INTERVIEW WITH THAIGO TERZI, GLOBAL BUSINESS MANAGER FOR THE ENERGY AND COMMODITIES GROUP AT BLOOMBERG


asktrik BACKGROUND  Thiago Terzi is an agricultural engineer by training and used to trade co ee for Cargill. He was responsible for the entire supply chain, which included buying directly from farmers, managing warehouse container and vessel assignments, and selling to large co ee roasting organizations. The business has changed a lot over the last 10 years, but the underlying assumptions of price uctuations due to conditions or events that occur along the supply chain remain the same. It is this perspective that Terzi brought to Bloomberg in developing the BMAP, Bloomberg’s location-based analytics platform, for the agricultural commodities group.


Article at a Glance

> The Agribusiness supply chain

> The Ethanol value chain

> Commodity trading and price uctuations

> Offsetting trading risk


LBX What was the underlying trade assumption for developing a mapping application for the agricultural commodities group?

TERZI Commodity trading is all about the flow of goods along the supply chain, illustrated in Figure 1. With physically based commodities like soybeans, coffee, rapeseed, and corn, unlike paper-based commodities like bonds, mortgages, and equity, it is the movement along the entire supply chain that matters. The question we set out to answer was how could a map allow a financial analyst or commodity trader to see information about the impact of prices along the supply chain first. (Commodity traders can represent financial institutions, or the commodity producer or retailer.)

FIGURE 1. This charter presents the Agribusiness Value Chain and complexity involved from origination to delivery. Courtesy of Bloomberg.
FIGURE 1. This charter presents the Agribusiness Value Chain and complexity involved from origination to delivery. Courtesy of Bloomberg.

LBX  What goes into the price determination of an agricultural commodity?

TERZI In looking at pricing information, relative to corn for example, we looked at three major determinants:

→ What is the cheapest location to acquire corn?

→ 4 What is the price at origin?

→ 4 What is the final price at destination?

See Figure 2 for global and U.S. prices of corn. What transpires in between acquisition and delivery involves transportation and storage costs and risks. Commodity price fluctuations result from weather risks, along with many other risks, including crop failure, transpor- tation (which includes lack of infrastructure and logistical problems), storage, currency fluctuation, and changes in regulations.

FIGURE 2. These slides illustrate the price of corn in the U.S. and globally. For the actual price, transportation costs still need to be calculated. Courtesy of Bloomberg.
FIGURE 2. These slides illustrate the price of corn in the U.S. and globally. For the actual price, transportation costs still need to be calculated. Courtesy of Bloomberg.

LBX It sounds like what you are modeling is the impact of disruptive events on the price of a commodity.

TERZI  BMAP is a risk management platform. The objective of BMAP is to be a tool to help commodity traders offset risk. For example: If the U.S. is the largest global corn producer, which it is, and China continues to consume large quantities of corn, what is the likelihood that China will continue to buy from the U.S.? When corn ranges from $4.25 to $6.37 per bushel, how do traders ensure the cheapest price? As corn is an input into final products such as ethanol and feedstock, how do traders forecast the supply at a predictable and stable cost?

LBX  How has BMAP changed the pricing analysis?

TERZI  For example, Pre-BMAP an analyst or trader would manually follow corn down the Mississippi River and through grain elevators. There are a number of facilities along the river which essentially act as a toll road, and determine price fluctuations. The price of corn also can go up or down along the river depending on the consumption points, which affect supply and demand. With BMAP, a complete view of actual prices and pricing impacts can be streamed into the analysis for a first-mover advantage. See Figure 2.

LBX What is the source of the pricing data?

TERZI The data comes from a combination of sources, including data that Bloomberg purchases directly from reliable data sources, the government, and Bloomberg’s daily market surveys.

LBX What is the value chain for ethanol?

TERZI Ethanol moves from farmers to grain elevators to food aggregators or processing plants to the end customer. At the ethanol processing plant, corn is turned into either ethanol or feedstock for livestock. Ethanol is blended into gasoline and then shipped to gas stations. If the corn is turned into feedstock or DDG (dried distilled grain), it is shipped to large feedlots and feedstock players. DDG competes with other feedstock such as rapeseed meal and soybean meal. Figure 3 illustrates the ethanol supply chain. As I mentioned before, transportation, storage, and insurance are factored into the price at each stage. Those transportation costs involve trucking, rail, or maritime shipping.

FIGURE 3. This illustrates the production process involved in harvesting corn, pro- cessing it into ethanol, and distributing it to end customers. Courtesy of Bloomberg and the Renewable Fuels Association.
FIGURE 3. This illustrates the production process involved in harvesting corn, pro- cessing it into ethanol, and distributing it to end customers. Courtesy of Bloomberg and the Renewable Fuels Association.

LBX BMAP appears to offer an unprecedented level of transparency into commodity pricing. What if anything is still not transparent?

TERZI  Three things are still difficult to capture:

→ the supply and demand for a single location;

→ the actual price itself; and

→ weather, from a crop forecasting perspective.
It is difficult to find a weather station close to a production site.

LBX Who is taking advantage of the BMAP platform for agricultural commodities?

TERZI  Bloomberg has 1500 agricultural clients, and we rolled out BMAP 18 months ago. Bloomberg clients include banks, the agriculture/agribusiness players, livestock companies, commodity traders and the government. Interestingly enough, we have a large presence with international governments due to their interest in following U.S. prices.