Reports E/CTRM Software – To Build or Buy? | Page 13
CTRM for Ags & Softs
contract, location, etc.), they must be changeable by date (moisture content will vary through time, for example),
there must be at least a minimal interface to collect sampling data from internal orthird-party sources, and there
must be a way to calculate and recalculate prices as the quality criteria change. It’s important to stress that these
requirements will change relative to each commodity given that specific quality attributes vary by
commodity.Various quality attributes are expressed in the contract and pricing terms, and these need to be
tracked by the CTRM for pricing and settlement purposes, as well as to determine cost accruals, and in valuation
calculations to gain an accurate picture of Profit and Loss.
Pricing Flexibility – The ability to calculate value via a diverse range of indexes, quality parameters, and deal
types.This will include use of quality criteria (which again may change as the commodity moves through the
supply chain), indexes, futures, deposit terms and much more. Pricing will be specific to the commodity in many of
these markets, as well.
Packaging and Shipments – Depending on the commodity, it may be shipped in bulk, in sacks, bags, bales,
containers, tanks, barrels or any number of packages. This means that many different types of product
specificationsmust be handled by the CTRM solution from both a logistics perspective, as well as a pricing,
inventory and financial perspective. Additionally, a commodity can be transformed from bulk to packaged during
its movements, or a shipment can be broken up into smaller lots. These scenarios, which can be extremely
complex, need tobe addressed explicitly within the application.
Futures Markets – As noted in Appendix 1, there are multiple future markets for some commodities such as
sugar.As such, an ags & softs capable CTRM solution needs to offer the flexibility to configure multiple trading
books, each of them reflecting the hedging market to be used or a proxy of that hedging market.
Unique Attributes Related to Individual Commod ities – Sugar, for example, is unique in the sense that it has two
principal markets or products that can be converted to each other physically. Raw sugar can be processed and
converted into white sugar, and hence, there is a differential known as the ‘white premium’ that can value the
conversion. The premium can change daily based on things like fuel costs and needs to be tracked. The white
premium has to be handled by a CTRM used for sugar explicitly for the usage of pricing, but also to support rolling
the premium.
Over time, a number of product properties for various commodities have emerged,defined and used by the
buyers,that also need to be ‘understood’ by the CTRM software. An example is the Coca Cola specification for
sugar. All of these product properties need to be captured and held in the CTRM solution. For buyers, customized
and changing specifications need to be supported as well, including but not limited to a wide range of product
forms and packaging alternatives.
Flexibility and Adaptability – Though ags & softs have been traded longer than other commodities, these have
been primarily merchant markets in which commodities would be purchased at the source, transported,
processed, repackaged and sold to consumer markets.With the advent of global trading markets and electronic
exchanges, these traditional markets are evolving to look more like financial markets.This evolution and
increasing sophistication of the market participants continues and impacts the technologies used by those
participants. Any CTRM solution, particularly one that covers multiple commodities, should be architected and
supported in such a manner that it can readily adapt to changing trading practices and regulations.
Bottom-line for companies seeking to buy or procure a new CTRM/CM solution – depending on where you lie in the
market and which commodities you buy or sell, the best fit solution may be difficult to initially identify. Each commodity,
and each market player, has a very specific set of qualities and requirements that must be addressed in a CTRM solution.
For additional information on the unique nature, markets, and requirements of the most common commodities traded, see
Appendix 3.
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