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

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

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

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

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

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

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

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

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

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

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

How long was an average long-term contract?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which was your favourite commodity?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Commodity Conversations® 2023

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

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

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

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

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

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

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

Would you describe the book as a biography?

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

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

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

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

You co-authored the book with Doug Peterson.

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

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

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

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

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

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

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

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

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

That’s an interesting question.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do you explain that?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We offer three courses at the undergraduate level.

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

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

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

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

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

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

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

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

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

© Commodity Conversations ® 2023

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

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

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

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

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

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

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

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

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

What lessons did you learn at that time?

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

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

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

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

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

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

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

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

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

Can you briefly explain how you trade?

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

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

What is the biggest mistake that traders make?

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

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

What is a trader’s greatest enemy?

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

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

What makes a good trader?

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

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

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

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

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

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

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

So, you have been happier as a sole trader?

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

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

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

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

Do traders manipulate markets?

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

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

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

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

Thank you, Ralph, for your time and comments.

© Commodity Conversations® 2023

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

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

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

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

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

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

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

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

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

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

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

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

Is your wife also in finance?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I think that is a fair way to put it.

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

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

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

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

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

How closely do you work with your risk managers?

Very closely.

What are your most significant risks?

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

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

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

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

What are the other risks?

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

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

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

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

Do you have trouble sleeping?

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

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

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

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

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

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

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

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

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

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

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

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

Do you have to compete internally for funds?

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

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

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

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

Would rising interest rates affect your plans and strategies?

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

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

Do you lend money to your clients?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you, Jerome, for your time and input.

© Commodity Conversations® 2023

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

 

 

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

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

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

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

How important are ags for HC Group?

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

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

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

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

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

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

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

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

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

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

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

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

It is the million-dollar question!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do you imagine AI will change future trading desks?

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

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

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

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

Thank you, Alex, for your time and input.

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

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

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

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

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

 © Commodity Conversations ® 2023

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