Pricing methods might be the biggest differentiator between Commodity Trade and Risk Management solutions and Enterprise Resource Planning systems. Now, don’t worry, we won’t revisit all the differences between CTRM and ERP, you can find our previous thoughts on that particular topic here. But CTRM pricing methods are definitely worth another go-round.
Commodity pricing
Pricing of a commodity can be done in various ways, the flat price being the most obvious one. When a flat or fixed price is given, the challenge remains to hedge it properly as the underlying physical commodity will fluctuate – you can find out more about the price of an agricultural commodity here. Depending on the nature of the commodity, other pricing methods are available, and a CTRM solution should be able to handle all of them.
The most used is probably the differential price. Based on an underlying future, the commodity is priced to be fixed towards a certain future and future month of expiration. A system should allow then only the quality or location difference as a premium or discount.
Sometimes these differences are called parities, which is basically the incoterm, quality difference and location where the commodity is.
Traditional CTRM provides functionality for these pricing methods. There is however more, some commodities or derived commodities cannot be captured in these pricing methods. A good example is a cocoa product such as cocoa butter or cocoa powder, they have definitely a relation to the cocoa bean futures contract but require so-called ratio’s to price and to hedge. For each of these commodities the business logic and processes needed to manage it effectively are embedded in Agiblocks and its modular design allows more commodities to be added whenever needed. What this means is that it includes specific functionality for specific commodities that are often missing from more general legacy CTRMs including.
Ratio hedging
Turning our attention back to cocoa, this means for instance that ratio hedging is already supported. Cocoa beans are generally transported in jute bags by sea container, of which the inside of the container is completely wrapped in insulating material, thus creating the ideal climate. However, there is no universally agreed upon size for these bags. Ghana and Cameroon ship 60kg bags, whereas Costa Rica uses 55kg bags.
Agiblocks supports all sizes, so you can leave your pocket calculator out of the equation. You can read more about that here, as cocoa is one of our specialized commodities.
Another good example might be milk, where the price is mostly depending on fat content which needs to be measured. In that perspective milk does have somewhat a relation to pricing metal concentrates as the measurement or assays to determine the final price.
Agiblocks allows to administrate and manage all these different pricing types and methods and associated workflows in a unique easy to set structure. Within Agiblocks these different methods can even be combined in a single overview, allowing alerts and views on the consequences. In other words, it’s a single click to see how much still has to be fixed. Our software even allows for different methods for a single commodity when that is applicable.
Administration
Pricing methods are by definition complex, as to-be-fixed contracts can be also priced partial or can be rolled with a broker. Agiblocks accommodates these processes with clear, easy steps within a highly intuitive user interface. Even more importantly, the trail back administration is kept by Agiblocks, which is usually a massive challenge in say a spreadsheet approach. Here, the value of a CTRM system becomes very obvious as a software solution like Agiblocks not only keeps the trail, but also readily provides the risk consequence and allows the user to manage that risk as it becomes visible.
Agiblocks provides detailed insight in your commodity trade chain and offers full control of every aspect of your business operation. Within a single, consistent environment offering customizable configuration, our software enables you to drill down in your trade book, your logistics chain or financial documentation and allows you to act quickly and easily if need be. It also keeps a full audit trail of transactions.
Speaking of pricing, did you know that Agiblocks offers per-transaction prices? Instantly opening the door for all kinds of smaller businesses? For example, if your company has two transactions a week, but you still need a full CTRM solution, that’s all you’re going to have to pay to use Agiblocks. Just another Agiblocks USP that’s really interesting for trading companies of any size: no expensive entry license costs. | Find out more.
