Commodities Markets In 2016 Require Managing Risk With Confidence

Commodity markets are facing many challenges today with oversupply, low prices and uncertainties, making managing price risk a critical skill for financial professionals. The 2016 AFP Risk Survey from the Association of Financial Professionals revealed commodity prices are one of the top drivers for earnings uncertainty across industries.

Global economic instability and volatility have material impact on commodity prices and a company’s ability to contain costs and protect margins. Even though we are operating in a historically low-price environment, commodity markets are not immune to dramatic, often unpredictable swings.

In April, soybeans and corn rallied up as much as 13.7%. These prices did not move us far from historical lows, but the sudden market rally was surprising for many. To minimize uncertainty or maximize opportunity in these markets, it is critical to engage in risk management strategies that ensure you are well prepared for a sudden rise or drop in prices.

Be Proactive

Having no hedging strategy is a risk in itself. Even if we do not know where the markets will be this week, a few months or years ahead, we can thoughtfully construct a risk management plan with our bias, experience and needs in mind. The goal is to feel confident that you have made the right decision for your company, in your markets, at this time.

Diversify Strategies

Diversification is essential for overall risk mitigation. For years, hedging risk through the trading of futures and options was cutting edge. In today’s markets, risk managers seek greater ability to identify, assess, prioritize and manage price risk. To be effective, evolving strategies with more customization are utilized to manage exposure.

Pursue Dynamic Methods

Price points are impacted by a variety of factors and that means simply hedging risk through futures trading or a fixed instrument will not meet all needs. Tailored options, currency hedging, structured products and other customized solutions are coming into play more often. A strong hedging portfolio is not overly concentrated in any one of these methods, but utilizes the appropriate solution to meet needs, objectives and risk tolerance.

Take a Holistic Approach

When you are constructing your retirement portfolio, you are likely diversifying your exposures in stocks, bonds and equities to ensure you are not putting your security and livelihood at risk should the market turn. The same is true for a commodities hedging strategy – concentrating all of your risk mitigation in one or even two types of products does not offer the same protection. Instead, you are likely making less pragmatic decisions and responding to every market move – which is ineffective given how quickly prices fluctuate.

Utilize Various Counterparties

In the past, corporations might have worked exclusively with large banks to seek solutions. Today, companies seeking to diversify their counterparty risk have opportunities to work alongside non-bank organizations to achieve their hedging objectives. When seeking a partner in risk management, ensure they provide a stable balance sheet and reputation, while also meeting regulatory requirements.

We can’t control the markets, but we can make confident decisions, utilizing diversified strategies and a proactive approach to risk management.


2016-17 total grains supply could reach new record

The projection for global grains production in 2016-17 is 9 million tonnes higher month-on-month, at 2.006 billion, a small year-on-year gain, the International Grains Council (IGC) said in its April 28 Grain Market Report. The total grains supply could potentially reach a new record, the IGC said.

Beneficial weather is improving the outlook for wheat, including in the E.U. and Russia, while maize forecasts are raised for a number of countries. Total consumption is a little higher month-on-month and is seen expanding slightly year-on-year, to 2 billion tonnes, second only to use in 2014-15. The world stocks figure is lifted by 7 million tonnes, to 472 million tonnes, up by 6 million tonnes year-on-year, including a significant accumulation in China. Trade is placed marginally higher month-on-month, but is still 8 million tonnes down year-on-year, partly because of likely reduced shipments to China.

While forecasts for world total grains supply and demand in 2015-16 are similar to the last report, concerns have increased over the past month about maize (corn) prospects in South America, the IGC said. Untimely rains are hindering the harvest in Argentina, while prolonged dryness has cut yield potential in Brazil. The adverse weather has also affected soybean output in the region.

Reflecting the impact of poor weather in South America, notably in Argentina, the 2015-16 world soybean production forecast is cut by 5 million tonnes, to 318 million tonnes. Nevertheless, this is only fractionally short of the previous season’s record. Prospects for crops in 2016-17 are tentative. But with output projected to be broadly unchanged year-on-year as consumption rises further, global carryovers could contract by 16%, to 32 million tonnes, the smallest in three years. Trade is expected to edge up to a high of 133 million tonnes on Asia’s expanding needs.

A much tighter scenario is seen for rapeseed and canola in 2016-17 on another drop in world production. At 4.4 million tonnes, aggregate inventories are projected to contract by one-fifth, led by a particularly steep decline in Canada.

Forecasts for rice supply and demand in 2015-16 are little changed from before, with global inventories expected to fall by 11% on steep declines in key exporters. Centered on a recovery in Asia, including in India, the 2016-17 world rice outturn is projected at an all-time peak of 485 million tonnes, up by 3% year-on-year. However, due to smaller carry-ins and continued growth in food use, stocks are anticipated to tighten to an eight-year low of 94 million tonnes. Trade in calendar 2017 depends on crop outcomes and availabilities in Asian and African markets, but is expected to stay close to 42 million tonnes.

While conditions have not always been ideal, the outlook for 2016-17 grains supply remains mostly good and, having been upgraded from before, global production is projected to slightly exceed the previous year. Smaller outturns of wheat, barley and sorghum are expected to be offset by a better maize harvest. A modest increase in consumption is forecast. In the feed sector, larger availabilities and likely attractive prices could encourage use of maize, with demand for wheat, barley and sorghum falling.

In spite of strong demand, a further build-up of grains carryover stocks is envisaged at the end of 2016-17. Those in the major exporters are seen increasing to a seven-year high, while China’s could exceed 200 million tonnes for the first time since 1999 to 2000. World trade is predicted to stay strong and is placed 5% above the average in the five years to 2015-16. However, volumes are seen dropping by 3% year-on-year, in part because of possibly reduced purchases of maize, barley and sorghum by China.

source: world grain


Global Trade Management: Redefining the Successful Execution of International Logistics

With nearly 30% of the world’s gross domestic product currently crossing borders, it is clear that global trade is an integral and growing part of business that is here to stay. As a result of this globalization, businesses have created a new concept to define the challenges and opportunities unique to the new highly globalized business environment – Global Trade Management (GTM). While savvy executives are wise to be wary of potentially short-lived buzzwords, there is no questioning the powerful trends that have made investing in GTM solutions such a topic of interest to forward-looking businesses:

  • The volume of global trade is substantial, and will only increase with time
  • Global trade is significantly more complex and risky than domestic trade
  • There are dramatic operational and cash flow benefits to be gained by businesses that implement and execute global trade operations efficiently


Global Trade Management is the practice of streamlining the entire lifecycle of a global trade across order, logistics, and settlement activities to significantly improve operating efficiencies and cash flows. The comprehensive nature of GTM is a boon for organizations that fully embrace the cross-functional, system-wide view of global trade. At the same time, because GTM crosses traditional functional silos within organizations, many businesses endure poor performance in their global operations for years before they realize the gains of applying GTM solutions.


Insufficient planning, execution and synchronization of financial, logistics and regulatory procedures can lead to very costly business challenges, including:

  • Shipment delays
  • High inventory
  • High AR & DSOs
  • Increased logistics spending
  • Penalties and fines
  • Lost sales
  • Claim write-offs and invoice deductions


The promise of GTM is to enable corporations to take advantage of the opportunities of globalization. One way of doing this is through on-demand applications that are integrated into one platform allowing companies to manage their global orders, control global shipments and optimize global finance to help save time and improve working capital for order-to-cash and procure-to-pay cycles.

Finding an integrated solution to provide import and export compliance, inventory management, shipment tracking, supply chain event management and global trade finance solutions such as open account and letter of credit management is now within reach.


Today, logistics executives are often focused only on the management of the shipment booking through proof of delivery process and the management of logistics costs. As companies continue to embrace the value of broader GTM solutions, logistics executives will be looked upon to provide leadership in understanding and adding value to the entire order life cycle including purchase order management, total landed cost modeling, insurance and claims, import/export compliance, security regulations and integrating more seamlessly to invoice reconciliation and trade financing systems. As an example, classic track and trace applications will need to be extended and integrated with other systems to allow for multi-criteria searching (e.g. PO number, SKU, product classification, invoice number, LC terms, etc).


GTM initiatives are underway in many organizations via shipment visibility, supply chain security, trade compliance, or trade financing projects. The majority of these projects remain piecemeal. To be effective, companies must streamline the entire lifecycle of a global trade. The logistics executive is often the most familiar with global trade hurdles and can thus be a clear influencer in the deployment of more robust solutions. Only those companies that best leverage the whole of GTM solutions will be positioned to meet their objectives of effectively growing top line revenue and benefiting from more economical sources of supply through cross-border trade.


Global Trade Management requires the integration of the financial supply chain with the physical supply chain, enabling corporations to accomplish the following goals on a continuous basis:

  • Grow top line revenue and reduce supply chain costs
  • Provide full visibility into shipments
  • Minimize working capital in inventory and accounts receivable
  • Comply with required governmental reporting and security mandates
  • Measure the efficiency and performance of global trade policies, procedures and trading partners

Millennials are drinking all of what’s left of the world’s coffee supply

Thanks a latte, Millennials — you’re drinking away the world’s coffee supply.

Global demand for java is percolating at an all-time high. But the coffee supply can’t meet the demand — and Americans under 35 are to blame, according to a Bloomberg market analysis.

The new report notes that young U.S. adults make up 44% of the country’s coffee drinkers, and they’re jonesing for a cup of joe earlier and earlier. In just eight years through 2016, daily coffee consumption rose from 34% to 48% among 18 to 24-years-olds, and jumped from 51% to 60% for those ages 25 to 39, according to the National Coffee Association in New York.

This doesn’t just outpace the older Americans who are laying off the caffeine, but also the world’s coffee crop in general. A shortage is brewing as a drought in Brazil, the world’s biggest producer and exporter, has threatened to dry up the bean supply.

And a recent Climate Institute report warned that half of the world’s coffee growing regions could disappear by 2050, because the “bean belt” of equatorial countries including Brazil, Ethiopia, Colombia, Vietnam and Indonesia has suffered from rising temperatures and changing rainfall patterns. Factors like coffee rust and increasing fertilizer prices have also hurt the coffee crop and raised the price of your daily cup. The cost of popular arabica beans is at its highest ($1.655 a pound) since 2015.

The Bloomberg report notes that Brazilian coffee plants can recover with more rain, and beans coming from Peru and Honduras can help meet demand.

Coffee is just the latest staple facing extinction, because Millennials. Although in the case of cold cereal, bars of soap, Big Macs and underwire bras, the younger generation is killing them off by snubbing them — not using them up.


The Opportunity in Weak Commodity Prices

Commodity prices in the markets – especially for crude oil — continue to face headwinds from excess supply and uncertainties about divergent monetary policies. But nascent positive trends give commodity markets a more balanced outlook, in our view.

Looking into the end of the year and into 2015, we feel investors should use the recent price pullbacks to take commodity allocations towards their long-term target allocations. We recommend an allocation split evenly between a broadly diversified position and another in energy (crude oil, refined products, and natural gas).

For the past two months, investor anticipation of new and large monetary policy stimulus in Europe and Japan has rallied the U.S. dollar and raised the cost of raw materials in local currencies. In addition, worries about excess commodity supplies accompany slipping global economic data.

We think the impact of these factors is overdone. During the coming weeks, expectations for dollar strength should moderate. The excess supply problem also seems to be resolving, especially in base metals, where miners are cutting production quickly and global markets are gradually rebalancing.

The crude oil market is particularly concerned about excess oil supply and the strong U.S. dollar. After touching $115/barrel in June, the price of benchmark European Brent crude oil fell by $35/barrel by early October, finishing below $100 for the first time since political turmoil erupted in Egypt in 2011. The decline seems unjustified based on our supply and demand outlook, and we advise investors to be careful about assuming $80/barrel oil prices are here to stay. For example, the last $12 of oil price declines came as the dollar also declined this month.

It is also risky to assume that OPEC and U.S. supply will become permanent sources of excess supply. Extra U.S. production does not add much to new excess supply. If OPEC would only cut by 500,000 barrels per day (1.5% of their daily output), it could effectively erase the contribution of this year’s gain in U.S. production. So why doesn’t OPEC cut? For perspective, oil prices are still in their four-year trading range of $80-$120 per barrel, and the collapse from $90 came quickly – possibly too quickly for OPEC’s factious members to form a consensus. Since the mid-1980s, OPEC has tried to steady oil prices, and potential price spikes are material risks – for example: if the Libyan production recovery falters and ISIS threatens large production facilities.

Our monthly review of the major commodity sectors follows next:

Energy: Energy prices continue to drag on concerns of excess crude oil supply and weak seasonal demand. However, seasonal petroleum and natural gas demand is poised to pick up, and consumption is still growing globally — especially from strong Chinese automobile sales — and should accelerate with improved global economic growth next year. We revised lower our 2014 year-end target for West Texas Intermediate crude oil to $90-$95 per barrel to account for temporary uncertainty and expect a rebound into year-end, followed by single-digit 2015 returns.

Base metals: Base metals prices have fallen with the rising U.S. dollar, and weakening global manufacturing demand and falling real estate prices in China have sapped the construction consumption of industrial metals. However, 2015 global demand prospects look better, and miners are slashing output faster than we previously thought they would.

Precious metals: Demand for platinum and palladium for catalytic converters has supported these markets somewhat, but no supply-demand rebalance is likely for gold and silver, which remain vulnerable to potentially higher U.S. interest rates sooner rather than later. Investors should use any gold or silver price rebound to reallocate into a diversified commodity position.

Grains: The wet weather in the U.S. Midwest has slowed the harvest and boosted the soil conditions for wheat planting. As a further negative for price, robust foreign demand for corn and soybeans may fail to counteract excess supply and the strong dollar and put U.S. farmers at a competitive disadvantage.

Soft commodities (primarily tropical agricultural products): Sugar and cotton prices are weighed down by large global supplies and record global production, but coffee, cotton, and cocoa face drought-related supply constraints in Brazil, Australia, and Africa. Moreover, U.S. producers are not the largest of all these products, so the dollar’s strength is not uniformly negative.

Live cattle and hogs: Cattle and hog prices have fallen back from recent highs on signs that feed costs may soon decrease encouraging larger herds. However, strong foreign demand and tight supplies may keep prices elevated in the near term.

Investment recommendations

We believe the worries about slow global growth are overdone and that assumptions of sustained excess commodity supply ignore the production reductions already in progress in metals, as well as the potential for OPEC to cut its production significantly.

We lowered our year end 2014 target last week, after Saudi Arabia announced it would not immediately adjust its production. Our new target is $90-$95/barrel, down from $101-$105/barrel for U.S. West Texas Intermediate crude oil.

We would still be neutral commodities overall and continue to expect seasonal factors to give natural gas and petroleum a boost towards our target in the coming weeks.

Source : Barrons