{"id":6539,"date":"2022-02-03T08:54:04","date_gmt":"2022-02-03T08:54:04","guid":{"rendered":"http:\/\/commodityconversations.com\/wordpress2\/?p=6539"},"modified":"2022-02-03T08:54:04","modified_gmt":"2022-02-03T08:54:04","slug":"going-where-no-one-else-would-go-in-the-digital-age","status":"publish","type":"post","link":"https:\/\/commodityconversations.com\/wordpress2\/2022\/02\/03\/going-where-no-one-else-would-go-in-the-digital-age\/","title":{"rendered":"\u2018Going where no one else would go\u2019 in the digital age"},"content":{"rendered":"

\u00a0<\/strong>\"\"<\/p>\n

by Wouter Jacobs \u2013 Erasmus University<\/strong><\/p>\n

In their book, The World for Sale<\/a>, published in 2021, Bloomberg reporters Jack Farchy and Javier Blas documented in rich detail the evolution of global commodity markets during the late twentieth century. They made explicit the modern-day commodity trading firm and the practices of their top-dog traders and executives. The crux of their analysis is that traders \u201cgo where no one else would go\u201d. It is a trait that resonates with the characteristics of the merchant trader from an earlier era. Still, it remains a critical human-based skill in our current period dominated by Big Tech, Big Data, and Artificial Intelligence (AI)-based machine learning.<\/p>\n

However, the ongoing financialisation of commodity markets, digitalisation, the quest for sustainability and inclusion, the emergence of decentralised and alternative forms of finance, the decommodification of supply chains and when or how to navigate the geopolitical and macro-economic restructuring of the world economy are all changes that require commodity trading firms (CTFs) to integrate new skills and mindsets.<\/p>\n

CTFs need more analytics and more analysts to synthesise the increased amount of data points to inform decision making and trading strategies.<\/p>\n

CTFs need to install compliance, due diligence, and Know Your Client (KYC) protocols to meet the demands of regulators, financiers, and the public. These protocols can be expensive, and they can constrain the intrinsic capability of a company\u2019s traders to go where no one else would go.<\/p>\n

CTFs need to take the time, effort, and leadership to incorporate sustainability into their company\u2019s DNA. It requires specific skillsets to monitor and report on Sustainable Development Goals (SDGs) with nitty-gritty detail, such as the amount of water used per plantation or the carbon exposures of a particular trade. It may require a public relations office protocol and narrative to deal with any criticisms. It may require strategies to maintain a local license to operate and a moral compass.<\/p>\n

Finally, CTFs need to digitalise their operations to synthesise complex information. Adopting information technology has been critical for commodity trading, but CTFs are not leaders in the space. Some struggle to define and optimise their digitisation needs to adapt to the rapid emergence of decentralised platforms for exchange, finance, and post-trade execution. \u00a0<\/em><\/p>\n

Given all these changes and the specific demands for skillsets, CTFs need to develop what Berkeley university professor and business guru David Teece has referred to as dynamic capabilities<\/em>. Dynamic capabilities refer to the ability to sense<\/em>, seize<\/em>, and transform<\/em>.<\/p>\n

Sensing<\/em> refers to scanning the business environment and identifying new opportunities that emerge from new technology. CTFs must seize any opportunities and translate them into their business model and adapt it accordingly. CTFs can encourage sensing through scenario planning and actively scouting for opportunities.<\/p>\n

Seizing<\/em> is more complicated. It requires clever re-combinations of existing competencies, such as rapidly prototyping new technologies into the workflows. An example of this was when some CTFs first ran in-house pilot projects on blockchain before joining a platform. Another (digital) seizing strategy is to consider lean start-up methodologies.\u00a0 An example is Farmer Connect, founded by Sucafina\u2019s head of trading, David Behrends.<\/p>\n

Transforming<\/em> is the most complex. It sometimes requires a wholescale redesign of its business model, asset portfolio, routines and competencies while insourcing entirely new or related skillsets. Internal shaping might involve \u2013 as Olam has recently done \u2013 an organisational separation of business lines. External shaping might include investing in universities\u2019 education and training programmes or B2B platforms and digital ecosystems.<\/p>\n

The Covantis platform, in which the ABCDs, Viterra and Cofco took the lead, is an example of the latter. Its scale and incumbent support can capture \u2018network effects\u2019 and dominate the market quickly, similar to other platforms (e.g., Netflix, Uber, Airbnb) in different markets and industries. While Covantis is now about trade execution, it may evolve into something more commercial. Be that as it may, it is not unthinkable that new platforms might even displace many of the intermediacy benefits of individual CTFs.<\/p>\n

Finally, dynamic capabilities require managers to overcome company-internal barriers to novelty while designing governance structures and a business culture that enables adaption or business transformation. Often periods of crisis, low profitability or the risk of a hostile takeover can act as wake-up calls and remove internal barriers to change.<\/p>\n

The archetypical successful trader goes where no one else would go. This risk appetite, combined with an intermediate position that captures value from information asymmetry within global supply chains, still defines a CTF\u2019s business model.<\/p>\n

But the amount of information upon which to act has increased exponentially. CTFs have increased their analytics teams accordingly. The larger companies have invested in technical analysis and quant-based trading modelling and strategies, predictive analytics, etc., while internally optimising their data systems. They have added new skill sets to the company, which do not involve \u2018going where no one else would go\u2019 in the traditional sense.<\/p>\n

However, \u2018going where no one else would go\u2019 still matters in a world defined by digital apps and algorithmic machine learning.\u00a0 It may matter even more in the future, although with a smaller physical presence than in the past. Understanding and appreciating local circumstances, cultural conventions, and languages is necessary for building trust and relationships.<\/p>\n

\u2018Going where no one else would go can give you an informational edge that no algo (still) could grasp\u2019.<\/p>\n

This is a short extract from Commodity Crops & The Merchants Who Trade Them<\/strong> available on Amazon.<\/p>\n

\u00a9 Commodity Conversations \u00ae 2022<\/p>\n

\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

\u00a0 by Wouter Jacobs \u2013 Erasmus University In their book, The World for Sale, published in 2021, Bloomberg reporters Jack Farchy and Javier Blas documented in rich detail the evolution of global commodity markets during the late twentieth century. They made explicit the modern-day commodity trading firm and the practices of their top-dog traders and … <\/p>\n

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