FSI-Business Seminar. Prof. dr ir Joost M.E. Pennings

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2 FSI-Business Seminar Prof dr ir Joost ME Pennings Chairman FS-Innovators BV/ FS-Innovators USA Inc Wageningen University, the Netherlands Maastricht University, the Netherlands University of Illinois at Urbana-Champaign January Copyright Joost ME Pennings 2011 For internal use only

3 FS-Innovators BV FS-Innovators USA Inc Agenda 1 Risico en waarde bedrijf 1 Hedging & kapitaalkosten 2 Volatiliteit 1 Prijs niveaus 2 Prijs relaties 3 Goederentermijnmarkten 4 De rol van speculanten in goederentermijnmarkten 1 Informatie aanwezig bij CFTC --Risk Management: The New Profit Center--

4 De waarde van het Bedrijf SV i t A i (1 R) 1 i t = planning horizon in years R = risk adjusted cost of capital Ai = net cash flow after taxation in year i

5 Volatiliteit grondstoffen: Koper

6 Volatiliteit grondstoffen: Mais

7 Volatiliteit grondstoffen: Tarwe

8 Volatiliteit grondstoffen: NatGas

9 Prijs relaties Niet alleen volatiliteit is toegenomen, ook sommige prijsrelaties zijn veranderd: Olie vs Gas Mais vs Gas

10 Prijs relatie Crude Oil vs Gas Prijs correlatie gedurende : 0,729

11 Prijs relatie Crude Oil vs Gas Prijs correlatie gedurende : 0,104

12 Prijs relatie Mais vs Gas Prijs correlatie gedurende : 0,025

13 Prijs relatie Mais vs Gas Prijs correlatie gedurende : 0,604

14 Welk risico is nu van belang? We focussen vaak op prijs niveaus Maar zijn het de fluctuaties in prijs niveaus die risico s introduceren? De relatieve prijzen zijn belangrijk o Denk aan handelaar Het gaat om prijs RELATIES tussen:» Inputs» Outputs» Inputs en outputs» Dat drijft volatiliteit in Uw winst!

15 Uw Dilemma: Tevens Uw Opportuniteit! Op welke wijze kan ik een optimale balans vinden tussen het nemen van risico en verwachte winst? Ken Uw risico attitude en risico perceptie Ken de risico- verwachte opbrengst karakteristieken van de markten waarin U opereert Ontwikkel methodes (regels) om beslissingen te maken die leiden tot optimale balans van risico en verwachte opbrengst

16 Risico Management Instrumenten Centraal verhandeld Termijn contracten Opties Bilaterale contracten vaste prijs contracten

17 Functies van Termijnmarkten 1 Risico management Overhevelen van Risico s 2 Prijs Discovery Discovering forward pricing Flow of information Bijzonder belangrijke informatiebron voor U!

18 Waarom bestaan Termijnmarkten? Risk-management instrument Reduceren van (prijs) risico Eliminatie van default risk Marktparticipanten complementeren hun fysieke transactie met termijnmarkt transactie: Cash flow termijnmarkt complementeert cash flow in fysieke markt

19 Welke twee parameters zijn nu van belang? Hedging effectiviteit: De mate waarin U de volatiliteit in prijs (winst) fluctuaties kan verminderen (in %) Hedging ratio: Welke proportie van mijn fysieke marktpositie moet ik afdekken om de optimale risico reductie te verkrijgen

20 Veel informatie: Wat is nuttig? 1 Reuters 2 Bloomberg 3 Hansa 4 FS-Innovators market scans Real time info about prices (time delay); some insight into order book; fundamental news (weather; crop reports issued by USDA etc)

21 Governmental: USDA reports The USDA Foreign Agricultural Service's Global Agricultural Trade System GATS includes international agricultural, fish, forest and textile products trade statistics dating from the inception of the Harmonized coding system in 1989 to present

22 University based research Farmdoc program at Illinois ting/weekly/html/071210html s/indexasp

23 CME Outlook Reports

24 T-Storm T-storm Weather is a Chicago-based subscription service that was founded in 2006 for users of commodity exchanges Independently develop and provide weather forecasts and information that are focused on the development of corn, soybeans, and wheat, as well as weather that influences the supply and distribution of livestock during the US winter Our information and weather opinions have been featured in the Wall Street Journal, BusinessWeek, Barron's, Bloomberg, Dow Jones Newswires, WGN-TV, International Herald Tribune, The Globe and Mail, Business News Network, Canada Television, San Francisco Chronicle, Commodity News For Tomorrow, and AgricultureOnline

25 Global Food in 3D TM

26 FSI MARKET SCAN

27 Role of Speculation Do they really in the long run distort prices? Most speculators using futures offset their positions prior to maturity, and hence never make or take delivery of the actual commodity Thus, the speculator never directly affects production or consumption of a physical commodity Except when having dominant position in the spot market (cocoa case) Geen netto positie in termijnmarkt op lange termijn Prijs trend gedreven door vraag en aanbod Speculanten kunnen tijdelijk prijs volatiliteit creeren Markt diepte effect

28 CFTC s Commitments of Traders (COT) Report Who are the market players? Snapshot of Tuesday market close Disaggregated Market data Release Time: The CFTC posts the COT report to wwwcftcgov every Friday by 3:30 pm Eastern standard time The data in the report is always as of the previous Tuesday

29 Number of Contracts Long Market Participants Wheat CBOT Commitments of Traders (COT) Reports CFTC (Long) 2/1/ /27/ /24/ /19/ /14/2001 9/10/2001 4/12/ /29/ /26/ /21/ /16/ /9/2002 5/11/ /31/ /25/ /22/ /17/ /8/2003 7/10/2003 2/12/ /27/ /23/ /18/ /13/2004 7/9/2004 2/11/ /28/ /22/ /19/ /14/2005 9/8/2005 4/10/ /29/ /24/ /21/ /16/ /7/2006 5/9/ /31/ /26/ /20/ /17/ /6/2007 7/8/2007 2/10/ /27/ /22/ /18/ /13/2008 8/7/2008 2/9/ /28/ /22/ /17/ /14/2009 9/6/2009 4/8/ /29/ /24/ /19/ /16/ Commitments of Traders Long Positions by Participant Non Reportable (Small Speculators) Non Commercials (Large Speculators) Commercials (Hedgers) Source: CFTC FS-Innovators BV

30 Number of Contracts Short Market Participants Wheat CBOT Commitments of Traders (COT) Reports CFTC (Short) 2/1/ /27/ /24/ /19/ /14/2001 9/10/2001 4/12/ /29/ /26/ /21/ /16/ /9/2002 5/11/ /31/ /25/ /22/ /17/ /8/2003 7/10/2003 2/12/ /27/ /23/ /18/ /13/2004 7/9/2004 2/11/ /28/ /22/ /19/ /14/2005 9/8/2005 4/10/ /29/ /24/ /21/ /16/ /7/2006 5/9/ /31/ /26/ /20/ /17/ /6/2007 7/8/2007 2/10/ /27/ /22/ /18/ /13/2008 8/7/2008 2/9/ /28/ /22/ /17/ /14/2009 9/6/2009 4/8/ /29/ /24/ /19/ /16/ Commitments of Traders Short Positions by Participant Non Reportable (Small Speculators) Non Commercials (Large Speculators) Commercials (Hedgers) Source: CFTC FS-Innovators BV

31 Hoe data van COT te gebruiken? Hedging or speculative pressure measure Non Commercial PNL t NCL t NCL t NCS t NCS t 2( NCSP)

32 Commercials: Watch them! Wearing multiple hats gives Cargill an unusually detailed view of the industries it bets on, as well as the ability to trade on its knowledge in ways few others can match Cargill freely acknowledges it strives to profit from that information when we do a good job of assimilating all those seemingly unrelated facts, says Gerg Page, Cargill s CEO, it provides us an opportunity to make moneywithout necessarily having to make directional trades, ie outguess the weather, outguess individual governments

33 Summary: Relevant data from CFTC Traditional Commitments of Traders (COT) Futures and Options (delta equivalent) combined Weekly (as of Tuesday s close) Commodity Index Traders (CIT) Futures and Options (delta equivalent) combined Weekly (as of Tuesday s close) Bank Participation Data Futures only positions Monthly (as of Tuesday s close) Corn, Soybeans, Soybean Oil, Chicago Wheat, Kansas City Wheat, Live Cattle, Lean Hogs, Cocoa, Sugar, Coffee

34 Summary: The Commitments of Traders Data Compiled by the Commodity Futures Trading Commission (CFTC) Disaggregates the Total Open Interest of a Futures Market Reporting Traders Non-commercial ( funds ) Commercial ( hedgers ) Non-Reporting Traders ( small speculators ) Widely Used Data Set Trade (what are the funds doing?) Academic Research (speculation, risk premia, forecasting ability)

35 Wat moet er gebeuren? Commodity intelligence unit (CIU) Systematic approach in: In terms of hedging effectiveness Basis risk monitoring Dynamic hedging effectiveness measurement and strategy In terms of Levels long term buying / selling strategy Trend

36 Commodity intelligence unit (CIU) Systematic approach in: Collecting relevant data Volume/open interest/order book/basis/cot/cit/usda/farmdoc/3d Food/basis Translating data in readily accessible reading format Graphs Hedging effectiveness Translating data in readily accessible numbers Position measures Pulling the trigger Pressure measures Sentiment measures

37 Risico Management als Opportuniteit: -- Risk Management: The New Profit Center -- Reduceren van kapitaal kosten Reduceren van volatiliteit van Uw winst Uw bedrijf als portfolio van kosten en baten Welke risico s vallen tegen elkaar weg?» Afdekken van restrisico met behulp van termijncontracten cross hedge Management van contract relaties met termijncontracten Conflicten in contractvoorkeuren kunnen worden opgelost

38 Risico Management als Winst Center Evaluatie van Uw huidige contracten mbv termijnmarkten Zijn de prijsafspraken (risico afspraken,bodem, plafondprijzen) marktconform? Uw betaalt immers impliciet een premie! Natural hedge: toevoegen van risico kan leiden tot vermindering totale risico en toename verwachte opbrengst acceleratie van de waarde van Uw bedrijf

39 Risico Management als Opportuniteit: -- Risk Management: The New Profit Center -- Ken Uw risicoprofiel Hoeveel financieel risico ben ik bereid te lopen Financiële structuur risico attitude & perceptie Maak het meetbaar! Ben in staat om uit de zeeën van informatie die informatie te identificeren die nuttig kan zijn Identificatie van relevante info Termijnmarkt prijzen & optie waarden

40 FS-Innovators BV Creating value through financial innovation Creating value by having a smart risk management strategy

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