Second only to oil, coffee is widely considered to be the most valuable legally traded commodity in the world, with an estimated 2.25 billion cups of coffee consumed worldwide every day. However, consistently high demand does not mean that coffee farmers, traders, buyers, and sellers are rolling in the beans. In fact, coffee has a history of significant price volatility that has greatly affected the ability of market participants to turn a profit.
According to Fairtrade International, this volatility spurred the creation of the first International Coffee Agreement in 1962, which was designed to stabilize the market by introducing quotas to withhold excessive coffee supplies. In 1994, a new version of this agreement stipulated that prices would no longer be regulated, and that same year, prices escalated to a high of $2.80 per pound thanks to a frost threatening crops in Brazil. Then in 2001, coffee prices fell to a thirty year low of $.45 per pound almost overnight due to overproduction, devastating farmers and putting many out of business.
Fast forward to 2011, when prices climbed to a 14-year high, spurring growers to expand coffee-growing lands and plant high-yielding tree varieties. Because of this, we are now experiencing what the Wall Street Journal calls the biggest coffee bust in over a decade due to overproduction. Arabica coffee on the ICE Futures U.S. exchange recently fell to their lowest levels since September 2009.
In order to maintain profit margins amidst never ending volatility, companies engaged in the buying, trading, and selling of coffee must have sophisticated commodity trading and risk management (CTRM) solutions providing business intelligence and analysis tools that enable smarter decisions, minimize risk, and optimize supply chain management. Spreadsheets do not provide the sophisticated functionality needed for maximizing efficiency and profitability in today’s unpredictable environment.
Coffee & Cocoa International has published an article featuring Triple Point’s Brian Seidman, VP, Solutions Director, Agriculture, exploring these very issues. It discusses how companies including Armajaro Trading and Mercon Coffee Group are leveraging Triple Point’s Commodity XL for Agriculture solution to mitigate market risk, maximize profitability, and achieve optimized supply chain management. Read it now.
Are you struggling with disparate commodity trading systems, overuse of manual processes and spreadsheets, and underuse of third party solutions? Have dramatic changes to the energy markets outpaced your technology capabilities?
If you know you need to upgrade your Energy Trading and Risk Management (ETRM) system, but are overwhelmed by the idea of ETRM vendor evaluation, ETRM system selection, and ETRM implementation, you are not alone. Structure’s Baris Ertan recently wrote an article on how to determine ETRM requirements. He explains that if you ensure the right ETRM requirements, “you’ll be rewarded with a system that meets your needs and prepares the organization to take advantage of the opportunities afforded by today’s complex and ever-changing energy markets.”
A few tips that I found particularly useful include:
1. Create a process review that includes an “as-is” baseline and “to-be” vision. Market demand, price volatility, and derivatives legislation continue to drive change in the energy markets. He smartly advises to incorporate planned growth in commodities, instrument types, physical assets, geographies, markets, currencies, etc.
2. Engage front, middle, and back offices in requirements gathering. The best solutions for staying ahead of the curve in today’s complex markets are end-to-end solutions. It is critical to involve IT, compliance, legal, procurement, and senior management in this strategic initiative.
3. Consider integration strategy early. Does a best-of-breed or a single system approach best fit your resources and capabilities? Baris explains that “an early investment in time on this process pays dividends. It is a key input into a requirements matrix that feeds vendor evaluation, implementation planning and estimations, solution design, testing, and ultimately deployment.”
4. Conduct scenario–based demonstrations. Your business requirements are unique. Baris advises, “it’s crucial to translate business requirements into detailed business scenarios that each vendor can model and use to showcase its solution.” I couldn’t agree more.
Determining your ETRM requirements is vital in conducting a rigorous vendor evaluation that renders the best functional and technical fit for your organization. A company can’t underestimate the importance of doing it right – taking shortcuts or rushing the process can have severe long-term financial and operational ramifications that are difficult if not impossible to rectify.
For more ideas on how to determine ETRM requirements, view on-demand Triple Point’s recent Commodity Trading, Procurement, and Risk 101 webinar. It highlights the latest must-have requirements for ETRM success.