New Tax Laws and Hedging

January 11, 2018 in Commodites and Hedging
Reuters News reported yesterday that the new U.S tax law is poised to drive more control over the nation’s grain supply to farmer-owned cooperatives. This brings concern to ethanol producers and privately run grain handlers that they could be squeezed out of the competition to buy crops.
The article states that it gives farmers such a big tax deduction for selling their produce to agricultural cooperatives that private firms fear their grain supply will dry up.
The new tax law allows farmers and ranchers to claim a 20% deduction on all payments received on sales to cooperatives.
Farmer owned cooperatives will benefit from this reform while privately held companies are nervous.  There were 1,953 farmer, rancher and fishery co-ops in 2016 in the United States, down 4.6 percent from a year earlier, according to the most recent U.S. Department of Agriculture data. However with this news, there are more farmers looking into the producer/member coop model.
 
While utilizing tax breaks through cooperative producer/member business model sounds like a quick fix after years of compressed margins from lower grain prices, we still believe you need to hedge better. It is critical that farmers and cooperatives utilize hedging strategies in this environment. Our Managed Hedge Program™ offers optionality and strategic trades to capture the upside and protect the downside. Plus, we only make money if you make money.
Tax cuts are great, but there is always more to be done.

Trading Commentary on Ag’s

December 21, 2017 in Commodities
While winter break is upon us and many are restless to finish their holiday shopping and be with their families, we also know nobody likes to miss out on what’s happening in the markets and global news while still at work. Here’s what we are watching heading into the holidays!
What We’re Seeing in Sugar
(graphs from Bloomberg below)
Will sugar stay between 15.50 and 13.60 forever? We have been there since June 29th.
This week we shot right back to the middle of the range after a relentless decline off the highs of the range.
This in itself signals strength. All markets break out of a trading range. The next sugar trades to 15.50 it won’t stop there.
 
​​SMLXL

 
Today in Grains
At the close, the March corn futures settled 2¢ higher at $3.51. May futures finished 2¢ higher at $3.59. Jan. soybean futures settled 5 1/4¢ lower at $9.48 3/4.  March soybean futures closed 5 1/4¢ lower at $9.59. March wheat futures closed 3¢ higher at $4.27.
Corn 
It is important to look at the big picture.
Basis the corn chart of this century, what stands out?
  1. When the ethanol mandate went into effect, the price paradigm shifted from lows of $2.00 to $3.00.
  2. All markets correlate in bubbles and crashes – 2008.
  3. Corn is very sensitive to slightest bit of weather (and demand), 2011, 2012.
  4. Don’t sell corn on a HTA basis in the $3.00 – $3.50 area.
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​Soybeans
  1. Soybeans too, shifted to a new paradigm since 2000. $6.00 to $9.00.
  2. All assets are correlated in bubble and crashes – 2008.
  3. Really demand sensitive – 2012.
  4. Beans are not so bad at $9.50, however I would use a strategy that leaves the upside open.
​​SMLXL

Wheat
  1. Wheat did not see the paradigm shift that corn and beans did.
  2. Wheat went crazy in 2008, weather issue and then the financial bubble hit.
  3. The drought of the northern plains could be more severe this year.
​​SMLXL

Case Study: The Pack Creek Capital and the FIS Kiodex SaaS Solution

December 6, 2017 in Commodites and Hedging

The Company

Pack Creek Capital has assembled one of the best commodity hedging teams in the industry. With a proven track ​​​​record in trading, client service and innovation, Pack Creek Capital is positioned to be the leader in the industry. Designed to reduce risk and enhance commodity margins, Pack Creek’s Managed Hedge Program™ supports all or a portion their client’s commodity price risk. Providing OTC trading and risk management solutions that champion the best interests of their commodity clients.

Their services are aimed at delivering professional hedge management and risk reporting services to the tens of thousands of under served medium size commodity firms around the world.  Pack Creek Capital will advance their clients` commodity hedge program to the next level.

Utilizing their clients` existing brokers and clearing accounts, Pack Creek acts as an external commodity hedge manager.  And bench marking performance means their compensation can be linked to the value Pack Creek delivers enhancing the knowledge base of their clients’ hedging operations without adding to their overhead.

The Challenge

The cost and complexity of implementing a hedge program has long been a problem for many firms. Tens of thousands of commodity producers, consumers, and traders lack either the technology or the experience to effectively set up and run an active internal commodity hedging team.

Historically Technology firms have struggled to sell complex solutions to firms that lack either the commercial resources or experienced personnel to best make use of the software. Similarly, consulting firms have targeted these same firms for assistance in strategy or execution without having the technical systems to help truly understand the risks inherent in their client’s business. The problem is that without the ability to understand both WHAT risk you face, and also HOW to mitigate them, commodity participants are unable to implement a hedging program at all. Partnering the best commodity hedging team in the industry with the leading commodity technology provider delivers a complete commodity solution for this vast and underserved market.

Pack Creek needed a technology partner with the ability to deliver on a demanding number of items. The FIS Kiodex Risk Workbench (KRW) was selected for the system of choice based on a number of factors including:

  • The ability to deploy a range of strategies to adapt to a diverse number of hedging requirements.  The flexibility of KRW was one of the key reasons in selection.
  • The capacity to quickly and securely scale as their client base grows and diversifies.
  • KRW is delivered as a software as a service (SaaS) solution, allowing Pack Creek to benefit from a low total cost of ownership, no hardware requirements, and rapid implementation (less than 5 days!)
  • Only KRW delivered all the reporting necessary to manage the MANAGED HEDGE PROGRAM™ , which will support all or a portion of their client’s commodity risk through a  proprietary MANAGED HEDGE ACCOUNT™.
  • The key differentiating feature was KRW’s easy to use reporting interface.  The robust reports are constructed with a familiar Excel feel similar in appearance to a Pivot Table.  KRW delivers the best of both worlds, providing the company with a secure and auditable system of record with the tools necessary to grow and enhance their reporting business processes combined with the comfort of reporting in an environment they were familiar with.

The Results

The combination of Pack Creek`s knowledge and the FIS Kiodex SaaS solution delivers the best tools combined with the best advice to a vast and previously underserved market. For producing, processing and trading firms in the commodity industry, managing price risk can be a daunting, expensive, and stressful task. Many firms lack the means to invest in professional risk and reporting tools, turning instead to the perils of Excel, the mercy of the markets, or simply hoping for the best.

The effort previously required to build and maintain a professional hedging program can now be outsourced to or enhanced by the Pack Creek model.  Any mid-sized commodity firm now has access to the tools and world class software to actively understand and manage risk, not just react to problems.

The improved level of controls enabled by KRW and the expert advice of Pack Creek gives smaller industry participants access to the types of resources and technology previously limited to the largest players.

“The cost and complexity of implementing a hedge program has long been a problem for many firms. Our relationship with FIS Kiodex is key to our Managed Hedge Program™,” said CEO, Mark Bradbury. “Firms that would otherwise forego hedging will now have access to advanced strategies that are managed by professional hedgers.”