📈📉 Day trading eggs and managing price risk

Welcome back to the Agrifintech newsletter!

Remember the stories about people day trading egg prices late last year and early this year?

They rocketed 49% in one month last year and there was a frenzy as speculators tried to cash in.

Thankfully, the inflation has abated and we don't need to consider cutting back on our egg intake any time soon. 😅 🍳

Consumers certainly felt the sharp end of price spikes. But what if this is your business? Producers were hit hard with the costs of avian flu and also increased input costs with little certainty of where the price was going next.

Managing price risk is one of the key challenges in the food and agriculture sector - eggs or not - and is one of the easiest ways to add value to both producers and consumers. When I outlined my marketplace cheatsheet in a previous issue (referenced ⬇️) - I noted this was one of the key means of adding value.

In this issue, I want to expand on this a bit further and add more context:

➡️ How much of the agricultural world can be hedged?

➡️ listed markets (innovation around futures and options)

➡️ unlisted markets (bespoke contracts)

📣 Also, news updates from Bushel, Agrolend, Zoom Agri and share some insight on Indian Agrifintech from Agribusiness Matters.

📖 I read this week - Distribution is key for embedded finance ⤵

How much of the agricultural world can be hedged?

This much. 👇

Is this infographic from Stable Research my favourite ever? It is waaaay up there.

There are a few things to digest here which when taken together paint an incredible picture.

1️⃣ Global Agriculture production is worth $3.5tn. Great TAM; 😁

2️⃣ 16% of this (and of the volume) is covered by listed futures contracts on 15 products, leaving;

3️⃣ A genuinely ridiculous 84% of those commodities - $1.7tn do not have mainstream price risk management across over 170 agricultural products.

That's almost $2tn in value just out there floating around, bobbing up and down like hens laying eggs. 🐔🥚

Listed markets

Oilseeds and grains are the main listed markets and the ones you may be most familiar with. Corn, Soy, Wheat are the three majors listed on most exchanges from Chicago to Johannesburg to Dalian in China. Softs in the graphic above most likely refer to Coffee and Cotton. These markets get lots of coverage.

And then there are an assortment of local contracts in areas of mass production and consumption. India, for example, has listed contracts in many spices such as Turmeric on the NCDEX.

🤓 Developing structured products for Ag commodities is fascinating and I could probably write a lot more on this topic. My issue on the Marketplace Cheatsheet, was actually a dummed down version of a major piece of work I was involved with vetting Ag commodities in Southern Africa, with output something like this.👇

When I think about new markets and marketplaces, like carbon for example, I always think of this framework.

Besides new product development, there are other innovative things happening in the listed markets space, with companies such Farmers Risk developing digital solutions for farmers alongside some of the major brokers in the U.S.

The price risk toolbox for them looks at crop insurance, derivatives and cash sales - aggregating all three exposures to make a decision is a major headache for farmers as prices, weather and inventory move in different directions. Bringing the insurance, derivative and market data together, alleviates these headaches.

Brokers also find this useful and utilise Farmers Risk to get better data for their clients.

This segway explains my fascination with the Stable chart above. And.. on that note, lets get back to the 84% of commodities not hedged.

The $1.7 trillion unhedged

Firstly, I don't think the $1.7tn itself is fully hedgeable. That Groundnut market in Malawi I looked at? Too dicey. There are many like it across the world. But the number is still huge - so how do you start to unlock it?

❶ There are established providers of third party pricing data covering sizeable markets globally. These make informed decision making possible. For example.  

Urner Barry provide pricing data for "center-of-the-plate" proteins (no, not heard that one before neither!). Animal feed prices are catered to by Feedinfo.

Mercaris are probably one of my favourite discoveries since starting to write this newsletter and they are domain specialists in non-GMO and organic contracts and were recently acquired by another major provider, Argus Media, which I hope to dive into a bit more.

However, informed decision making is the first step.

❷ Sensible forecasting emanates from this. Decision Next - bringing it with data like the White Bread Index - are an example of a company operating in this space.

They provide 'risk-aware' forecasts from the pricing indices to allow actionable decisions to be made.

❸ Finally, we have risk management contracting, provided by companies such as Stable. This is next level (and they also happen to give a fantastic rundown on the Egg markets here)

Stable aggregate hundreds of these indexes and wraps financial products around them in insurance form, by analysing past price movements.  In fact, Stable have established their own regulated Insurance company to underwrite some of these risks alongside a panel of reinsurers familiar with the various markets.

Their target audiences are food processors, large scale producers and food businesses such as the QSR's in the U.S. (Quick Service Restaurants). 🤔 What I love about this, is the focus on the food value chain, as opposed to just farmers, which really gives an holistic view of risk at that value chain level.

For Stable, it allows them insight into growing trends for product development, with contract development for niche markets like biofuels 🌽 and paper packaging 📦 underway. 👀

So, how do they filter these new markets and prioritise them? According to Joe Brooker, their SVP for Commodity Partnerships

Our mission statement is to support businesses who are either exposed to significant basis risk to the futures contracts, or don't have any liquidity to manage their price risk. It really becomes markets where those two things exist, and a combination of market size.

And the other key driver is spend. For example, for many of our food manufacturer clients, sugar is such a huge component of spend, it would not make any sense to look at managing the other inputs. But for some CPG's the food packaging spend is huge and there is no way to manage those price risks.

Similarly, Concept Dairy are a dairy specialist and another one to watch.

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Milk, bread, eggs. That's breakfast sorted.

News

Lots to dive in to here.

⦿ Bushel have issued their 'State of the Farm Report' which is one of the best reads I have come across on key topics in Agtech and Agrifintech in the U.S. market.  

The payments section jumped out at me - see a snippet below - but there is a treasure trove of information covering grain marketing, carbon markets, farmer priorities and more. If you are interested in these themes, this is a must read.

⦿ Agrolend have launched an LCA, or Agribusiness Credit Bill, in Brazil. The company confirmed a fundraising target of $82m, or R400m in local money, and are making swift progress to reach this. Here they are celebrating the launch ⤵️

💡 An LCA is fixed income security backed by rural credit, with the return based on a predetermined rate. This is a tax efficient structure used in Brazil to faciliate credit to rural areas and totals $65bn in the current financing window.

The Agrolend amount is a modest portion of this, but it is not difficult to see how a digital bank dedicated to the Agriculture sector can pick up market share pretty quickly in following seasons.

ICYMI - also check out this A1+ bond raised in Argentina 👀

⦿ Agribusiness Matters takes a look at the Indian Agrifintech scene, where Venky examines the market by lending structures.

The discovery -> transaction flow -> financial service framework used by Venky is quite a good one and the jobs listed are quite useful (e.g. escrow, credit profile, credit, payments).

He settles on lending types as ways to split out the providers, which is sensible in the Indian market due to the PSL (priority sector lending) rules.

⦿ Zoom Agri secured a $6m Series A to expand their computer aided vision for commodity inspections.

This may appear very niche but again the global scope for this product is huge and focusing on the value chain (versus farmers) is very appealing.

⦿ Reading - more on verticalisation of embedded finance, where distribution is key according to Fintech VC and builder Matt Brown.

Enjoy!

And that is everything this week folks - did you enjoy? I'm always here for some feedback.

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