Mobilising agribusiness

The impact on the P&L is significant both for commodity traders and producers of consumer packaged goods who are heavily dependent on agricultural commodities.

A number of interconnected factors are responsible. In the past 12 months alone, La Niña weather patterns led to drought in Latin America, damaging corn and soybean harvests in Argentina, Brazil, and Paraguay. From June, hot and dry weather in the US Midwest lowered corn and soybean yields². Adverse weather also caused the International Grains Council to predict a 20% drop in wheat output in Russia, the world's fourth-largest exporter. The UN Food & Agriculture Organization also cut its global estimate for rice production by 1.1% because rainfall had dropped by 17% against the 50-year average during India's monsoon³.

At the same time, demand is up. Global population is expected to grow from seven to 10-billion over the next 35 years. This includes a rapidly expanding middle-class in China, India, and other parts of Asia, which is set to grow by three billion people over the next 20 years, according to McKinsey. This has driven up direct demand for commodities such as oil, coal, and wheat; but has also increased indirect demand, as increased consumption of meat and animal products has diverted agricultural output towards animal feed.⁴

Agricultural crops are also being diverted towards fuel production. This has driven up prices and increased volatility thanks to correlation with wholesale oil and gas markets. The rising oil prices has also driven up fuel and fertiliser prices and consequently the cost of production. Finally, stringent regulations regarding environmental practice and traceability, corporate governance and financial management add to the pressure.

These are long-term trends that will continue to drive acute commodity price swings, and increase agribusinesses' exposure to the four key types of risk identified by the Committee of Chief Risk Officers (CCRO): price risk, operational risk, counterparty credit risk, and regulatory risk.

In this challenging environment, companies at all stages in the food supply chain have increasingly turned to commodity risk management systems to handle price volatility, optimise supply chains, improve decision-making and minimise risk. These sophisticated platforms enable energy firms to:

• Streamline the supply chain by scheduling transport of bulk goods and tracking inventory/storage, in-transit positions and P&L; handling straightforward physical trade matching as well as complex itineraries with multiple trades, commodities, transport methods and inventory movements; and managing all aspects of vessel operations and chartering including freight risk management.
  
• Provide product customisation for farmers, by embedding derivatives in cash contracts for customisation and improved farmer relationships, while aggregating risk within and across multiple commodities.
  
• Optimise complex trading operations by integrating physical and financial instruments; accessing real-time information to better manage current positions and leverage market movements; and utilising variable price models including fixed, index and formula.
  
• Ensure compliance with corporate governance and financial management legislation including Hedge Accounting and Fair Value Disclosure through corporate accounting and controls, accelerated month-end reporting, and the flexibility to adapt as regulations evolve.
  
• Manage price risk and mitigate the impact of unforeseen events with analytical tools including what-if analytics, limits, VaR, credit, hedge accounting, simulation and Greeks/sensitivity modeling; and analyse real-time positions and exposure to market, volumetric, credit, delivery, and FX risk at granular and rolled-up level.

These systems have typically been provided through a desktop or laptop interface. However, the current overwhelming trend in enterprise technology is the move to mobile. The wholesale use of Blackberries in the early years of the 21st century, and more recently the advent of iPhones, iPads, and other tablet computing devices has taken enterprise computing to a new level, and created new ways of increasing productivity.

As a result, the workforce as a whole is becoming increasingly mobile. In a survey conducted for IBM, 75% of executives stated that the deployment of mobile devices is critical to the long-term successes of their companies. The Fortune 500 has already embraced modern mobility: iPhones are already being deployed or tested by 80% of the world's biggest companies, and iPads are being deployed or tested by 65%. Research from Forrester shows that 75% of companies report increased worker productivity from deploying mobile applications.

The power and prevalence of today's mobile devices is transforming the shape of the modern enterprise. Mobile applications empower executives to make informed, rapid decisions by giving them the data and analysis they need, when and where they need it. Industry experts believe that in four years approximately 50% of the devices connected to corporate networks will be mobile.

In the agricultural sector, evidence suggests that the use of mobile phones by farmers and aggregators upstream has had a measurable and positive impact on the efficiency of the supply chain, particularly in developing nations. The improved flow of information between geographically dispersed stakeholders and often isolated producers has helped improve crop yields, co-ordinate logistic operations, and reduce prices⁵.

The power of mobile also extends to downstream operations, where executing commodity trades quickly and efficiently based on real-time pricing data is vital for optimising profits in a volatile market. By breaking the link between function and location, mobile applications can help ensure that deals are rapidly and accurately captured in enterprise systems, enabling companies to understand their true position and arrange appropriate hedges to mitigate market risk.

In particular, mobile applications are particularly well suited to the following areas of the energy business:

• Reducing market risk by enabling hedging strategies to be rapidly executed against trades captured in the field, and tracking the effectiveness of any risk mitigation or hedging strategy.
  
• Optimising trading by allowing transactions to be completed from anywhere in response to changing market conditions, and by viewing real-time pricing and capture deals in the field.
  
• Ensuring field-based originators are working with the most up-to-date commodity pricing.
  
• Improving efficiency by viewing the delivery point closest to a supplier's location while onsite.

When looking for suitable mobile applications, there are a number of points to consider. The most valuable tools are not simply lighter versions of full desktop applications - they are developed precisely for the device concerned. Entire desktop solutions that have been ported on to a mobile platform are also sub-optimal: the ideal solution will include only those tasks that are suitable to the mobile environment, and will have been developed to offer seamless performance of the key functions that are most appropriate and/or necessary for the designated users. When it comes to agriculture, this will include making sure that an offline mode is available to capture transactions in areas without internet access and transmit them automatically when a connection becomes available.

The most important point is that mobile applications are a complement to desktop solutions, not a replacement for them. One company that has embraced this philosophy is Triple Point Technology. In addition to its Mobile Commodity Trader, the company has already launched a number of mobile applications.

The new reality for agribusiness is that industry participants must adopt the latest sophisticated technology-based tools. The complexity of managing unpredictable crop yields, changing demographics and demand patterns, and the interconnected, highly volatile wholesale markets are here to stay. Early adopters of desktop solutions gained competitive advantage. Now the field of competition is mobbing to the mobile space. It's time to take them up or risk being permanently left behind.

For more info on Triple Point Technology, go to www.tpt.com.