How Large Commodity companies use Finance to gain Advantage

Big Commodity companies like Cargill, Bunge, Trafigura and Vitol all run very complex financing operations.   For example, Cargill runs an internal Hedge Fund to provide competitive advantage vis a vis competitors.

Many of these companies will have internal Trade & Structured Finance groups that focus on a variety of things

  • Manage local currency exposures in emerging market currencies, especially ones which have strict FX Controls. This includes balancing the needs of repatriatiating capital versus the need for local currency to finance growing and harvesting in the currency. During the offseason, when cash is in surplus, the group must find ways to invest and manage the surplus cash.
  • Handle Subsidiary Finance needs – large commodity players have vertically and horizontally integrated operations encompassing processing, warehousing, transportation, trading, merchandising, custody and exporting. They do this for a variety of soft and hard goods, including corn, wheat, sugar, barley, sunflower, soy, coal, etc. in multiple countries. The working capital requirements to manage these operations can easily be in the $50M to $1bn local currency range. When commodity companies need additional working capital, they must find most cost and tax effective ways to get money into the country, all the while dealing with punitive taxes and currency controls.
  • Handle Trade and Commodity finance for all subs – When you have a sale of soybeans from Brazil to China, that would typically be done on a letter of credit basis with deferred payment terms. The group must make sure adequate bank lines are in place to cover flows and price shocks.

Straddling these three needs requires a deep understanding of tax, currency, and legal bankruptcy issues, and also understand what banks can be helpful. Maintaining relationships with bank lenders critical, especially who has risk appetite for what. This can change dramatically, as we found after the 2008 Financial crisis when access to USD deposits impacted the commodity lending business of several large European banks, including BNPP, Credit Agricole, etc. The other issue is the direction of commodity prices.   Lending against commodities which soar in prices, like we had a few years back, is a lot easier than when prices can fall, or even collapse due to growing conditions,

The sophisticated trading firms have deep understanding of their commodities and are always looking for distinct anomalies and arbitrage between Trade Finance and the Capital Markets – creating a profit center. In fact at one large trading company, trading got so big, that the arbitrage opportunities were the greatest contributor over the margins on the sale, and this gave this firm a distinct advantage as it could sell for low margins and outbid the ConAgras, Bunges, etc.


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