Grains(Insights from the SRIC Trading Forum 2019)

Themes as drivers over the next 9 months

Trade war resolution:does a “deal” bring new demand to the US and the World or does it simply readjust global flows?

Current flooding in the US corn and soybean belt:do we have a major “prevent plant” for corn and does this mean a significant shift to soybean?

African Swine Flu:is the real impact being underestimated, with some reports suggesting up to a 20-30% reduction in the output of some South East Asian countries and China? Up to 200 million pigs could be culled or die from being infected as African swine fever spreads through China, Rabobank said. Knowing that China is home to the world’s largest pig herd which counted around 360 million heads in late 2018, the impact on the output would be huge and could not be supported by Europe and USA (2nd and 3rd largest producing country) production as the sole reduction occurring in China’s output is equivalent to Europe’s yearly pork output. 

Market drivers over the next 9 – 22 months

Weather: Directly affecting short term yields, are we getting closer to a major, multi country weather event again? And how do we deal with what seems to be a reality that technology is flattening or compensating the impact of weather?

Technology: How exponential is the technology curve in farming and in the supply chain? Is an integrated supply chain a medium or a long term reality?

Traders: How much does an asset oriented supply chain impact trade flows? How much consolidation is coming and who will be the consolidators?

• In Russia and Ukraine, both the biggest exporters and producers of grains are national companies without any international network, so in a world leading to consolidation, how is this possible and what can be done by traders?

Consumption: How does ASF impact on the medium term and does it incentivize a switch to poultry ? Are we anywhere close to “peak consumption”?

• Poultry need half of the feed stuff to produce the proteins that a pig requires. But it still it’s more the consumer’s habits that drive the demand and the market for what people want to eat.

Trade news

An important turning point for Brazilian soy is starting to emerge as major grain traders are trying to negotiate the tariffs of the old Panama Canal for Brazilians grains ships delivering in China. According to traders, it is today cheaper by USD 206’000 for a Brazilian ship to go through the Cape of Good Hope, rather than using the congested new Panama Canal. Should the private port operators and the traders find common ground, it would be a win-win situation as the Panama canal would receive more Brazilian ships and the traders would save up to 5 days voyage. 

Another news is regarding Louis Dreyfus, major grain trader, and its investments in an Asian poultry and food industry following an IPO – sources claim ten different investors limited at 5% maximum share. It is understood that this horizontal integration is done according to the diversification strategy of LD as the grains sector is facing an important diminution in both purchase and sales margins

Finishing with Brazil, we see another logistic disaster as a bridge, connecting large farming areas of Pará state to northern ports collapsed. Traders seemed not as distressed as barges still manage to sail up and down the river and alternative routes are available for any truck transportation. The region is approximately delivering 5% (~6 million tons a year) of the Brazilian soy annual production.

GMO Soybeans

In the US, 87% of the vast majority of soybeans are GMOs, according to GMO Compass whereas in Brazil, according to ISAAA, the area planted with GM crops totalled 50.2 million hectares in 2017, approximately ⅔ of the US cultivated lands. Europe decided to launch the strategic European Independence Protein Plan to develop all protein crops which are under cultivated in Europe. EU has a huge dependency on South America’s soy, as it produce only ⅔ of the internal demand.

People are moreover looking for non-GMOs product and that’s what the EU tends to do with reducing the import of GMOs products. US and Brazil represents the biggest exporters of soybeans and the content of GMOs in their crops could likely close the doors of the EU market in the near future.

Price movement

According to China Customs data, domestic demand for soybeans remained low compared to previous years and the March import of soybeans was at 4.91 million mt, 13% lower than the same period in 2018. The soybeans global outlook did not feel confident about the US-China trade talks.

Furthermore, government-related trading companies in China have delayed their purchases of US soybeans. “We have seen that China has bought millions of tons of American soybeans in recent months, but recently it has reduced its purchase because we have not seen many soybean movements out of the United States.” declared a trader. 

According to the United States Department of Agriculture, the United States exported $13,366 million worth of soybeans from October 2017 to February 2018, and one year later, exports decreased by 37% to $8,411 million of soy.

The slowdown in soybean consumption, mainly in China, has created a lot of uncertainty as market players struggle to digest the excess supply of soybeans from the United States, Brazil and Argentina.

The spread of African swine fever in Chinese pigs has reduced the demand for soybean meal, a high protein animal feed, from the world’s largest soybean importer.

Last year, the US government set up a $12 billion agricultural aid package to mitigate the effects of declining farmer incomes. However, the Trump administration does not seem to help the farmers anymore. The U.S. Secretary of Agriculture Sonny Lies on Tuesday: “they can consider the option if the trade negotiations and weak commodity prices linger”. We can assume that it will depend on the polls of the upcoming elections, taking into account that those farmers are a major source of votes for US President Donald Trump.

Recommendation for the future

The managing director of the International Monetary Fund, Christine Lagarde, said Monday that she hoped the US and China would reach an agreement to end their trade dispute, which baffled the financial markets and cast a shadow over the Mondial economy.

According to a poll by Reuters, Brazil’s soybean crop in 2018/19 is expected to be the second largest ever.

We are less optimistic than we once were and therefore would advise to take short position.

Sources

Wheat at 6-week low on crop-friendly conditions, soybeans firm

CFR China soybean price hits 2019 low on ample supply

https://www.reuters.com/article/us-china-swinefever-pork/up-to-200-million-pigs-to-be-culled-or-die-from-swine-fever-in-china-rabobank-idUSKCN1RO0MP

https://www.reuters.com/article/us-usa-weather-fertilizer/floods-stall-fertilizer-shipments-in-latest-blow-to-u-s-farmers-idUSKCN1S11BY

https://www.reuters.com/article/us-usa-trade-aid/no-fresh-aid-package-for-u-s-farmers-planned-for-now-agriculture-secretary-idUSKCN1S62M3

Non-GMO Soybean as a Strategic Crop for Europe

https://www.industryweek.com/supply-chain/gmo-corn-soybeans-dominate-us-market

https://www.livestrong.com/article/200114-what-are-the-dangers-of-gmo-soybeans/

https://www.reuters.com/article/us-brazil-gmo/brazil-boasts-worlds-second-largest-genetically-modified-crop-area-isaaa-idUSKBN1JN1KW

https://www.reuters.com/article/malaysia-ipo-leong-hup-louisdreyfus/update-1-after-coffee-louis-dreyfus-to-invest-in-poultry-ipo-idUSL5N22735G

https://www.reuters.com/article/us-brazil-panamacanal/brazil-ports-linked-to-bunge-cargill-seek-lower-panama-canal-fees-idUSKCN1RE26O

https://www.reuters.com/article/us-brazil-grains-bridgeaccident/brazil-bridge-collapse-could-affect-grain-shipments-in-north-idUSKCN1RI0KJ)

Argentina eyes expanded farm trade with China as harvest nears

Asian Prices vs European Benchmark

Prices on the Asian market have decreased below the European benchmark for the first time since the US started exporting LNG in 2016.  

We can easily observe a drastic fell for the LNG prices since the autumn 2018, and especially on the next friday, according the Financial Times, prices collapse due to the current higher seasonal temperatures as well as the recent restarting of Japan nuclear industries and the storage in North Asia still full.

Also, important buyers mainly located in Japan, Taiwan and India, have decreased their demand of cargo deliveries leading the Asian JKM price to $4.429 per million British thermal units, the lowest since April/May 2016 with $5,86 per million Btu. In that sense, China, an other large LNG buyer, is currently more interested for purchasing LNG forward contracts rather than on the spot market for immediate delivery. Prices have also been affected by rising LNG supply, which grew by 12 per cent in February from a year ago, according to consultants Energy Aspects.

As Asian LNG prices have been at their weakest in three years so far this winter, U.S. cargoes have found home in Europe, which has been the top buyer of U.S. LNG this winter season. Indeed, the market has been inundated with supplies coming onstream from the United States, Russia and Australia.

However, a cyclone heading for north western Australia may disrupt LNG loading there,clearing the loading port at Dampier and Ashburton, according to Pilbara Port Authority.

To compare, see below the European LNG benchmark price.

Europe LNG Market is Becoming an increasingly important market.

For some LNG analysts and industry officials, Europe is becoming an important LNG demand market after 2021 especially due to the decline of the natural gas production in northwest Europe, meanwhile that the global LNG supply will growth.

Indeed, the Netherlands is reducing their production at the huge Groningen field, aiming to terminate production by 2030. The UK and Norway may also see drops in natural gas exports.

Forward Curve only for European Countries ( Dutch market )

Since December 2018, the futures price falls on the TTF curve ( Title Transfer Facility, is a virtual trading point for natural gas in the Netherlands).

Excepting for a warmer spring than normal, Europeans tend to store gas inventory and so conducting a global decrease of futures prices.

Therefore, we remark a low sharp movement in the front months of the TTF curve.

We can mention that the gas forward curve represents a price indicator for energy prices evolution and futures expectations.

Indeed, the relationship between gas and coal plants in European power markets will be the key price barometer on the European demand side.

Investment of different stakeholders

Chinese state shipbuilding company and Norway-based DNV GL classification society have unveiled a project to develop the world’s largest liquefied natural gas (LNG) carrier with a capacity of 270,000 cubic meters. which will be run on LNG thanks to the royal Dutch  shell and tokyo Gas agreement.

Chevron second biggest oil company are investing in unconventional resources in the permian basin, the goal is to use produce 600’000 barrels a day in the end of 2020, and reach 900’000 barrels by the end of 2023 some of that will go to the LNG plant and around the world to serve the growing demande

Source for forward curve :

Europe & Asian gas prices slump

Other sources :

https://oilprice.com/Energy/Natural-Gas/Europe-To-Become-Increasingly-Important-LNG-Demand-Market.html

https://uk.reuters.com/article/us-global-lng/asian-european-lng-prices-crash-below-5-on-oversupply-idUKKCN1R21LO

https://www.ft.com/content/9c485852-4cb6-11e9-bbc9-6917dce3dc6

Wheat Prices

Chicago wheat futures decrease for a fifth consecutive day on Wednesday 10 April, the worst losing streak since February, after a U.S. government report raised its estimate for world wheat inventories.
The most-active wheat contract on the CME was down 0.3 percent at $4.58 a bushel. The five days of losses for the wheat contract are the worst streak of declines since prices dropped for six days in a row from Feb. 25 to March 4.
The wheat market is under pressure after the U.S. Department of Agriculture (USDA) in a monthly report on Tuesday raised its forecast of global 2018/19 wheat ending stocks to 275.61 million tonnes, the highest in a range of trade expectations. The USDA also boosted its estimate of domestic wheat supplies.

Corn Prices

South American bids were down, reflecting abundant exportable supplies. Argentine bids fell $3/ton to $159, while Brazilian bids, reflecting improved prospects for second-crop corn, were down $25/ton to $165. Black Sea bids rose $2/ton to $174 on stronger demand from the European Union. U.S. bids fell only $3/ton to $170 as larger- than-expected planting intentions were mostly offset by concerns over planting delays and weather-related river logistics complications.

Prospective Plantings in the US:
Corn planted area for all purposes in 2019 is estimated at 92.8 million acres, up 4 percent or 3.66 million acres from last year.
All wheat planted area for 2019 is estimated at 45.8 million acres, down 4 percent from 2018. This represents the lowest all wheat planted area on record since records began in 1919. Winter wheat (HRW, SRW, and White Winter) is down 3 percent from last year.
Area planted to other spring wheat for 2019 is estimated at 12.8 million acres, down 3 percent from 2018. Of this total, about 12.4 million acres are Hard Red Spring wheat. Durum planted area for 2019 is estimated at 1.42 million acres, down 31 percent from the previous year.

Problem in the US due to the USDA report and Weather
USDA (U.S department of agriculture) report of the month of April has highly impacted the future price of corn and wheat. Indeed, an increase is forecasted in U.S corn ending stocks. Indeed, the USDA reported that the amount left over of corn for the end of the 2018/19 marketing year was 1.835 billion which is historically high. More supply means that the price of corn will go down.

Moreover, Corn is also threatened by terrible weather condition into the southern fringes of the crop belt. Even more alarming, the US farmer have started to plant the 2019 corn and wheat crops. The current snowstorm will have some impact as it might kill the crop that are really fragile currently. 15 to 30 cm of snow are forecasted in the area of South Dakota, Nebraska, Iowa, Minnesota and Wisconsin. This is also combined by the recent flooding disaster that happened recently in the US.

Figure 1: Corn Belt

Figure 2: Wheat Belt

Trading houses reaction to the hard times of soft commodities
From the trader point of view, it appears that soft commodities are not as profitable as it used to be. It is mostly due to the US – China Trade war and the weakened the amount of shipment between the 2 countries. The profit of ADM has been reduced from the food industry. For ADM the food segment an operating profit of $339 million in 2018, compared to $546 million for 2017, (includes grain handling). The solution found by ADM is to force early retirement among many employees of the enterprises such as traders and operators to improve the productivity.

Future prices

Figure 3: $/bushel

Figure 4: $/bushel

Bibliography:
https://af.reuters.com/article/commoditiesNews/idAFL8N21Q5EC

https://www.reuters.com/article/us-archer-daniels-workers/u-s-grain-trader-adm-says-to-seek-early-retirements-may-cut-jobs-idUSKCN1RM2MF
http://marketqview.com/forwardcurvechart.php?ID=19&TYPE=Price

Better perspectives in copper supply

World’s major miners believe that copper market will be considerably better supplied in the mid-term than a year ago.

This positive view is due to a strong demand trend and the fact that copper companies think that new mines are needed. Those able to develop these new projects will increase volumes, profit and revenues. Therefore, the high copper prices in 2017-2018 have also encouraged few companies to invest in new copper projects. This new production will lead to an expected 900’000 tons a year more copper supply around 2020 than today.

It is forecasted that the copper deficit will shrunk from 600’000 tons to 200’000 tons. A slowdown in the demand growth is expected in the coming years from 2,5% to 1,9% of growth per year.

We also have to keep in mind that the global outlook is strongly influenced by China even though is rate of growth is declining. Furthermore, its economy is changing to an industry growing economy which demand a lot of copper supply to a consumption-based economy which has a lower demand.

Copper producers must nevertheless keep an eye on the market and introduce flexibility into their new project to ensure maximum profitability. Indeed, the slowdown in demand from the developed countries and the speed at which China demand slows remain uncertain and could affect producers’ new projects.

MMG Ltd plans after tax hike in Congo

After Glencore and ERG another foreign miner is reviewing its future production plans after the government increased taxes and removed investors safeguards.

MMG Ltd which is a Chinese state-owned enterprise is considering to invest in more expensive methods of mining the metal when existing oxide resources are exhausted.

Congo ranks alongside the United States as the world’s fourth biggest cooper producer and the largest source of cobalt. A supply change in Congo could have the potential to impact the cooper and cobalt prices, which have declined in the past due to that trade war between the U.S and China.

Forward curves

Current

Current

By comparing 2 forward curves below, we can notice some changes in the copper market. In the previous curve, the market was in the backwardation from march to April, meaning that the there was an undersupply situation. In the current curve, we are in contango. The market turns from a bullish to bearish market to an oversupply situation.

Spot Price

We can see a drop in the copper price during the month of February probably due to the Chinese New Year. Prices start to rise again on March as Chinese demand restart as well as the economic growth. The copper market is still undersupply which add even more pressure on prices.

Copper futures forward curve. MarketQview(online). 28thMarch 2019. (Consulted on 31th March 2019).
Available at the URL:http://marketqview.com/forwardcurvechart.php?ID=18&TYPE=Price
https://www.ft.com/content/2d2eef1e-5187-11e9-9c76-bf4a0ce37d49
Global copper market under supplied, demand on the rise — report (online). (Consulted on the 2nd April 2019)
URL:http://www.mining.com/global-copper-market-supplied-demand-rise-report/ Futures Forward Curve (online). (Consulted on the 2nd April 2019)
URL: http://marketqview.com/forwardcurvechart.php?ID=18&TYPE=Price https://markets.businessinsider.com/commodities/copper-price MMG Joins Glencore, ERG Reviewing Congo Plans After Tax Hike (Consulted on the 2nd April 2019) https://www.bloomberg.com/news/articles/2019-04-03/mmg-joins-glencore-erg-in-reviewing-congo-plans-after-tax-hike

As shown in the graph above, the price of  22^nd March stands on 1280 USD. Comparing to last bulletin price (of the last day), the price dropped from 1’482 USD to 1’280 USD which represents approximately 13.6% decrease in the price which is significant.

This price decrease might be due to the price stabilizing after the increase that it held during the chinese new years (explained in the previous bulletin).

As a trading company, this significant decrease in the price of freight can represent an opportunity to increase the profit margin of the company (as there is a decrease in costs for a deal). It is possible that trading companies schedule the transport with the freight according to their expectations of the price movement but the price cannot be predicted with 100% certainty which means that it is not an easy task.

Freight risk –
The effect of the freight price on the trading company depends on the incoterm which the contract is referring to. In case the transportation costs are under the responsibility of the trader company , then the price volatility does affect the margin of the trader.

In contract, freight risk does not have this level of effect on trading companies like Cargil for example that use vertical integration (meaning that they would take the shipment operations under their responsibility as well as the actual trade). This means that not only the margin will increase due to the decrease in the number of involved parties but also means a decrease in price will drive costs down for the trading company.

Energy trader Mercuria gets green light to buy Aegean Marine Petroleum

In light of the new IMO 2020 regulations, shipping rates are expected to rise as vessels will need to buy fuel of better quality and thus more expensive.

Mercuria, the global energy trader, are going to buy Aegean Marine Petroleum. This company is a marine fuel Logistics Company that physically supplies and markets refined marine fuels to ships in port and at sea.

Mercuria sees the acquisition as key ahead of new rules on shipping fuel by the International Maritime Organisation (IMO) due to take effect next year.

We can see through this acquisition how freight rates and decisions regarding shipping could affect trading companies. They are now trying to have a larger control of the shipping sector as well.

Freight derivatives – Risk management tool  
Derivatives are used to hedge risk in the freight markets. Tankers are one of the most common means of transporting commodities such as oil and coal. Freight derivatives, such as swaps or forward freight agreements (FFA), can be used to protect ship owners against changes in freight rates. Commonly traded on the Baltic Exchange, dry (bulk) and wet (crude) freight derivatives are traded for particular routes and forward months in standardised sizes of vessel.

https://www.risk.net/definition/freight-derivatives

Cargill Net Drops 20 Percent, Revenues Fall as Trade Fight Bites

Cargill, the world’s biggest agricultural commodities supplier, reported 20% of drop in its fiscal second-quarter 2019 net earnings. The reason of company’s bottom line decrease is indeed due to the global trade tensions together with the challenges in the Chinese hog sector and a struggling U.S. dairy business . This drops shows again how volatile the commodity markets is and how the  the external factors can impact company’s net profit significantly.

Then, in regards to the Freight commodity, Cargill has additionally to this 3 business units, an “ocean transportation”units, more precisely “dry shipping services”, which is highly impacted by the U.S.-China trade fight as it brings uncertainty in the freight markets.

These 3 indexes behave quite similar, meaning that the reasons for the volatility of the price of freight for the 3 of them would probably be similar, however, effect each index in a different level.
For example : it is possible that the chinese new year had a greater effect on BDI than BHSI, as the change in the price was more significant. at the same time, it is possible to see that the timing of the trends is quite cohesive which makes their behaviour similar.  
https://www.pacificbasin.com/en/ir/industry.php

References :

https://www.pacificbasin.com/en/ir/industry.php

https://www.risk.net/definition/freight-derivatives

Energy trader Mercuria gets green light to buy Aegean Marine Petroleum

http://www.ampni.com/fup/fuels-32128.htm?lang=en&path=-234507605

Two weeks ago, we have seen the composition of the gasoline price in the US, now as requested, here is a video which explains the composition of the price of gasoline in Switzerland

In order to illustrate the seasonal pattern of the gasoline that we explained last week we can see the price in Switzerland per months.

Unleaded 95 :

https://www.erdoel.ch/fr/chiffres-faits/prix-de-l-essence/sans-plomb-95-moyenne-mensuelle

Unleaded 98 :

https://www.erdoel.ch/fr/chiffres-faits/prix-de-l-essence/sans-plomb-98-moyenne-mensuelle

Diesel fuel :

https://www.erdoel.ch/fr/chiffres-faits/prix-du-diesel/diesel-moyenne-mensuelle

The past few weeks have been very interesting in the oil market. Oil prices took a bit of a hit  and President Donald J. Trump has Tweeted on the 28 of March 2019 that OPEC should increase the flow of Oil in order to decrease Oil price. OPEC did not react to Trump’s Twitt.  Experts in the oil market have showed that Trump’s Twitt war with OPEC and Russia is waning. Indeed, even if the market react violently to Trump tweet on OPEC, it very quickly recover to its old price levels. Trump’s anti-OPEC rhetoric is clearly losing importance and impact.

Another important new in the Oil market is the Venezuelan crisis. Venezuela, which is a key Oil producer have shut down all operation due to issues the country is facing. During the past few weeks, China has sent humanitarian help to Venezuela when humanitarian aid from the US has been blocked along the Venezuela-Colombia border. Many people in the Oil industry believe that a trade war is taking place there.  When the US and other western countries are struggling with high Oil price, in China the situation is totally different. All trading houses in China are state-run companies. During the past week, Chinese companies have received orders from the Chinese government to produce more Oil even if the cost of production and storage is relatively high. For instance, Sinopec, one of the largest refiner and one of the two largest oil and gas producers in China has announced a fourfold increase in capital spending. This is a direct response to Beijing’s call for oil and gas companies to boost domestic production.

With thin profit margins in the oil sector, commodity trading houses have been looking for the next big movement in the energy industry. Trading giants such as Gunvor Group LTD, Trafigura Group Pte. Ltd and Vitol SA are all investing into the liquefied natural gas sector. They are all looking to buy more natural gas and therefore move away from dirtier and high pollution commodity such as crude oil. The world’s biggest commodity trading houses are looking to reshape the energy industry but they are also looking a new way to increase margin. The 27 March an article from Bloomberg has quoted Mr. Russel Hardy, the Chief Executive Office of Vitol who said that “ The liquified natural gas sector looks like a much younger crude market,it is an area that can grow and that is positive for trading houses”

To conclude, there were many important news related to Oil market, but what we can retain is that many important trading houses such as the Chinese Sinopec, have reported a huge drop in profit. For instance, Sinopec has reported a 76% drop in its latest quarterly profit for October- December 2018. The OPEC supply cut, the Venezuelan production shut down and the Iranian sanctions have  lead to the biggest inventory reduction when stocks normally increase at this time of the year.

When looking into the diesel situation specifically, there is a growing problem which is dubbed the illegal diesel trade. It is mainly present in the city of Dubai and the official has organised a dedicated task force in order to the tackle this growing problem. And that problem is that 62% of the companies inspected by that task force regularly trade illegal diesel. That illegality comes from the sulphur content in the diesel, which based on the Federal Cabinet Decision No. 37 of 2013 the sulphur content must be extremely low. Specifically, the content must not be over 10 parts per million (ppm) of sulphur. That 62% of companies were trading diesel barrels with sulphur content that far exceeded that limit. Not only is it a violation of the UAE, but also results in extremely harmful gas emissions.

http://theconversation.com/why-maduro-is-blocking-venezuela-bound-humanitarian-aid-when-so-many-people-in-his-country-need-it-111585

https://oilprice.com/Energy/Oil-Prices/Expect-Higher-Oil-Prices-As-OPEC-Clashes-With-Trump.html

https://oilprice.com/Energy/Energy-General/Whats-Keeping-Oil-From-Rallying-To-75.html

Dubai ‘makes progress’ in fight against illegal diesel trade

Trade news

Coffee and cocoa’s trading as a whole

From HR Maritime, the number of trading houses around the lake is high.

Let us remember that the leman region is

There are many commodity trading house of coffee and cocoa in Geneva. We will focus on some of them.

The big players of coffee are nearby :

• Sucafina
• Louis Dreyfus
• OLAM international
• Ecom agro (in Lausanne)

Many small/medium size companies:

• Walter Matters 
• DIT

Traders in coffee are usually traders in Cocoa as well. So if you find a coffee trading house, there is a very high chance that it trades Cocoa as well.

What you can usually find on the traders’ website news are usually the same:

• M&A
• Sustainability
• CSR
• Actions in favour of 3rd world countries

It seems like they put a lot of effort into marketing themselves as good companies or big companies that buy other companies.

Where do the traders hang out? According to some traders:

• Chez Philippe 
• River Side Café

Very well situated according to the map

What about coffee/cocoa traders? Where can we find them? 

SCTA (Swiss Coffee Trade Association)

Themes:

Where are they?

We find all the big buyers and traders in the list:

Also:

Where sponsors are mainly coffee buyers. We can find big players:

• Mövenpick
• Jakobs Douwe Egberts (joint venture of Mondelez and DE master blender)
• HERMO (torefactor company in Switzerland)
• Lavazza (Italian company big in the coffee market as buyers)

Coffee traders wage according to “glassdors”:

Also seen: 75-80k in other job offers in indeed.ch (for coffee/cocoa)

(All sectors) 

In Switzerland

In Geneva

The jewel in chocolate – Cocoa business in Asia

According to an article from Reuters, many markets in Asia are showing a grow appetite for chocolate-based products. This might mean for cocoa trading companies that Asia could be one of the current market to target and to supply. Indeed, Olam International, a leading food and agri-business supplier and coffee/cocoa trader listed on the Singapore stock exchange, decided to boost its presence in this sector in Asia and planned to supply more cocoa thanks to an investment in the origination, processing and research of this commodity in Indonesia. 

The company acquired 85% share in the parents of Indonesia’s largest cocoa processor (BT Cocoa) by making an investment of $90 million. 

The project is the following; making an international surplus of 100’000 tonnes from the upcoming cocoa crop. We could imagine that traders would have to face to a decrease of the cocoa’s price due to this surplus. 

In such a situation, it is highly recommended to be long physical and short future for cocoa. 

Besides cocoa, Olam International’s CEO, Sunny Verghese, told that coffee’s market could potentially face to a rally. 

As cited in the previous bulletin, Brazilian coffee producers expect to get a bumper harvest of Arabica and Robusta’s coffee beans for 2019, that would normally decrease the price of coffee. However, Sunny Verghese added that this bumper harvest might be lower than expected because of possible adverse weather conditions in Brazil. 

This information might tell to coffee traders to be prepared of an increase of the coffee’s price. 

The recommendation for coffee’s traders would be to be short physical and long future for coffee.

As a result, coffee and cocoa will probably show an interesting change in their prices that traders have to capture. 

This newspaper is interesting for students in commodity trading’s major at the HEG or in commodity trading master at the University of Geneva, who are interested by coffee and cocoa trading and by emerging markets such as the Asian market. Indeed, companies based in Geneva such as Olam International will need dynamic and young graduated traders to meet the demand in these markets. 

Sucafina prize of excellence for the master’s thesis in commodity trading

The CEO of Sucafina, a multinational coffee merchant founded in 1977 and based in Geneva, has awarded the Sucafina prize of Excellence to a student at the Geneva School of Economics and Management (GSEM) for his Master Thesis in commodity Trading. 

This newspaper might be interesting for students in commodity trading who have to write their bachelor/master thesis about a topic in Commodity Trading. 

Such an award demonstrates hard work and skills which might open doors for interesting opportunities in commodity trading companies. 

Review of February market situation of Cocoa

The cocoa is a niche market having a total production of 4.65 mio kg per year which is quite small compared to coffee with a total production in 2017/2018 of approximately 9600 mio kg per year. This means a production more than 2000 times bigger than cocoa. 

The organisation having the biggest influences over this market is ICCO, International Cocoa Organisation, which functions such as OPEC but for cocoa. 

There are 2 futures market, one situated in London (ICE Futures Europe), and one in dollars in New York (ICE Futures U.S.). 

Finally, for the spot price, ICCO provide also daily prices denominated in U.S. dollars. 

The chart below shows the development of the futures prices on the London and New York markets at the London closing time. Both prices are expressed in US dollars in order to compare them easily. The London market is pricing at par African origins, whereas New York prices at par Southeast Asian origins. Indeed, Cocoa need to grow hot and humid region that is why, we will find mainly production in Africa mainly dispatch between Côte d’Ivoire and Ghana and in Asia, mainly in Indonesia.

We can observe on firsts days of the chart, a quite strong difference of futures prices between the two markets. It can be explained by the implementation in May 2017 of changes in the grading rules for ICE Europe. That led to a substantial increase of prices due to higher norms for cocoa which impacted the African market.  For instance, 2’000 tonnes failed the submission for grading because of that rule. However, we can see a convergence from 5^thFebruary which were due to return to normal market configuration.

By looking at the global trend in February, the market is in contango, the contract prices perked up on both the London and New York markets as seen. 

This upward trend can be explained by weather conditions adequate for the growth of cocoa in some West African cocoa growing regions as well as good expectations from market participants and forecasters. 

Subsequently, compared to prices at the start of the month, future prices rallied by 9% from US$2,083 to US$2,269 per tonne in London, and by 3% from US$2,178 to US$2,238 per tonne in New York by the end of February.

However, at a certain stage, the supply exceeds the demand. The price stopped to increase and therefore, this bullish stance did not continue. From 20^thFebruary onwards, projections suggesting that the top cocoa supplier was racing toward another record level in cocoa production resulted in a downward turn in prices. Thereafter, the front-month contract prices plummeted by 2% from US$2,310 per tonne to US$2,269 per tonne in London, and by 3% from US$2,302 per tonne to US$2,238 per tonne in New York.

Sources

REUTERS, 2019. “Singapore’s Olam says to expand “crown jewel” cocoa business, Q4 profit drops”. Reuters(online). February 28^th, 2019. (Consulted on March 26^th, 2019). Available at https://www.reuters.com/article/olam-results/singapores-olam-says-to-expand-crown-jewel-cocoa-business-q4-profit-drops-idUSL3N20N2P1

REUTERS, 2019. “Olam takes control of Indonesia’s top cocoa processor”. Reuters(online). February 26^th, 2019. (Consulted on March 26^th, 2019). Available at https://www.reuters.com/article/yts-ma-olam-intl/olam-takes-control-of-indonesias-top-cocoa-processor-idUSL5N20L4RC

Sucafina, 2018. “Sucafina prize of excellence for the master’s thesis in commodity trading”. Sucafina(online). November 30^th, 2018. (Consulted on March 26^th, 2019). Available at https://www.sucafina.com/news/news-updates/sucafina-prize-of-excellence-masters-thesis-commodity-trading/

JOBS Salaire, 2019, (consulted on March 27th, 2019) Available at https://www.jobs.ch/fr/salaire

Glassdoor Salaire, 2019, (consulted on March 27th, 2019) Available at https://fr.glassdoor.ch/Salaires/coffee-trader-salaire-SRCH_KO0,13.htm

WhoMovesTheCoffeeMarkets? MeetTheWorld’sLargestGreenCoffeeTraders (consulted on March 27th, 2019) Available at:https://commoditytrading.guru/commodities/who-moves-the-coffee-markets-meet-the-worlds-largest-green-coffee-traders/

OLAM website (consulted on March 27th, 2019) Available https://www.olamgroup.com/news/all-news.html

USDA Report, PDF (consulted on March 27th, 2019) Available at

HR Maritime website, Why Geneva, (consulted on March 27th, 2019) Available athttps://hr-maritime.com/geneva/why-geneva/

Google Maps, Website (consulted on March 27th, 2019) Available athttps://www.google.com/maps

Louis Dreyfuss website, (consulted on March 27th, 2019) Available at

International Cocoa Organization (ICCO), (consulted on March 27th, 2019). Available at : https://www.icco.org/statistics/monthly-review-of-the-market.html

(Cash price of corn)

Trader are currently facing a lot of uncertainty and pressure due to the next week report USDA which will give precise information about the choice of the farmer regarding the types of crops that they have chosen to plant. This will have a direct impact on the supply side at the global scale. Therefore huge variation of cash price have happened recently.

(Cash price for Wheat)

As you can see above, forwards curves for wheat and corn are quite special as they are always/often in contango.

This fact is due that it has to always cover the cost of carry to give the incentive to the farmer to keep growing this agricultural product. May to July are the only months when the contango becomes less steep for wheat.

This is due to the harvest period and the market is full of new crop. However for the corn, it is from July to September that the supply become huge and takes over the demand.

By logic, as the market is bearish it will reverse the forward curve for two/three months. Finally, when the market become more bullish as the demand is higher, the forward curve becomes again in contango. This feature is very typical for agricultural goods.

USDA Planting Intention

Each year, at the end of March, the US Department of Agriculture releases its Prospective Plantings report which is based on surveys and states what the farmers are intending to plant for the coming year. It is a powerful tool as it provides the market with an expectation of the size of each crop for the year.

Corn and Soybean seems to be a great dilemma right now.

According to Fram Future analysis based on weather forecast and estimations, corn should be more profitable than soybean but also riskier as processes are more complex.

A survey based on estimations of the plantation is going to be publish end of March by the USDA, showing accurate numbers about the acres used for corn.

As for now, the supply is still uncertain waiting for the numbers to come. If acres used for corn are less than 91.5 million and yield diminish slightly, stock in the US would reach a 5-year low rate stock/mass-needed (under 10%). If such hypothesis are confirm by the USDA plantation report, December futures price should increase as supply is weakening. In summary, the whole year is actually getting planed for the corn supply side in the US and solid assumptions about the market are going to be made next week based on that report and famers plantations.

Last month 2018/19 U.S. corn outlook is for lower corn use for ethanol, reduced exports, and larger stocks. The corn used to produce ethanol decreased by 5 times (from 25 to 5.5 billion. This conclude with a decrease on the season average corn price by 5 cents to get a price of $3.55 per bushel. Also, for the substitute of the corn which is the sorghum, there is a decrease in the export of 15 million bushels, to get a total amount of 85 million which is the lowest since 2012/2013. The production of corn is unchanged as the increase in yield forecasts is offset by a reduction in acreage. The corn production increased for India but reduced for South Africa. The major change in which we can focus in 2018/2019 is higher projected corn exports for Argentina and Ukraine and reduction for the United States. China’s corn feed and residual use is raised with lower sorghum and barley imports. Corn imports are raised for the EU and Canada. Foreign corn ending stocks for 2018/19 are lowered from last month, mostly reflecting reductions for China, Brazil, and Argentina.

Wheat:

Wheat production, exports and consumption:

Global wheat supplies are lower due to smaller crop forecasts in Iraq and Kazakhstan. However, Global trade is expected to stay unchanged as lower wheat production in certain countries is offset by a larger one in others. Exports are increasing from the EU and Brazil but lowering from the US and Mexico.

The EU is expected to increase its export to 23 million tons as it is experiencing an improved export competitiveness thanks to a price discount to Russian wheat, the improved competitiveness should continue for the rest of the trade year. The EU is now having a more prominent role in supplying African and Middle-Eastern countries. Egypt, the world’s biggest wheat importer recently shifted from buying Russian wheat to buying EU wheat, mainly from France and Romania.

The projected world consumption is reduced by 5.1 million tons to reach 742.1 million and India accounts for 3.0 million of the decrease. This reduction is based on an upward revision of the wheat stocks estimates for 2019. Global ending stocks are increased 3.0 million tons to reach 270.5 million tons, which is 3 percent less than last year’s record.

As a trader point of view, the recent change in supply of Egypt from Russia to Europe is an opportunity to save money on the shipment as france and romania are much closer in term of distance than Russia.

Historical seasonalities have shown that the price of wheat reach a peak during Jan-Feb-March. Therefore, when looking at the already existing average price for 2019, we assume that the cash price is going to fall even more during the year due to seasonality, probably closing the year lower than it started.

Sources:

https://www.fas.usda.gov/data/grain-world-markets-and-trade

https://www.usda.gov/oce/commodity/wasde/wasde0319.pdf

https://www.farmprogress.com/story-weekly-corn-review-0-30766

U.S. Corn Market Outlook: March Madness

https://downloads.usda.library.cornell.edu/usda-esmis/files/cz30ps64c/x920g4086/f1881t245/Wheat_Newsletter_Final.pdf

LNG trade reached 319 million tons in 2018, this demand growth are led by Asian countries such as China, India, South Korea and Pakistan, 37 million tonnes of new LNG capacity added in 2018, moreover 35 millions of tonnes additional supply expected in 2019, this is due to coal to gas switching. Biggest exporter are Qatar, Australia, USA and Russia.

Here is the price chart of natural gas in Henry Hub, which is the US benchmark. As natural gas is a seasonal commodity, the demand has an impact on prices: the demand of LNG grows during the winter because people need to heat their home. At this period, the quantity of LNG is low, because people are cold, they need a lot of LNG and the demand increases. That is why we can observe these peaks in December and January. More over since 5 year the price never reached this high in December, this is due to china doubling imports of LNG to counter air pollution, which represented 176 million tonnes of carbon reduction in China winter air quality.

The price of natural gas decreased in the middle of February and raised slowly in March because spring is coming. 

Here is the graph of the UK National Balancing Point, which is the natural gas’ reference for Europe. This graph also shows the seasonality of this commodity.

For the Asian market, there is the JKM, the Japan Korea Marker as benchmark for spot physical cargoes of LNG. These cargoes are delivered into Japan, China, South Korea and Taiwan. These countries represent the majority of global LNG demand.

This graph also shows how the weather influences the price.

Firstly, the alternation between the winter and summer season leads to regular variations during each year.

Secondly, we can distinguish the European hub destination price from the 3 others (Southeast Asia, Latin America and Australia) due to Russia, Algeria and Norway supplies.

Moreover, the correlation between the crude oil price from Saudi Arabia in particular and the LNG price play a major role in the demand. Indeed, an increase of crude oil price encourage the substitution of natural gas, which would increase the LNG demand. Therefore, the LNG price will rise if the supply stays constant or decrease.

It is probable that the current Khashoggi affair would bring out the rise of crude oil supply from Saudi Arabia in order to stifle this big incident in the Istanbul consulate. 

Under pressure, the Saudi kingdom had to admit Mr Khashoggi’s killing.

Therefore, a collapse of price of LNG in Europe in particular significant at this time, leading to losses in factories.

Finally, the cooperation between Russia and South Korea for an increase of LNG purchase from Russia, in order to diversify Korean gas imports channels, is developing. The benefit of localisation is leading to this initiative of “gas bridge”.

Diesel V.S. Gasoline

In order to better understand gasoline and diesel market, it seems important to understand the difference between both. Diesel and gasoline come from the same source which is crude oil but the refining methods vary.

Gasoline, also called petrol is a fuel used for private vehicle and small aircraft.Diesel also called gas oil is used as home heating fuel in some western European countries but also for agricultural machinery, cars, lorries, and others road transports. In principle, diesel fuel is easier to refine than gasoline.

The major difference between the two is found in their consistency and the type of engine using it.  Diesel fuel is refined to a thicker and more oily consistency, while gasoline is refined to a lighter consistency. Gasoline is also more flammable than diesel and requires less heat for combustion. Diesel engine are generally more fuel efficient because diesel is thicker than gasoline. Diesel combustion emits less carbon dioxide and carbon monoxide than gasoline combustion, but it also emits more particulate matter. Diesel engine is more popular in Europe than in the US.

At first Diesel fuel was less costly to refine than gasoline, but since 2006 and 2010, the introduction of ultra-low sulfur diesel has increased diesel production costs as it requires more refining.  In average gasoline is more expensive than diesel in most countries. Many countries tax diesel and gasoline differently. For instance, the US tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel. In contrast most European countries have lower taxes on diesel than on gasoline. Since taxes are one of the most important factors determining the final consumer prices of fuels.

The spread between diesel and gasoline prices also varies over time with the different factors such as:

Supply, demand and seasonality..   

We took this graph to illustrate the correlation between Gasoline, Diesel and Crude oil, indeed, the price of the Crude oil will have a direct impact on the Gasoline and Diesel. Moreover, this shows perfectly the volatility of these commodities.

When we look closely to gasoline, we can see that the graphs illustrate a seasonal pattern,  gasoline tend to rise starting in the spring and tend to decline on the late summer and fall. This reflects the beginning of summer-grade gasoline, which is more expensive to manufacture due to its more exigent production process, in February and March.

Now, regarding the actual price of the gasoline, we can see the increase of the price per gallon due to the seasonal pattern explain above. The decreasing curve in February is also due to large gasoline inventories (high refinery runs driven by increased distillate demand in general) combined with lower demand for gasoline.

Big Oil

The seven largest publicly traded oil & gas companies are known as “Big Oil”. These include  BP, Chevron Corporation, ExxonMobil, Royal Dutch Shell, Total, Eni and Conoco Phillips.These corporation, for the most part, include two or more firms in their group, for the exception of Royal Dutch Shell operating with only Shell, as it can be seen in the graph below.

This term include the dominating corporations that have a high influence in the market and setting prices. However, it does not include national producers and OPEC oil companies which often have a greater effect and influence on the price.

https://financesonline.com/top-10-oil-producing-countries-in-the-world-wheres-the-greatest-petroleum-dominion/

http://www.factfish.com/statistic/gas%20diesel%20oils%2C%20total%20production

https://www.reuters.com/article/us-oilmajors-production/oil-majors-output-growth-hinges-on-strategy-shift-idUSL169721220080801

https://www.eia.gov/dnav/pet/pet_pri_gnd_a_epd2d_pte_dpgal_w.htm