The US Midwest is suffering its worst drought in decades. The US Department of Agriculture (USDA) recently dropped its corn yield forecast from 166 bushels per acre, made earlier this year, to 123 bushels per acre. The expected shortage of corn is causing prices to surge.
Corn has multiple uses – it is used as fuel (ethanol), animal feed, or directly as food. Roughly 40% of US corn production goes towards ethanol, 36% towards feed, and the rest towards food.
There are several concerned groups that believe the Environmental Protection Agency (EPA) should relax the ethanol requirement under the Federal Renewable Fuels Standard act, which states that there must be 13.2 billion gallons of corn starch-derived biofuel produced in 2012. The UN has called for an immediate suspension of the US-mandated use of ethanol. In addition, a coalition of beef, pork, and poultry producer associations have called for a cessation of the ethanol requirement.
Whether the EPA will ease the ethanol requirement is not the most important question – the real question is how do we plan to deal with rising agricultural commodity prices and volatility in the long term? The corn shortage might be a one season event, but volatile agriculture and softs prices are here for the long term.
We have an expanding world population that is forecasted to grow from 7 billion to 10 billion in the next 35+ years. As part of this population growth, there is a rapidly growing middle class across China, India, and other parts of Asia. China and India alone are doubling their per capita incomes at approximately 10 times the rate and 200 times the scale achieved by Britain’s Industrial Revolution in the 1800s. This growing middle class wants to eat higher on the protein scale (more meat which needs more animal feed). And it appears we’ve hit a pattern of severe weather events including droughts, floods, extreme temperatures, etc. These long term trends will drive acute commodity price swings – which is, as we’ve said before, the new normal.
All companies in the food supply chain, from upstream to downstream, should be putting plans and commodity risk management systems in place to handle price volatility.
In just a few years, mobile technology has reshaped the landscape for businesses everywhere. The growing presence of smartphones and tablet devices in the workplace has forced companies to take a sharper look at the benefits mobile applications offer.
Previously, it was impossible for certain jobs to be performed away from a workstation. The mobile revolution has changed those rules. With the arrival of powerful mobile devices and sophisticated mobile applications, it is now possible for employees to perform tasks, previously restricted to their desktops, from any location at any time. And therein lies the value that mobile technology can offer: the ability to untether employees from their workspaces while increasing productivity. For this reason alone, companies are exploring ways to adopt new mobile solutions into their infrastructure in order to maintain an edge over the competition.
Software vendors across all industries are looking for ways to establish themselves in the mobile frontier. The challenge facing these vendors is to find a way to deliver solutions that make sense in a mobile world. The first temptation is to simply repackage existing desktop software and offer it on mobile platforms. This tactic fails, however, to recognize that a mobile solution cannot comfortably accommodate the same movements and actions that might be found in standard computer software. Vendors must accept that the answer lies in preserving functionality while promoting simplicity.
This fundamental concept has helped distinguish the visionaries in mobile technology from the rest of the competition. As software industries saturated with players hum with promises of new mobile initiatives, only a handful of companies actually deliver on such promises. This is especially true of the Commodity Management world. For almost two decades, Triple Point Technology has outpaced its competitors in this industry by producing unmatched Energy and Commodity Trading and Risk Management (CTRM) solutions. When it comes to mobility, Triple Point is the only Commodity Management company today that has managed to bring mobile CTRM products to market. In just under a year, Triple Point has already managed to produce four distinct mobile applications capable of transforming the way companies manage commodities by empowering staff to perform key operations anytime, anywhere.
To read more about Triple Point’s mobile commodity management solutions, click here.
Heavy users of raw materials face a huge challenge. The prices of many of the world’s key commodities reached all-time highs last year, and volatility across the markets was more than enough to create huge problems for companies in the industrial manufacturing and consumer products industries.
It’s easy to find startling examples of price volatility in every category from arable crops and metals to timber, oil, and chemicals. And it’s also easy to see the consequences of such volatility in companies’ bottom lines – time and time again, there are stark reminders that sharply rising raw material costs can impact profitability.
For example, spice and condiment manufacturer McCormick saw first quarter profits hit by 3% because of higher than expected raw material costs. And Swiss agribusiness company Syngenta cautioned that its 2012 results would be impacted for the same reason.
According to a new white paper on Commodities Management from Procurement Leaders, there are several ways to fight back, including hedging, forming strategic supplier alliances, and leveraging advanced technology solutions. The paper provides a good primer on the subject, and discusses how companies including Unilever have successfully controlled skyrocketing raw material costs. Read it now.
According to McKinsey, Asia’s global middle class is likely to grow by three billion people over the next 20 years, and China and India are doubling per capita incomes by approximately 10 times the rate and 200 times the scale achieved by England’s Industrial Revolution in the 1800s.
This massive middle class expansion has fueled demand for commodities such as oil, coal, and wheat. More and more Commodity Management companies dealing in the Asia Pacific (APAC) region are realizing that in order to ensure price volatility doesn’t diminish profitability, they need advanced technology solutions such as Triple Point’s Commodity XL™ to optimize supply chains, improve decision-making, and minimize risk.
In 2011 Triple Point experienced record growth in APAC, with year-over-year revenue for the region increasing 75%. APAC customers include China National Offshore Oil Corporation (CNOOC) Limited, China’s largest producer of offshore crude oil and natural gas, as well as Bayin Resources, Dhanlaxmi Bank, Marubeni, Merit Chartering, and State Bank of India. Triple Point has also significantly expanded its staff in Asia Pacific, growing from 250 to over 400 employees, in order to ensure full support for the company’s growing customer base. In addition, Triple Point extended its Asia Pacific footprint with the acquisition of QMASTOR, the premier provider of mining software solutions, headquartered in Newcastle, Australia.
News-grabbing headlines highlighting commodity price increases due to weather-related and other supply issues have completely shifted the dynamics of Commodity Management and broader procurement, sourcing and supply chain management activities.
According to advisory group Spend Matters, organizations are observing radical commodity price fluctuations of up to 40% which are having a massive impact on their P&Ls. However, despite this volatility and its impact, precious investments in technology solutions and skilled resources often go towards other areas of the business rather than being allocated towards efforts to control, mitigate and manage commodity risk. Companies that allocate little or nothing towards Commodity Management head down a very dangerous path towards declining returns and higher risk profiles.
A new white paper from Spend Matters, “Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals,” explains that “now is the time for organizations to make the right set of investments in Commodity Management.” It outlines the business case for Commodity Management, including how to build a quantifiable argument to invest in the right team, processes and solutions to take action in the current environment. Read it now and learn how to prepare your organization to manage the dips, twists and turns of today’s roller coaster economy.
Is your commodity trading and risk management system adequate for the “new normal?” New regulations in the US and Europe, extreme price volatility, capital constraints and shorter cycle times demand new risk management strategies.
Triple Point recently hosted a webinar with Accenture’s commodity trading and risk management expert, Alex Chandy, on the latest trading and risk management best practices. Triple Point’s own risk expert, Greg Leck, also discussed how Triple Point’s leading CTRM solution delivers up-to-the-minute risk intelligence to manage portfolio risk exposure, set limits, and control risk.
The webinar highlighted valuable tips on how to deal with today’s market chaos and uncertain regulatory environment. Key takeaways included:
1. How to optimize risk and create opportunity in the face of
high frequency trading
2. Tips on how to avoid losses and identify hidden risk with
broader scenario analysis
3. A clear understanding of the Commodity Super Cycle and
what it means to your business
4. Why it is NOT and Excel world anymore
Sempra was an amazingly successful commodities trading organization in the 1990s and 2000s before forming a joint venture (being sold) with RBS in 2008. At one point, Sempra had 44-straight profitable quarters. I recently read a very interesting article about how newly-formed Freepoint Commodities, which launched its North American operations in March of 2011, is really a “restart” of Sempra. David Messer, the former CEO of Sempra, is the CEO of Freepoint. In addition, roughly two-thirds of Freepoint’s employees are former Sempra employees.
I particularly liked this quote by Mr. Messer: “We started trading in June and I think that’s fairly remarkable to launch on March 1 and be trading 3 months later. I think that’s testimony to the fact we’ve been able to reassemble a team that is highly experienced and has worked together. We’re currently ahead of our plan.”
I’ll add from a Triple Point perspective that’s it’s also important to choose the correct Commodity Management partner and solution. Triple Point was able to implement Freepoint’s platform quickly to support its business requirements and also provide the robust functionality to support Freepoint’s rapid growth plans into additional commodities across the globe.
The Commodity Management Blog has been closely following the top Commodity Management issues throughout the year. Not surprisingly, posts discussing Dodd-Frank top the list. Below is a complete list of the 10 most popular posts over the past 12 months based on views and shares. We thank you for following us and hope these posts have provided valuable tips on how to manage commodities smarter.
2. The Treasury Function and Commodity Risk
3. Life in a Dodd-Frank World
4. 4 Out of Top 6 Commodity Traders Use Triple Point
5. Can There be Good News in Men’s Underwear?
6. Triple Point’s Partnership with SAP
7. CTRM Checklist for Agriculture Companies
8. 5 New Rules for Credit Risk Management
9. Surviving Global Economic Uncertainty
10. Purchasing: The Impact of Risk and Volatile Raw Material Prices
We have some really great things in store for 2012, so here’s to a year of fresh ideas for Commodity Management!
With the start of the new year, the US Legislature did not renew the 45-cent-per-gallon tax incentive for producing ethanol-blended gasoline or the 54-cent-per-gallon tax on foreign ethanol imports. The incentive cost taxpayers about $6B per year. This ends thirty some odd years of government support for the biofuels industry.
The real beneficiary could be Brazil’s sugarcane/ethanol industry. UNICA, the Brazilian sugarcane industry association, issued a press release titled “Time for the world’s top two ethanol producers, the United States and Brazil, to lead a global effort for increased production and free, unobstructed trade for biofuels.” According to Leticia Phillips of UNICA, “This means that in 2012, the world’s largest fuel consuming market (US) will be open to imports of less costly and more efficient ethanol, including sugarcane ethanol produced in Brazil.”
It will be interesting to see how the US biofuels industry fares in 2012 and what the change in policy will mean to corn prices.
A December Financial Times article that reported oil price volatility in 2012 could swing between $50 and $150 a barrel might prove quite prescient. The story, “Fat-tail fears catch oil traders between $50 and $150 bets,” noted that investors are concerned about events that could cause large swings in oil prices.
On the one hand, eurozone debt issues could drive oil prices much lower, but on the other hand, a crisis with Iran (or elsewhere in the Middle East) could send prices much higher. In the last few days, we’ve seen the saber-rattling between Iran and the US send Brent crude rising by more than $4 in a day to $111.
At the risk of stating the obvious, the commodity volatility trend of recent years will continue in 2012. Rapid and large price swings are not going away – if anything, volatility is getting more extreme. How commodity volatility is managed will be an incredibly important factor in determining company profitability moving forward.
The key phrase for organizations doing business in these volatile markets is “risk management.” With the proper processes and systems in place, risk can be turned to competitive advantage.
Here’s to a profitable 2012 for all!