Change and Risk are the only Constants in Agricultural Markets
August 12, 2019
It’s been a difficult year for many North American agricultural producers, merchants and traders. With a bitterly cold winter and an exceptionally wet spring across much of the growing region, and an ongoing trade war with one of the world’s largest markets, these market participants have experienced more than their share of challenges in 2019.
Market Risks Abound
The continuing back and forth escalation of the US/China trade war has resulted in a 25% tariff on US-produced soybean imports into China, effectively shutting off access to what had been one of the largest markets for US growers and has provided others countries, particularly Brazil, the opportunity to grow their share of that market at the expense of US producers.
Unfortunately, these types of geopolitical battles are just one of the almost countless risks faced by agricultural commodities players in North America and around the globe.
Dry agricultural bulk commodities, including grains, beans and rice, are among the most widely traded goods globally. Given the broad distribution of growing regions and the use of these commodities in a wide range of products – from consumer-packaged goods (CPGs) to animal feed – their supply chains and markets are constantly and rapidly evolving to meet supply shortfalls, logistical constraints or economic developments….and with those changes, the risks and challenges change as well.
Weather (particularly precipitation patterns), geopolitical developments (such as tariffs), regulations (including genetically modified crop tracking or bio-fuel mandates), crop failure due to disease or insects, and even changing consumer habits and tastes create supply and demand imbalances and increase costs, price volatility and risks for all agricultural commodity market participants.
An Evolving Marketplace
Agricultural markets have also been impacted by near continuous consolidation and reformation as companies up and down the value chain combine or refocus through mergers, divestitures, and reorganizations. These changes reflect both strategy – consolidate market share from farm to consumers – and a reaction to the near constant shifts in global supply and demand patterns that require near continuous shuffling and re-optimization of asset portfolios. While much of the merger, acquisition and divesture activity has been driven most obviously by the global-scale merchants; regional operations, including coops and merchants, have also sought to gain additional market share via consolidation.
Notably, the four largest firms in the space, the ABCDs (ADM, Bunge, Cargill and Louis Dreyfus) have, over the last decade, undertaken numerous acquisitions around the globe – including farms, elevators, terminals and food manufacturers. However, despite their size and global reach, they have experienced inconsistent returns and have at times struggled to maintain profitability in their core grains businesses, resulting in numerous reorganizations and strategy adjustments, particularly in the last several years.
CTRM/CM in Ags
Managing your agricultural business while addressing risks and staying abreast of developments in global markets requires a significant investment in software systems and technical capabilities. In particular, commodity trading and risk management (CTRM) and/or commodity management (CM) solutions for agricultural commodities are required by merchants, processors, traders and industrial-scale commodity consumers to accurately record, track and manage their businesses, providing capabilities such as contract/deal capture, inventory tracking and valuation, and risk management (usually focused on hedging).
While CM solutions can provide some agricultural-specific capabilities that may not be found in off-the-shelf CTRM solutions, few of these applications can model, capture and manage many of the complex business activities across the value chain of grains and other agricultural commodities. Additionally, the scope and range of processes and activities in the ags supply chain will vary not only by commodity, but also region, and can require any number of supporting capabilities that fall outside the scope of many of these systems. These capabilities can include, but are certainly not limited to:
- Farm technologies including crop management solutions and market communications
- Elevators/Storage solutions for capturing origination, inventory and sales
- Logistics solutions for truck tracking and management, scale management, and inventory management covering offsite (on farm), onsite, and in-transit volumes
- Manufacturing technologies, including recipe management, machine control and production scheduling
Few CM systems address any of these capabilities, and, due to the monolithic nature of their solutions, they lack the flexibility to quickly add capabilities or functionality as your company’s strategies and asset mix change. As such, most companies whose businesses operate along the wide-ranging “field to fork” operations must rely on a multitude of systems, including ERP, CTRM/CM, CRM, spreadsheets and custom developed software.
Recognizing the limitations of these types of architectures, Eka developed the Digital Commodity Management (DCM) platform. Eka’s platform enables ag producers, traders, merchants and CPGs to leverage a variety of pre-built (or custom developed) apps to gain insights into both their operations and market developments to identify opportunities and limit risks. With capabilities that span the breadth of the agricultural supply chain, Eka’s DCM platform can quickly integrate with any CTRM, CM, or ERP solution, internal data sources such as spreadsheets and external sources such as markets feeds, allowing companies to leverage existing IT investments while gaining the critical capabilities to operate in today’s rapidly changing markets.
Patrick Reames is the founder and managing director of Commodity Technology Advisory. He has a deep understanding of the energy and commodities markets, developed through hands-on experience and managerial oversight of energy and commodity operations, including exploration, production, gathering, plant and pipeline operations. Over the last 15 years, he has been focused primarily on information technology serving energy and commodity trading, marketing, and risk management.