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When F Gaviña & Sons, a California-based coffee roaster, puts on a hedge to lock in an attractive price for coffee beans, the firm doesn't go to a Wall Street bank. Instead, its preferred counterparty is Cargill Risk Management (CRM), a unit of the Minnesota-based commodity trading giant Cargill.
Pedro Gaviña, the president of F Gaviña & Sons, says his customers have increasingly been pushing the firm to hedge further down the forward curve so they can provide stable pricing to their own, typically retail customers. In the past, the family-owned coffee roaster used physical forwards with its suppliers as its main hedging tool. But lately it has preferred the flexibility of financial derivatives – and CRM has been a big reason for that shift, Gaviña explains.
"Cargill has helped us a lot," he says. "They show us different options, we choose how aggressive we want to be or not be, and they tailor a programme that makes us feel comfortable with it."
As banks have pulled back from commodity markets in recent years, a growing number of non-bank players such as Cargill have chosen to leverage their core physical business to offer swaps, options and structured products to the same clients with which they trade physically. At Cargill – one of the world's largest private companies, with assets of $59.2 billion and employees in 70 countries – deep ties to farmers, ranchers and food and beverage firms have created a natural opportunity to build the firm's presence in agricultural commodity derivatives.
Today, agricultural commodity hedging tools offered by CRM include vanilla swaps, options and collars as well as more exotic structures such as barrier options, calendar averaging swaps and accumulator swaps. "It truly covers the gamut of structured products and instruments," says Sheryl Wallace, head of hedging solutions and global risk management at CRM.
Regulations have discouraged some commodity merchants from becoming dealers in over-the-counter derivatives, but not Cargill. In 2013, Cargill became the first nonfinancial firm to register as a swap dealer under the US Dodd-Frank Act. As a so-called ‘limited designation swap dealer', the swap dealer rules apply only to CRM rather than to the parent company, and counterparties face CRM for derivatives trades while transacting with other arms of Cargill for physical deals.
CRM says its corporate client base has grown by 10% over the past 12 months, across energy and metals as well as agricultural commodities, and the unit now has 17 offices in 13 countries, having most recently set up shop in Paraguay. Wallace says CRM's growth has been organic: by leveraging its relationships with corporate hedgers in commodities such as corn or sugar, it has pushed into related industries, such as packaging, and into other areas where its customers have exposure, such as energy, metals or foreign exchange.
"As we've engaged in each of our regions, our customers have referred us to others either within their industry or other markets," Wallace says. "That's led to growth in places like Australia, the Middle East and Brazil."
Even as CRM has expanded in energy and metals – it became a category 2 member of the London Metal Exchange last October – the unit has continued to develop the agriculture business. In recent months, for instance, CRM has expanded its offering of customised swaps and structured products in the dairy space, building on its strength in markets such as grains and sugar. The unit now offers hedging tools in dairy commodities such as cash-settled cheese, class I, II and IV milk, dry whey, nonfat dry milk and butter, many of which are illiquid markets with relatively little futures activity.
Another focus area for CRM in the past 12 months has been non-US dollar hedges with producers whose local currencies have experienced volatility, such as the Brazilian real, which lost more than 30% of its value against the US dollar in 2015. Against that backdrop, CRM has worked with Brazilian sugar producers whose production costs are valued in real, even as sugar is traded globally in US dollars. The unit executed hedges that allowed such clients to lock in floor prices in Brazilian real and minimise their exposure to forex volatility.
In all, CRM offers hedges in 24 currencies, including Australian and Canadian dollars, Colombian and Mexican pesos and the Peruvian sol. "We can provide not just a commodity hedge, but a currency hedge at the same time," says Wallace.
She adds that it all comes down to crafting solutions for clients, wherever they may be: "It really is customer-specific. Our team engages with customers, listens and then responds based on what tailored solution will address their goals."
The week on Risk.net, September 8-14, 2018Receive this by email