Mercator Commodities specialises in the production, trading and processing of agricultural commodities, ranging from wheat to more niche products such as linseed and canola oil, from Siberia and Kazakhstan. GTR speaks to partner Natalia Haas about the trading house’s strategy, the challenges it faces, and what the future looks like for commodity traders.
GTR: Tell us about Mercator Commodities; what’s your current focus?
Haas: We are a niche trader and our projects are often specific, which is different to the larger, classical commodity houses. We work very closely with our producers, for example through our presence on site and how we monitor production, and we do this to understand the farmers’ requirements, which enables us to align our trading and financing patterns to best suit them. From production through to processing, we offer an end-to-end operation.
Some of our key focuses currently are vegetable oils, seeds and nuts, and their oils, for example peanuts, canola oil and sunflower oil. They are less competitive markets and they have better margins. However, they are quite small markets and there are transport, logistical and climate specifics required to trade them. But taking everything into account, we have a good outlook for these commodities.
GTR: What are some of the challenges you face as a niche trader?
Haas: The biggest challenge we face is the shift in the industry because many of the traditional financing processes banks used to offer are changing. There are many paper-based processes we use for commodity trading which require a lot of time, and this, combined with different lending conditions from regions across the world, means it can be hard to compete in terms of financing conditions. We can get financing based on our balance sheet, but it requires a lot of paperwork, and we can get factoring based on the client’s balance sheet, but this means we would have to provide all sorts of confidential information to the bank. It is surprising there’s still little flexibility in what you can do as a trader.
Nowadays it is easier for the rest of the world to get financing based on the company (balance sheet, hard assets, number of employees, etc), as opposed to the business (trade value, underlyings and trade quality) because this is the way the domestic banks work in, say, Asia. It is a challenge that Western traders are facing and unless you have a high turnover, it can be difficult to obtain financing to compete with the global market.
Another challenge is, of course, blockchain technologies. There are many schemes and trials with big technology providers and commodity players going on, making the technology hard to navigate. In terms of commodity trading, consumers understand how things are made easier by being more digital, and producers understand how they can gain efficiency by gathering and analysing data on tablets or whatever it may be, but if the bank doesn’t support the initiative, it is difficult to onboard the system. You have to buy sensors and install everything, so it can be a hard business and operational case to make. But it is a safer and better way to trade commodities. There are many pilots in place, which concern one or the other link in the chain; however for commodity trading, it is very difficult to incorporate the entire process onto these digital solutions. On the one hand there is change, and on the other hand it is challenging for the industry to transform.
GTR: Where do you see blockchain technology headed in the commodity market and for you as a trader?
Haas: It is a case of waiting until a good solution comes along that fits the commodities market. We know there are platforms that connect financial institutions, for example in the Nordics there is Mitigram, where as a trader you can sign up and negotiate trade finance deals with banks and compare banks’ interest rates on deals, which gives a good idea of the competitiveness of trades. But it only really helps traders with existing credit lines.
For commodity trading, there are many tools and elements that must be united on one platform to work because producers and consumers want logistics, reliability and quality of their goods, and other physical criteria; while banks want the intangible data to access and assess.
There are bits and pieces being done on the physical side, for example satellite monitoring software, which enables farmers to prove their harvest by using satellite imagery, which then enables them to get insurance.
We are hopeful that in the next 18 months there will be a blockchain solution for commodity traders like us. We are keen to help our producers collect and record their data safely and accurately in order to make the commodity trading process more efficient.