puzzle together and say, ah, this looks like 1978 or 1964, or whenever, but because of climate change and the warming oceans, you must adjust your predictions. It is not easy. Sometimes warming oceans can create colder conditions like last year’s Texas freeze. There are many variables.

I have an in house weather software program called climatepredict that looks at historical climatic variables, adjusts them for climate change with predictions sometimes months in advance.

Are you an optimist or a pessimist regarding climate change’s effect on agricultural production and yields?

Climate change leads to more frequent extreme weather events such as droughts, floods, freezes etc. It makes it harder for farmers to produce the food that we need.

Global warming is shifting the agricultural belt further north in the northern hemisphere, bringing new areas into production. Against that, hot and dry conditions further south make it more challenging for farmers in some developing countries.

But remember, there will be a lot of fluctuations from year to year, and the “normal” is made of extremes. Over the next 20-30 years, climate change will exaggerate those extremes, resulting in record crops in some areas and crop failures in others.

Which crops are the most vulnerable to climate change?

That is a tricky question, but the first would be coffee. The coffee belt is situated around the equator and is vulnerable to heat and moisture stress.

Many of the world’s wheat areas are susceptible to insufficient moisture. We saw this last year, and it may be a feature going forward.

Cotton and almonds are also susceptible to droughts. We could see significant variations in production from one year to the next, depending on moisture levels.

Luckily, grapes like dry weather – so wine production could benefit from global warming. There is some good news, at least!

What about cocoa?

Interestingly, warming oceans in the Gulf of Guinea and to the south of West Africa tend to correlate with normal to above-normal rainfall in West Africa. To this extent, warming oceans could benefit West African cocoa yields.

Any other thoughts?

Yes, two.

First, we must find new technologies such as carbon capture to fight climate change. The decarbonization of the global economy presents enormous opportunities for investors in the renewable energy space.

Second, weather and politics are the two most significant drivers of agricultural commodity prices, and everyone in the markets needs a good weather service!

© Commodity Conversations ® 2022