In this ever competitive world in the agricultural commodity markets, operating margins are compressed and profit margins are squeezed. At the same time, price volatility has increased. Growing agricultural companies are challenged to effectively manage the business as they expand globally, acquiring new plants and products. Unfortunately, the processes to manage the business in this environment of mergers and acquisitions tend to proliferate and the discipline around those processes often goes by the wayside.
Agriculture companies that try to use ERP to manage supply chains typically rely on additional spreadsheets to manage hedging and risk. (Learn more of the problems trying to use ERP in "An ERP Solution in Place of CTRM Software? Really!") But companies with exposure to commodity risk need commodity management software that enables them to make better decisions, faster. They can no longer get by with spreadsheets or proprietary, in-house systems.
Some of the signs that it's time to invest in agribusiness trading and risk software include:
1) Different Versions of the Truth
Companies using individual spreadsheets or siloed systems of information are exposed to operational risk. Spreadsheets, although flexible, introduce risk to the business as they are error-prone and too often dependent on the person who created them. When mission critical business functions are being supported by spreadsheets, the corporation suffers unnecessary risks as spreadsheet errors are common and frequently undetected. These errors result in uncertainty, fear, and doubt. Businesses require one version of the truth.
A siloed system of multiple spreadsheets and disparate databases will hinder an organization's effectiveness. Because different users in different departments cannot share this data, duplication of data entry results and adds more errors.
To be successful, any organization – large or small – must run its operations effectively and efficiently while managing risk. Information should be entered into systems one time only, without the need for duplication. The data should be secure yet readily accessible by the people who need it across users in different departments.
When information is misrepresented or mishandled, the company suffers. Reliance on spreadsheets, human error in rekeying data, and improper controls are just some of the challenges facing these companies.
With a single, integrated platform that includes all front, middle, and back office functions, everyone in the company has the information needed. Operational risk is abated when there is one version of the truth across an organization. By replacing multiple spreadsheets with an integrated platform, agricultural companies gain an up to the minute view of consolidated commodity positions across the organization.
2) Issues in Meeting Regulatory Compliance
In today’s highly complex and volatile commodity markets, commodity market participants are faced with the challenges of ensuring compliance with regulatory and corporate governance requirements. Greater supply chain complexity, increased commodity volatility, and rising compliance requirements are driving demand for commodity management solutions. For auditing purposes, access to data must be tightly controlled.
Commodity market participants can have additional requirements to ensure they meet the regulations of the financial markets, including increased transparency of derivatives.
3) Unable to Meet Accounting Requirements
Without comprehensive hedge accounting software, commodity market participants struggle with an arcane process to meet their hedge accounting requirements. These companies must maintain all documentation including hedge objectives, type of hedge, description of hedge, type of risk, length of hedge, and prospective and retrospective assessments. Plus, all types of trades can occur including forwards, futures, calendar spread, product spread, exchange, over-the-counter (OTC), swaps, and average trades.
Hedge accounting - A method of accounting where entries for the ownership of a security and the opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment of a financial instrument's value, known as marking to market.
The first step in the compliance process is linking the physical purchase or sales contract with the appropriate hedge against it. Hedge accounting recognizes the off-setting effects between the derivative and the underlying commodity, which allows a company to recognize the net profit or loss at the same time on the income statement.
4) Difficulty Determining Exposures to Specific Customers or Determining Available Credit Lines
Agricultural companies need the ability to define, measure, and control organization wide risk. Real-time position and mark-to-market P&L across physicals and derivatives is required, identifying exposures and enabling timely decisions and actions. These companies need market risk software to capture, analyze, manage, and report transactions in real-time.
Counterparty credit risk should be measurable and counterparty credit monitoring should be done in real-time. Companies should be able to quickly identify potential breaches or contract milestones.
5) Unable to Readily Generate a Mark-to-Market or VaR Report
In many businesses, the lack of proper tools to manage commercial and risk activities may be sabotaging profits. The combination of different product streams, swings in inventory levels, and increasing volatility in commodity prices are only a few of the complexities facing the risk manager. Risk managers should be able to generate mark-to-market and VaR reports on demand, as well as perform stress testing on portfolios. If a risk is not measured, it is not controlled.
ERP systems lack the sophisticated analytic tools necessary to manage risk. Spreadsheets are not up to the task, and their use may introduce a whole new set of risks.
6) Dependence on a Few Individuals
A homegrown system is often dependent on one or a few individuals. Frequently, a small number of individuals knows how to use the system and run reports. This makes it difficult for the business to operate effectively, especially when those individuals are not available either temporarily when they are on vacation or permanently when they leave the company.
7) Lack of Transparency
Users across the organization need a current, transparent view of all positions and exposures. Since commodity companies frequently have little influence on the underlying price of raw materials, they must focus on reducing costs and avoiding errors to remain profitable. This is impossible with homegrown or siloed systems.
Invest in Next-Generation Agribusiness Trading and Risk Software
If these signs are evident at your company, it is time to seek alternatives, particularly when millions or even billions of dollars are flowing through the existing systems. Stop wasting time finding data and fixing mistakes. Eliminate inefficiencies in your workflow processes. Mistakes can be costly and missed opportunities to secure a greater profit can occur in the absence of real-time information.
Eka’s InSight CM software platform is a next-generation CTRM software platform for managing risk across multiple commodities including softs, grains, feeds, edible oils, oilseeds, and livestock. The comprehensive risk management solution controls price, counterparty credit, regulatory, and operational risk. The platform supports derivatives, complex pricing, mark-to-market, and position management. With Eka's InSight CM platform, vital information is brought together in a single, central system to enhance decision making.