Trading in volatile markets could lead to plenty of opportunities for more profits. But, it also comes with higher risks.

While commodity markets have always been volatile, decision making in today’s markets is especially multidimensional, with events from extreme weather, political changes, tariffs, etc. impacting profitability in real time. Static, on-premise CTRM systems do not work in volatile markets because they are not real-time systems. These systems are not equipped to leverage modern collaboration tools like in-context chat or data sharing, and do not use Machine Learning principles to spot opportunities outside the norm, resulting in decisions that do not reflect real-time market conditions.

To maintain a competitive edge, navigating in these new market conditions calls for going beyond inflexible CTRM & ERP systems and spreadsheets and adopting a more intelligent approach. One that involves making better decisions, faster, backed by data with real-time insights, not intuition.

In this white paper we will demonstrate use cases from day-to-day trading scenarios to demonstrate how commodity enterprises can transform their way of working, starting with how the speed of decision making is faster on a Digital Commodity Management System.

Abstract

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AT THE EDGE OF TOMORROW: COMMODITY MANAGEMENT REIMAGINED

Commodity markets are changing in ways that no one could have predicted even a few years ago. Worldwide access to high-speed internet and cellular service, advances in computing power, innovative technology such as drones, the Internet of Things, AI and machine learning have transformed commodity management from data-intensive to data-overwhelming.

Commodity trading has always been data-intensive, requiring traders to monitor and analyze mark-to-market, position, risk limits, physical trading, accounting, derivatives, VaR, compliance, and logistics. Commodity Trading and Risk Management (CTRM) software was developed to help companies improve commodity management.

However, traditional CTRM software and its related Energy Trading and Risk Management (ETRM) software can only help so much because they were not designed to incorporate data from outside the trading system. Creating reports that incorporate external data requires relying on spreadsheets and custom systems, and often results in errors and multiple versions of reports. These systems also tend to be static, running reports at specified times (such as end-of-day reports). They are not designed for on-demand analytics and reporting.

But the world has changed. Today, data comes to companies continuously, in real time and in a variety of formats and systems. Commodity trading companies need to analyze data fast, because the world does not wait for pre-scheduled reporting cycles. Commodity trading companies need to analyze changes in real time, to flex and expand with the market.

With trade battles increasing and tariffs hammering imports around the globe, commodity supply patterns are changing, and costs are increasing. From aluminum to soybeans, once reliable sources of supply are quickly becoming uneconomic or being lost entirely as countries erect new barriers to imports. Consumer Packaged Goods (CPGs) and fabricators could be particularly exposed if these trends, first established in mid-2018, continue deep into 2019.

Companies that import and consume commodities for finished products will need to quickly identify new sources of supply and determine the financial viability of the various options available to them. With m o s t commodities having variable grades and qualities, recipes and production plans must be thoroughly analyzed, and potentially adjusted, in order for these firms to continue to operate profitably.

Price volatility and downward pressure on prices will likely increase in 2019 across virtually all commodities as economic indicators show a potential slowing of the key Chinese and US economies. With lower demand for almost all commodities, including metals and energy, increasing concern over Brexit, regional geopolitical instability and increasing discord within OPEC, rapid and significant prices movements is as great or greater than any time in recent history.

Volatility Increasing in 2019

The Evolution of CTRM & ETRMDigital Commodity Management

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What is Digital Commodity Management?Digital Commodity Management (CM) disaggregates CTRM/CM into smaller pieces, reducing reliance on difficult and expensive to maintain monolithic CTRM systems and moving towards more agile and scalable cloud-based platforms. Digital CM turbocharges commodity trading and risk management by increasing the breadth, depth, and speed of CM systems.

Speed

Breadth

Depth

Digital CM extends commodity trading across the entire value chain, creating a powerful, flexible, dynamic system to optimize trading efficiency and proficiency.

It boosts commodity management performance immediately by

Extending beyond trading and risk to the entire value chain. Digital CM enables users to make decisions based on the entire picture, not just the information in their own piece of the value chain. Users can analyze and optimize operations across the entire value chain from sourcing to distribution, inventory movement, operational efficiency, and more.

Eliminating data siloes. Digital CM is fully integrated across the entire value chain, ensuring everyone has access to all the data they need whenever they need it. Users no longer have to spend hours or days aggregating data for reports.

Enabling true collaboration. Digital CM provides data sharing and collaboration with internal teams and external trading partners digitally and in real time, enabling real-time communication and collaboration so users can move fast to take advantage of new opportunities or mitigate risk.

Digital CM aggregates and analyzes data in real time, providing on-demand analysis and reporting and enabling users to make better decisions, faster. In volatile markets, time spent aggregating data yields lost opportunities and decreased profits.

Digital CM goes beyond trading and risk management, connecting the entire value chain – including sourcing, trading and risk, operations, supply chain, and downstream. Companies no longer work in siloes. They gain complete visibility into the entire value chain and collaborate more effectively with trading partners.

Combining big data with advanced analytics, including AI and machine learning, commodity trading is based on deep analysis and real-time insight, not intuition or “what we did last year.”

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Connecting to both external and internal data. Digital CM integrates data from real-time market feeds, spreadsheets, ERP systems, weather feeds, regulatory, market prices indices and more, enabling complete visibility, faster analyses, and better decision making.

Enabling anytime, anywhere access. Digital CM’s mobile platform provides real-time access from any mobile device, because commodity markets are global and market shocks won’t wait for normal business hours.

Delivering self-service insights. Easy-to-use apps enable on-demand reporting, so users don’t need to rely on business analysts to create essential reports. Because Digital CM provides access to all available data and advanced analytics, users create the insights they need when they need them.

Providing a native cloud platform. Digital CM’s cloud-based platform enables faster implementations and requires no hardware, software implementations, or local maintenance. Implementations are faster and easier, and adding new functionality is quick and easy. The system is designed to flex and expand with the business.

Breaking CTRM into bite-sized apps. The power of an app-based platform is the flexibility to create exactly the system and functionality needed with the ability to easily expand when needed. Digital CM’s apps can be used to create a new system or be integrated into existing CTRM systems to expand their functionality.

Delivering powerful insights with AI and machine learning. Seeded with years of deep domain knowledge, Digital CM provides insights that matter the most

The Cost of Relying on Traditional SystemsIn rapidly changing markets, the costs of relying on older, disconnected systems are significant.

Upfront costs of implementation. Traditional CTRM is implemented on premise and involve lengthy implementations and heavy IT involvement. Even systems claiming to be cloud-based often require long implementations to integrate systems. Digital CM provides a simple, cloud-based implementation with prebuilt connectors. It requires limited IT involvement and goes live in just a few weeks at a fraction the time and cost of traditional CTRM systems.

Buying more than you need. Traditional CTRM and ETRM systems have an all-or-nothing framework, so you purchase the system and pay for the functionality whether you need it or not. Eka’s app-based platform enables you to buy just what you need, and nothing more, but also provides the ability to add functionality quickly and easily later as you grow. Implement the risk management you need today and add accounting and hedging tomorrow – it’s seamless, easy, and cost-effective.

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Manually incorporating data from external systems. The problems of integrating data manually are twofold, it takes a lot of time and aggregating data manually creates errors.

• Automated data aggregation takes seconds. Manually collecting data from various systems and inputting all that data into spreadsheets or other systems takes hours – or even days. While those hours or days pass, markets continue to move, and opportunities are lost.

• Manual data aggregation results in errors – cut and paste errors, incorrect formulas, collecting the wrong data. People make mistakes, and data errors can result in making bad trades. Automated systems do not make mistakes.

Making suboptimal decisions. Relying on data that could be several days old does not work in rapidly changing markets. By the time the data has been analyzed, and decisions are made, the market has changed again. In fast moving markets, you need to be smart and fast. Relying on systems that don’t use real-time data results in missed opportuni-ties.

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How Digital CM Turbocharges Commodity Management

• Access data and insights from any mobile device, because commodity markets do not stop to wait for you to arrive at your desk.

• Use AI and machine learning to create deep insights and make better decisions. Run simulations, analyze real-time and historical data, look for trends, optimize production, improve shipping and logistics, and more.

• Share insights with your team by using the chat feature or any messenger app. The ability to collaborate when you need to, not just when you are sitting at your desk, provides a first mover advantage that can drive profits.

• Collaborate across the value chain. Digital Commodity Management connects the entire value chain, so you can negotiate with suppliers and customers digitally and in real time and avoid delays inherent in email and phone exchanges.

Digital CM enables you to collaborate more, make better decisions faster, and outmaneuver competitors.

Digital Commodity Management monitors and analyzes data from across the entire value chain in real time – 24 hours a day. It delivers visibility into the entire value chain, from internal systems monitoring inventory, position, operations, and logistics to external data including market feeds and weather reports. The system provides real-time alerts when user-defined thresholds are breached, enabling rapid response to mitigate risk or capitalize on new opportunities.

Digital CM is designed to enable users to stay ahead in rapidly changing markets.

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Eka’s Digital CM Fuels Energy Trading Imagine you are a crude oil trader and you are out of the office attending a conference. While out of the office, you and the other traders learn of a cargo that has just become available due to a canceled commitment. What happens next varies significantly depending on if you use Digital CM or traditional CTRM.

Digital CMWith Digital CM, all the information you need to decide whether or not to purchase the cargo is right in your hands.

You start by checking your position for the delivery period to see if you need the cargo. You check credit limits and exposure for the delivery period to ensure that you won’t breach any limits if you complete the purchase.

You evaluate the most profitable destinations to sell the cargo. You enter the trade as a simulated deal for a final limit check and to refine shipping and other secondary costs.

You review the simulations, you make a decision…The entire process took just an hour!

Your Process with

Now you are in the same situation, but you have a traditional CTRM system. This system has data silos and does not support real-time collaboration and analysis on mobile devices. What happens?

You email your team to request a position report for the cargo delivery time. You email credit and market risk teams to confirm availability of credit and whether exposure would remain within boundaries if the purchase takes place and you wait…

You receive emails back confirming interest in the cargo and credit checks, but now have to wait for end of day reports to evaluate position. You wait…

Having run the EOD report overnight, the risk manager takes the output and creates a business impact report and verifies it against business policies. You receive an email stating that the deal looks good but the risk team needs their analysts to run a detailed scenario check. You wait…

The scenario analyses arrive via email and you review it, call your team, and make the decision to purchase the cargo. The cargo has already been sold. The entire process took more than a day and resulted in a missed opportunity.

Today, many farmers rely on middlemen to coordinate sales with large agribusinesses. With Digital CM, this extra step is eliminated – saving time in the negotiation process and providing a level of visibility that benefits both farmers and agriculture companies.

It’s simple. Instead of waiting for a broker to negotiate a deal, farmers access an app on their phone, computer, or tablet to see what agribusinesses are looking for which crops and at what price. They use the app to input their bid to provide the crop and negotiate directly with the agribusiness in real time. The entire process can be completed in just a few minutes, without the delays inherent in email and telephone negotiations.

The app connects directly with all internal systems, so the contract and other necessary documents can be uploaded and synced across the entire agribusiness instantly. Both the farmer and the agribusiness can view all information about the transaction, including delivery and payments, on the app. It’s quick and easy.

Farmers Increase Sales E�ciency by Trading Directly with Agriculture Companies

Traditional CTRM

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Empower Procurement with Digital CM One of the biggest problems with traditional CTRM systems is the lack of real-time insight. Procurement profes-sionals must secure raw materials at the best price, on time and within budget. If there is a sudden shock to the market – a hurricane, fire, or earthquake; new tariffs; civil disruptions et al – they need to assess the impact on their portfolio and ensure they can still get the materials they need at an acceptable price.

At every step of the way, Digital CM is superior to traditional CTRM. The moment the disruption occurs, prices will be impacted. While two traders in the same city sleep peacefully, the price of one of their inputs is skyrocketing. The difference is that the trader with Digital CM will receive an alert the moment the price crosses a pre-defined threshold and the other trader will not. The Digital CM alert enables the trader to start evaluating options and creating a plan before traditional CTRM users even know there is a problem.

What happens next? The trader opens the Procurement app on a tablet and begins running simulations. He evaluates expected results based on the price swings and shares these analyses with his team via the chat feature. All the team members review the analyses and they schedule a meeting for first thing in the morning at 8:00 am, to create a plan and execute a procurement and hedging strategy for the new market reality. By 8:30 am they have a plan in place and are moving on to the next order of business of the day.

Meanwhile, the other trader finally learns about the price shock and begins collecting data on current prices, historical prices, and current and forecasted purchases. Because all of this information is stored in disparate systems, manually aggregating it takes several hours, so they do not begin analyzing it until the next day. At that point, they run simulations and advanced analytics to evaluate options for a procurement and hedging strategy, but they are two full days behind the Digital CM team, so prices have changed, contracts have been secured, and opportunities have been lost.

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A US dairy organization was looking for an effective way to monitor profit margins from milk and processed milk products. The company was spending too much time gathering data for analysis.

Prior to implementing Eka software, the company would manually pull data from existing systems – spreadsheets for inventory, Oracle ERP for physicals, direct brokers’ statement from multiple brokers, different formats for derivatives, spreadsheets for additional information on inventory, market data from multiple data feeds and websites – finally apply rules and adjustments to handle exceptions, process issues, and flag inaccuracies.

Improve Risk Management – Story of a U.S. Based Dairy Company Background

Because this was a time-consuming process, the company’s hedging strategy wasn’t optimized. The market would move by the time it could see its true exposure, creating missed opportunities. Its risk policies were not in line with business defined thresholds and risk limit breaches often occurred and were not immediately detected.

Analysis of gains and losses took a long time to create, thereby increasing risk due to delays in identifying market risk.

Digital CM’s rapid deployment means a quick ROI. The dairy company implemented Eka’s Position, Mark-to-Market, Procurement and Risk apps in just 8 weeks. Now, they can consolidate and automate contracts and inventory from ERP, budgets and forecasts from spreadsheets, and CSV broker statements from FCM for all products.

With Eka’s Digital CM Platform, the company can aggregate data from disparate systems, helping it to mitigate risk exposure. Users can create instant executive dashboards and receive real-time alerts for breaches of risk limits, enabling a quick response to increased risk.

The management team can evaluate budgeted spending, actual spending, projected spending, and coverage across the organization in real-time. Using the Position and Mark-to-Market apps, the company can view exposure at the click of a button instead of waiting days for manual reports. Digital CM also eliminates any chance of human error while it aggregates, blends, and analyzes inputs from all data sources to provide one, accurate visual representation of position in real-time.

How Digital Commodity Management Helps

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Traders Make Smarter Stock and Sell DecisionsA trader balances managing physical positions or inventory purchased from suppliers with trading to maximize profits. To make the most profitable decisions, the trader must stay on top of open positions, inventory, perishability (if relevant), storage, logistics, markets, and shipping. Digital CM enables traders to access all this information on one platform in real-time.

The trader checks his open contracts and inventory position in the CTRM system in the morning to understand his overall stock position.

He looks at the market curves using an external system. He runs what-if scenarios on spreadsheets to simulate varying market conditions and evaluate decisions to sell on spot markets or hedge future positions with exchange contracts.

He then manually checks the credit of counterparties with his mid-office and decides who to sell to. He completes the trades and manually enters them into the CTRM system. After execution, the back office matches the trades manually with vessel/inventory logistics to complete physical delivery.

He then waits until the next morning for the end-of-day report to understand his overall position and P&L versus market prices. When he arrives at work the next day, he starts the day by evaluating position and P&L based on the end-of-day report and once again must check open contracts and inventory position based on this updated information. Heexecutes a series of trades. He is always out-of-step with the market.

Digital CM Traditional CTRM

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The trader logs into the platform to check his inventory position and open contracts in the morning. With Digital CM, he can access overall exposure across his physical inventory and financial position in one place and analyze his position with real-time market prices and current news impacting the market to see what his open positions are.

Still logged onto the Digital CM platform, the trader quickly checks the Mark-to-Market app using current pricing and identifies the positions he wants to sell. He runs a few what-if scenarios to evaluate the potential impact of news and prices on potential trades.

He compares selling on spot markets against hedging future positions with exchange contracts. He identifies counterparties that buy his stock and runs a live credit check on counterparties prior to confirmation.

He then runs a three-way pegging to match his open position/purchase/sales/shipment and planning to ensure he maximizes efficiency end-to-end.

He executes these transactions and is immediately able to see real-time inventory forecasting showing his current position net of inventory and sales.

At the end of the day, he scans through the P&L and position reports and shuts down for the day knowing exactly where he stands because he has stayed on top of his position all day. He does not need to wait for end-of-day reports.

Increase Profits with Back-to-Back TradingTraders use back-to-back trading to mitigate risk. The trader purchases the physical commodity from the producer and mitigates risk by selling this position to a customer. For example, a trader makes a commitment to purchase six-month corn from a farmer in Kansas and goes short on corn with Nestle in Illinois for the same period.

The Process with

When the trader wants to check his position on contracts in his CTRM system he must run all impact analysis on spreadsheets outside the system. He looks at market curves on external systems and must use the previous day’s end-of-day reports to evaluate the impact on Mark-to-Market. If he wants to evaluate what-if scenarios, he has to use spreadsheets.

When he completes the trades on the CTRM, the back office must execute the transaction matching available logistics (vessel & date) to the purchase/sale. He then waits to run a day closure report to understand overall end of day position and P&L versus market prices. When he arrives at work the next day, he starts the day by evaluating position and P&L based on the end-of-day report and once again must execute a series of trades. He is always out-of-step with the market.

ConclusionTraditional CTRM systems have stayed inflexible and disconnected, forcing commodity companies to work out of step with the digital productivity of other industries. This has meant lower productivity, slower decision making, and overall suboptimal markets for all parties from farmers to traders, logistics companies, food manufacturers and end consumers.

To be profitable, the business of trading needs a robust, digital commodity management platform. One that fully incorporates realities of uncertain markets, adapts to changing levels of volatility in real time, and not previous day prices or end of day reports. Commodity businesses need a flexible solution that can make disconnected systems work like a collective brain by analyzing data from disparate sources and providing solid insights backed by data rather than gut instincts, so they have every bit of information that helps them take the best decision to move at the speed of markets.

How Does this Compare to Traditional CTRM?

When a trader logs into the Digital CM platform to check his position and P&L in the morning, he gains an accurate, real-time view of exposure and P&L based on current market prices. He can quickly evaluate the impact of the latest news on his position and P&L.

He can run real-time Mark-to-Market analytics using current prices, identify open positions and run what-if simulations to evaluate the impact of various trades he can do to offset the impact of current events on his position. He can examine every scenario using real market prices, his current position and P&L to identify the actions he needs to take.

Because the integration layer in embedded in the platform with multiple as-is market data connectors, all data is instantly integrated with the system. This way traders are able to access multiple data sources and assess arbitrage opportunities. The trader can now log the trades into the system. Because Digital CM provides one platform for all trading applications, the back office has the same information in hand immediately and can

match the trades to available vessel logistics ensuring the delivery from the supplier matches the pickup logistics from the customer.

With Digital CM, the trader can evaluate position and P&L with real-time market checks and make further tweaks, if needed. Even better, he receives an alert if market price shifts require him to act, so he worries less and is free to focus on taking more positions to boost profits.

How Does Digital CM Help?

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About Eka

Eka is a global leader in providing digital commodity management solutions driven by Cloud, Blockchain, Machine Learning and Analytics. The company’s best-of-breed solutions serve the entire trading value chain across agriculture, energy, metals and mining and manufacturing markets. Eka is reimagining commodity management with a new age architecture that breaks monolithic ETRM and CTRM systems into bite sized chunks of powerful, enterprise grade apps, thereby enabling faster implementation, adoption and decision making. Eka’s mobile-first, enterprise apps are embedded with commodity specific algorithms that empower businesses to stay on top of volatile markets by letting them scale at will, go live faster, and achieve better value for their investments. Eka has offices across the Americas, Asia, Australia, and EMEA serving 100+ customers globally across multiple commodity segments.

For more information, visit www.ekaplus.com

To learn about how Eka can add value to your operations, email us at info@ekaplus.com

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