STiR coffee and tea magazine

Volume 4, Number 5

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Page 32 of 67

STiR tea & coffee industry international 33 Coffee trading is volatile and margins are thin. There are so many ways to lose money in the blink of an eye that traders rely on automated software to recognize risk and convert it into a profitable opportunity. Here are four common types of risk defined by Generation 10, a software company specializing in commodity trade risk management. Market risk The risk of a change in the value of a financial position due to changes in the value of the underlying components on which that position depends, such as commodity prices and currency exchange. Credit risk The risk of not receiving promised payments on outstanding investments because of a default by the borrower. Operational risk The risk of losses resulting from failure to perform due to in- adequate or failed internal processes, people and systems, or from external events. Liquidity risk The risk stemming from the lack of marketability of an invest- ment that cannot be bought or sold quickly enough to prevent or minimise loss. Risky Business formerly with Louis Dreyfus Commodities and a past managing director of Bernhard Rothfos in Hamburg, Germany. Firms were deeply vested "seeking to enhance value adding functions in pro- ducing countries, rather than remaining an asset-light service pro- vider," said Heinricy. The market has changed from old-fashioned relationship- building and salesmanship to "cool and rational corporate and investor efficiency that is focused on short term cash profit and less about value creation," according to Heinricy. He cautions that market moving speculation and bets based on analyst conclusions about the inefficiency of markets are "dangerous." "New market participants are attracted by the volatility and inefficiencies of soft commodities like coffee, acceleration and exaggeration is the result," he said. Heinricy sees a risk to the roasting industry "as both its supplier categories will care less about them, selfishly seeking a profit. The relationship between the supply chain and final roaster may become less comfortable and more opportunistic, less accountable. Industry customers will have to watch out with whom they want to associate in the future, and carefully evaluate the value propositions still offered," he said. In our coverage this month STiR Tea & Coffee takes a close look at coffee trading with a feature on modern traders from Norway whose Nordic Approach makes them direct sales con- duits for roasters, delivering micro-lots from farms they visit regularly. "The whole idea is to build bridges between the produc- ers and the roasters," writes trader Morten Wennersgaard, co- founder of Nordic Approach. "That's why transparency is so crucial. Having two parties, in both ends of the chain, engaged makes everything worthwhile. We are often bringing clients with us to origin, and it makes any project we do much more mean- ingful. It proves that all the hard work from everyone involved is worthwhile." See pg. 38, A New Approach to Trade. And for the largest traders, STiR explores commodity trad- ing risk management (CTRM) systems, a high-speed, real-time means of tracking every transaction from the palm of your hand. See pg. 47, Mobile Commodity Trading Software Arabica production and consumption 2000-2015 Source: Coffee Network INTL FC Stone The Economics of Coffee 2014

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