Commodities trading becoming more complex

BP hosted an entertaining table outside the annual conference of the Commodity Markets Council, a US trade group, held in Florida this week

Visitors could sit at laptops and simulate trading WTI oil futures. I made a virtual $409,500 in 10 minutes, a feat that might seem impressive were I not down $100,000 in the first five.

The simple exercise of going long or short crude stood out as an anomaly at a conference where the increasing complexity of trading commodities emerged as a theme. This is posing a challenge both to companies and to regulators seeking to peer more deeply into their trading operations.

The Commodity Markets Council’s members include the “ABCD” of agricultural trading – Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities. It also includes growing ranks of companies that trade energy, such as BP, Mercuria and AGL Resources.

Speakers at the conference noted it is no longer enough for the energy sector to focus solely on oil, natural gas or power. It is also not enough for food companies to consider themselves hedged using grain futures alone.

Jack Bienkowski, senior director at Mondelez International – the snacks group spun out of Kraft Foods – said there was a “blurring of the space” between commodities. Trading strategies have evolved in response, in some cases to bundle a position in a few commodities rather than try to neatly hedge the price of, say, wheat.

“You used to have an oilseed trader or a corn guy,” he said. Now, “we look at all of that together”. Managing grain costs is impossible without first looking at energy markets. “Energy to us is the floor,” Mr Bienkowski said.

Andy Milnes, head of oil supply and trading for BP in North and South America, said company analysts are watching not only petroleum fundamentals but Brazilian sugarcane – a source of ethanol fuel. “The market’s definitely way more sophisticated now,” he said.

The complexity complicates the process of matching physical commodities exposures to financial derivatives designed to hedge them. This is especially true with many derivatives migrating from the tailor-made swaps world to more generic futures, speakers said.

The blurring of commodities positions also makes it tougher for companies to prove they are genuinely hedging as they seek exemptions from new US rules limiting commodity speculation. The rules are on hold pending a court appeal.

Lance Kotschwar, senior counsel at Gavilon, the US-based commodities merchant, said that as for “this notion that there’s a direct tie between a physical position and a derivatives position . . . It doesn’t work that way. We’re never perfectly hedged.”

It all made simulated oil-trading look easy.

The Commodities Note is a daily online commentary on the industry from the Financial Times