The Hidden Plumbing of Commodity Finance

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On the iHeart Radio app, Apple podcasts, or wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, radio, news. Hello and welcome to another episode of The All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe, why isn't it all? Joe, I think I've told you this before. But way back when I was starting in financial journalism, I really wanted to be a commodities reporter. I get it. It seems fun, it seems real. It seems like one of the few areas of finance that's not just a screen, you know what I'm saying? Where there's more to it. No, there's a physical advantage, right? Yeah, but also like, you know, every was like, this is a relationship business, but I feel like commodities, you know, everyone in finance has that, right? Do your banker impression again. This is a relationship. That's not it. But right, but everyone says that in finance. This is a relationship business. But actually, commodity seems to be one of those areas where actually that's a real thing and just a cliche and stuff. So I get it. It seems to be very idiosyncratic where like one load of whatever commodity might not be completely fungible with the same commodity. Yeah. Because we call it commodities. Right. And yet, but you know, so I had this like romantic idea in my head of what a commodities reporter actually does, which is like, I don't know, go on ships, travel alongside, like huge things of coal and metal and aluminum and stuff like that, which is probably not realistic. One aspect of commodities that I never really appreciated was how much financialization there actually is in the market and that there are so many different players in the market. We've sort of touched on it before with the straight of Hormuz situation where, you know, you have the insurers and then you have the reinsures and you have like insurers for the free and for the whole and for like liability. And it just seems so complicated. You have a very similar situation on the financing side. Sure. And it struck me that we have never actually done a commodity financing episode. No, and I'm really interested in this because again, like one of these things, you always hear about capital efficiency, right? This is very important. And so, okay, here's like, let's say we do not know, I don't know what the cost of moving so and so many kilograms of copper from one place to another is whatever that cost is. I probably don't want to tie up all of my capital at the, I probably want to put down a fraction of the thing, borrow the rest, etc., then pay off that loan when the ship gets there, etc. So that I am as liquid as possible at any given moment. This is just like, I'm sort of like, this is my first principles. I don't know anything about this space, but I assume that there are a lot of calculations like this within the process of procuring mining, delivering commodities. Absolutely. So today we are going to learn about commodity finance. We're also going to try to get a handle on what's going on in the commodities world right now, given some of the disruptions that we've seen. And I'm glad to say we do, in fact, have the perfect guest. We're going to be speaking with Lewis Hart. He is, of course, the head of corporate advisory and banking at Brown Brothers Haramons, so someone who lives and breathes commodity finance. Thanks, Tracy. Thanks, Joe. It's great to be here. Would you say you know more about commodity finance or 90s hip hop and R&B? Oh, that's a tough one. Very close. I'm throwing that out of nowhere. He's a big hip hop guy. Tracy knows me well. Tracy knows me well. She's going back and we just talk about that. No, we shouldn't. Okay. What's commodity finance? Like, what exactly are we trying to achieve here? It's a good question. And the way I think of it, it's like the biggest $20 trillion market that no one talks about. So you think about global trade. It's about $20 trillion of global trade in goods, goes through trade finance programs. commodity finance is a specialized subset of trade finance, and it's about $4 or $5 trillion. Okay. So as a huge market, it sort of surprises me sometimes that it doesn't get more headlines, but it's not that glamorous. It's kind of boring. And so when things go well, it doesn't really create the drama that headlines are seeking. Sure. Well, this is the cabinet to be fair. This is the case with almost anything, which is that you never hear about anything when things are going well and that, including any types of finance. And hopefully, you know, ideally, you would never hear about any finance because where house shipments successfully makes it. Yeah, right. It wouldn't make for it to be honest. As a journalist, I wouldn't try and pay is receivable on time. Yeah. I pay is receivable on time. When I think about finance generally, I think about like, who is a consumer of financial services and what services are they actually? I guess purchasing or when do people find the need for finance, right? So a homeowner occasionally, needs financials or a home buyer suddenly needs is a purchase of the financial services through a mortgage, right? Yeah, etc. What is it canonical or modal example of a consumer of commodity finance? Sure. Well, it's really the business of financing motion. And so the classic example would be a commodity merchant. Okay. commodity merchant kind of evokes a lot of history, right? You think back to Renaissance Italy and the Medici's and all the merchants that kind of pioneered global trade in the days and actually goes back even farther, you can go back to even the B.C.'s and C. trade finance happening. But the typical consumer is a physical merchant and they may be in the energy space, they may be in the metal space or they may be in the agricultural space. Their job is not to speculate on prices contrary to popular belief. You think commodity trader most people think speculation. That's actually not what they do. They are essentially supply chain managers. That's their role. And they are the largest consumers of commodity finance. And what are they purchasing? They're purchasing, you said it well at the beginning, ship loads of copper cathode, containers of coffee, green coffee, unroasted coffee in barrel at back. No, but like, so when I get a mortgage, I am purchasing the ability to have to have a minimal monthly payment that's spread out over 30 years. Yeah. So that is what when I like enter when I interface with the bank or whatever a mortgage broker, I am purchasing the ability to not destroy all my liquidity when I buy a house. So what are they not setting aside the commodity that they're purchasing? What are they purchasing from the bank? Yeah. So essentially the basic product is a line of credit, a secured line of credit. And that line of credit, kind of like a credit card, can be used to buy eligible commodities. So it's a line of credit that's self-liquidating. Meaning once you make the loan, you know what the client's buying and you know what the source of repayment is. That's very different than other types of lending that take much longer to repay. Okay. So it's very short term, it's self-liquidating, and it's secured by inventory. And then when the inventory is sold, it's secured by the account receivable that results from the sale of the inventory. The receivable will get paid and then it keeps happening again and again. It revolves up and down. The big variable that is always tricky is what's the price of that commodity at the time of the loan. And these structures are designed to give clients flexibility to buy the copper, whether it's $6 a pound, $4 a pound, $7 a pound. It's hard to predict these capital needs. And that's most lenders like fixed amounts. This is a floating dollar amount, which is kind of a unique part of it, where the value of the loan changes as the price of the commodity changes. Oh, that's interesting. Wait, okay. So why did they need that flexibility? You explained that further. Yes. So good question. So think about a client who's buying a pound of coffee, right? Think about your local coffee shop here. That coffee being traveled 2,000 miles from somewhere likely in South America. It went through a whole process of milling and exporting. It went on a ship. It ended up at a roaster in the US and finally made its way to a retail shop in Manhattan. There's a ton of capital involved there. That client likely agreed to buy that coffee several months in advance. The time when they actually fixed the contract and pay is when the coffee ships typically. And at that point, we don't know if the price is going to be $3 a pound, $2 a pound, $1 a pound. And so the capital needs you kind of configure them out within a band. But sometimes things happen that actually change what you thought. And so the unique thing about a commodity lender is they're marking to market that inventory. So if you pledge me a pound of copper, I'll lend you 75 cents, 80 cents, maybe more of the value of that copper, whether it's $3 a pound, $350 a pound or $250 a pound. Where does the commodity futures market play into this? Because when we're talking about the unpredictable nature of we don't know the price of commodities fluctuate, you can lock in prices. In many commodities and not all and I want to get into that. Yeah. Non-financialize commodities. But to some extent doesn't the futures market solve part of the problem of the variability of the pricing? In one sense, it solves the price risk. So one of the key risks in commodity finance is the price risk. So if I'm lending against copper, yeah. And the price goes down, I better be careful, right? My capital could be impaired. So you use the futures market, the derivatives market to hedge that price risk. So we like to say our clients are typically long physical, meaning they own the inventory. And they're short paper, they're short futures contracts. That works really well. But when prices go up, that means they have to post margin calls. So if I have a $3 a pound copper shipment and the price goes to $3.50 while it's on the water coming from Chile to Georgia, that client says, I need to borrow more money to keep my hedge. Okay. And until the ship arrives and the client pays for the copper, that hedges on and you don't know what that margin call is going to be. This is what happened with like nickel a few years ago. Yeah. And entities that were long nickel and still got destroyed by the margin calls that they experienced. Even though they're on. I'm lucky. I'm so level on there. They were on the right side of the trade. They were on the right side. Yeah. This is a slight tangent. But you brought up coffee just then. I think both of us read Lloyd Blankfein's book in preparation for having him on the podcast. And he was talking about how when he was at J. Aaron, they had the huge warehouses of coffee beans. And apparently they smelled really bad because they would like rot like us or like their beef. It's not an optimal. Yeah. What are you doing? Yeah. Is that true? Do coffee beans actually smell bad in large amounts? I mean, I like the smell. I've walked through many coffee warehouses. Yeah. There are a lot of them in New Orleans. There are a lot of them in New Jersey. They're basically burlap bags full of green coffee. Yeah. That sounds pretty good. Yeah. So I'm not sure about that story, but the good warehouses store them well. They don't really degrade that quickly. They have a pretty good shelf life. And they can last for a pretty long time before they start to decay. But you have to keep moisture away. There are things you have to do to secure the quality of them. And the good warehouses are expert at handling those. Okay. So this is actually a serious question. Then when you're doing due diligence for a loan, what are the factors that you're taking to account? Would you look at something like the quality of the warehouse that commodities are going to be stored in? Absolutely. You would look at, you would have location eligibility requirements. So you'd say, I will lend against coffee that's in this warehouse, this warehouse, or this warehouse, but not coffee that's in this warehouse for whatever reason. So that's a big part of your diligence. That's one risk. The bigger risks are really what we touched on, price risk. Counter-party risk is the second one. International risk, which I'm sure we'll talk about, where is the good that you're financing? Hopefully it's moving. Sometimes it may not be. And yeah, exactly. In some cases, it may not be. And the biggest one, I think that Brown Brothers Harrahman particularly focuses on is the management. The owners of the business, what are their motivations? What's their reputation? What's their character? We have something we call the five sees of credit. It's kind of an old adage. And those are character, collateral, capital, conditions. And the most important one we think is character, a character of the borrower, which really comes out when markets get volatile, how people behave. And these are, you started saying accurately, this is a super relationship, focus business. Character is really the most important thing in the business when you boil it all down. So just to be clear here, when we're talking about, okay, client comes and whatever they have need for some coffee or whatever, the other side, is this coming off of Brown Brothers Harrahman's balance sheet? Are you a middleman for this or is it your own balance sheet or both? Historically, this market was dominated by banks. There was sort of a group of banks, particularly European banks that dominated. I would say in the last 10 years, many of those banks have actually stepped away from the market for a variety of reasons. And as a result, they're not that many in the US who really specialize in this, where one of them, but they're plenty of European banks that really understand this business. And what we've seen is you're seeing more and more interest in this asset class from institutional investors. So they like short term, floating rate, inflation protection, uncorrelated to the broader equity markets. There's some really attractive features in this. It's historically been a very small group of banks, but it's starting to expand into the institutional investor world. So are you selling that, reselling that risk in many cases? We're typically holding the majority of it. Okay. But we will syndicate risk out to other investors from time to time as well. And we have some partners that we work with. We have different banks that will essentially buy risk from Brown Brothers. But we're always holding a significant portion of the risk on our balance sheet. Data centers need electricity. AI needs copper, reshoring needs steel, and Gold's run may tell you something about how the world is repricing money and debt. All of those point back to real assets. The RACS ETF is an actively managed one-stop real asset shop from Gold to commodities to natural resource equities, adjusting his conditions change. Visit vanak.com/raaxpod to learn more. An investor should consider the investment objective risks, charges, and expenses of the fund before investing to obtain a prospectus and summary prospectus, which contains this and other information, visit vanak.com. Please read the prospectus and summary prospectus carefully before investing. RACS is distributed by Vanak Securities Corporation Distributor. By fellow Americans this is Liberation Day. Impact politics. Change businesses. Listen to the big take from Bloomberg News every weekday afternoon on the iHeartRadio app, Apple podcasts, or wherever you get your podcasts. How come the banks have exited the business? Is that just like a 2008 regulatory capital story or something else? It's definitely a bozzled story to some extent. I think as bozzled for has kind of taken hold, you see more and more capital requirements that make it harder to issue letters of credit and things like that. That's definitely part of it. Another big part of it is just the administrative intensity of running this business. If you think about tracking all this collateral as it's moving around the world, you need people. Now over time, digitization is going to take hold here, but you still need know how you need people. It's not easy to run this business every day if you don't have the right people. We're fortunate to have a very experienced team that knows how to do this. We started 206 years ago in this business. We've literally been doing it for over two centuries and that's a big part, I think, of why we've stayed committed. It's kind of the DNA of our firm. I think over time, you're seeing some banks coming back into it, but you also saw in the energy space in particular, first of all, big problems in 2015 during the correction, banks lost some money, and then you had ESG pressures, particularly around European banks that caused some to say, "You know, I don't really want to be in the business of financing this commodity or that commodity. I'm going to shift my resources more to the renewable sector, for example." So those are all the factors that I think have contributed to it, but there is a group of banks globally that has stayed committed to this business through kind of thick and thin and knows how to do it, has produced good returns, very low losses over time. You mentioned tracking commodities and shipments. How do you do that exactly? Is it different to what I can do? Maps go. Yeah, maps go is pretty cool. I was looking up something the other day. It was a cargo of fertilizer leaving Saudi Arabia. It was pretty easy to see where the ship had left from and where it was going and whether it was on time. So what exactly are you doing? So the bill of lading is like, I call it the talisman of trade finance. It's this really cool document. It's a title document when it's negotiable. So there are four words to the order of that when those four words are printed on a bill of lading, that means that whoever to the order of the word after that, they essentially control those goods. Those bills of lading have numbers. And you can type those numbers into, for example, Bloomberg Terminal has the Marine track or app we look at that. So we're using public source data to really track that collateral when it's necessary. You typically don't need to do that unless it's something's going wrong because ships tend to go where you think they're going to go. But that is a tool with technology that makes it much easier to actually track your collateral while it's on the water. Once it goes into a warehouse, you typically get a warehouse receipt, which also can be a title document very important if it has those four important words. And in that case, you're often talking to the warehouse directly. So you may say, the client may say, I'd like to release these five bags of coffee or one cappuccino to sell to this roaster. Is that okay? And our team is actually saying, yes, please release those. But that's on trust, what we call a trust receipt. And then they have to give us an account receivable to replace that within a certain number of days. Interesting. Okay. So obviously in the backdrop of this conversation is the closure of the straight of hormones. And we'll get to that in a second. But it does raise the question of sort of hinted at in the beginning. We all know that oil flows through the straight of hormones and there's a futures market for it that allows some ability to reduce volatility or take out concerns. Pistachios also flows through the straight of hormones. There's no, as far as I can tell, there's no pistachio futures. I just looked it up on the terminal. And I'm curious, do you, first of all, a, do you do commodity finance for commodities that don't have hedging instruments? So what are my colleagues? This may shock you is on the board of the peanut tree nut association. And so it's actually called the peanut tree nut association. It's a big trade organization and we happen to finance. You know, it's our tree nuts. Hence the name has to be. Yeah. You need peanuts and tree nuts in a title. It's very, very important, very specific. So we, we actually are active in lots of non-hedgeable commodities like cashews as a good example, pine nuts. Pistachios less so, but, but all kinds of non-hedgeable commodities that would probably surprise you. How does that change the calculus of commodity finance when that instrument doesn't exist? Yeah. So thinking about what's happening in the street, first of all, we're not the largest player in the Middle East. I think more, more of the European banks, but certainly we, we're watching it closely. And I think what the media is really focused on is kind of the oil side of the story. So you keep hearing 20% of global oil is trapped. The largest disruption in the history of the oil market, those are all true. You see lots of activity in the price, although it's mostly in the front month, the front of the curve, not in the back of the curve. What I think we're interested in actually in the lens of a Kamali banker versus the lens of sort of an oil research analyst is how much capital is actually trapped, right? Because our business relies on turning over your balance sheet, the Kamali merchant and the Kamali banker. The fundamental principle is that self-liquidating nature. So you buy it, you sell it, you collect, and then you do it again. It's velocity of money, right? It's the velocity of the turnover. And right now, there is a lot of capital that's stuck in the street. And I see lots of different reports, is it something like 1500 commercial vessels, some number like that? I think that's what the Pentagon said recently. That's a lot of work in capital. So doing some rough math, that's tens of billions of dollars. Maybe it's more than 100 billion, but it's a massive number. And when all that gets trapped, and you have potentially margin calls related to hedges on those inventories that can really strain your liquidity if you don't have the right financing structure behind you. And that's why in these situations, you need a bank that understands your business. So if you were going to load an affer max, which is like typically 700,000 barrels of oil, that's the capacity of an affer max vessel. Or February 28th, the cost of that might be 40 million, 45 million dollars. Today it's more like 70, 75 million dollars. And so overnight, the cost of your single shipment went up a significant amount. And how do you finance that back to the earlier point? You need a bank that can be flexible enough to write a line of credit that allows you to do financing under a certain guideline. So how are the banks actually handling this at the moment? Because on the one hand, like, okay, the cost of actually shipping stuff has gone up. On the other hand, the value of the underlying collateral, assuming it's oil or maybe steel or something like that has also gone up. But on the other hand, as you point out, balance sheets are probably a little more restricted if you have these huge sums that are already tied up because the ships aren't actually moving. So I think going back to COVID and then Russia, Ukraine, first you had this huge supply chain disruption. We all remember images of container ships off the coast of Long Beach. Two years later, we had the Russian invasion of Ukraine and this huge disruption in natural gas flows from Russia to Europe. People didn't forget about those things. So companies went out and raised more capital so that they were ready for the next exogenous event. So I think- -Kamadi merchants. -Okay. -Kamadi merchants in this case. -Yes. -Kamadi merchants specifically went out as a result of the volatility in those two events, raised more capital. So they're coming into this crisis, well-funded. And so far things are working. Actually, there's not evidence that things are breaking. If this lasts for months and months and months, who knows where it goes. But right now, the system is functioning well. Actually, the banks are supportive. The Kamadi merchants are dealing with the liquidity needs. They have enough liquidity. We haven't heard of any major issues yet. But it's a matter of time. And if the straight doesn't open sooner than later, then I think you could see big strains because there's so much trap capital there. -What actually happens mechanically, if I've financed a particular shipment and is now hypothetically stuck in the straight of our moves. Like what conditions start to kick in? -Yes. So I think putting, if you're channeling your inner Kamadi banker, the first thing you're looking at is my collateral okay. Right? So if it's a shipment of oil, the crew okay is the ship in the right place. Is it going to be at risk of being in a war zone and having impairment? Once you get over that, you're looking at the insurance, making sure the insurance coverage is there. You're looking at what does the charter contract say between the merchant and the ship operator. And that's going to govern who pays for this detention, voyage, frustration, their different terms. But all those are going to be covered. -Is voyage frustration an actual term? -Yes. -Frustration of voyage. Yes. And so this is, you know, the marriage is a common term that that's when the merchant is slow to load a vessel or slow to discharge a vessel. This is something a little different because this is essentially a war zone. The ships can't leave. And so it has happened historically, but it hasn't happened in a long time. And I know everyone is sort of looking at the contract, figuring out what the losses and costs are and then figuring out who's responsible for what. That's not a single answer. It's case by case. But first you're looking at the collateral, then you're looking at, does my client have enough capital to withstand this? How many months, days, you know, hopefully years could they withstand if this actually never opened? -By fellow Americans, this is Liberation Day. -Chair Powell opened the door to this first interest rate cut. -Impact politics, change businesses. Listen to the Big Take from Bloomberg News every week day after news on the I Heart Radio app, Apple podcasts, or wherever you get your podcasts. -Do you do like, you know, what would be the equivalent of workouts with clients? I mean, you know, here is a clearly something that's not their fault. It's an exogenous shock and so forth. You probably would like to have that client be with you five years from now when hopefully hopefully the straights open in five years and so forth. And so do you have like, okay, like here's money some OS, but this would be really stupid to put the screws to you now to collect that. Maybe they have the capital could make the payment, but it would be very unwise in the long term to put the screws to the client to get that payment back given that life is long and so forth. -Yeah, we operate under the principle that you don't put all your eggs in one basket. So supplier diversification is a really important part of commodity risk underwriting. And that means, if a a client has a hundred percent of their supply coming from one region. You might get a little anxious about that credit and say, maybe not for us. Typically, there's enough diversification that a single ship or series of ships that are stuck in one place doesn't cause the company to kind of seize up. There may be some of that out there, but we're not seeing that with our clients. I'm sorry. I want to just go back to something because I didn't understand. You mentioned your colleague who's on the peanut tree nut association. Yes. From the perspective of Brown Brothers, Haramann, how does commodity banking or finance work differently for some of these more niche commodities where the client does not have the ability to go short to contrast the physical? You're always in non-hugible commodities. You're also measuring price risk. Typically, in something like cashews, as an example, cashew supply chain is super interesting. By the way, it starts typically in West Africa. It comes in something called Rossiid. It then gets shipped to Southeast Asia, Vietnam, India, and they extract this kernel. The kernel is what you eat, and there's actually toxic liquid in between the shell and the kernel long story. It's a fun supply chain, and then it gets exported in edible form, typically from places like Vietnam. It's a very long supply chain, and typically what you're relying on there, because the price does move a lot, is a forward contract. That forward contract may not be financially settled as it is in the futures market. I've sold this all to XYZ buyer at ABC price. So, maker of sweets or something like that? If you like cashews, if you go to your local grocery store, it's probably whoever sits in between your local grocery store and our client that is packaging and salting and all those things. I was looking up the toxic liquid that comes from cashews, and it's urish oil. I'm not trying to pronounce that right, but the stuff that comes from poison ivy, which I am currently suffering from. This is interesting to me. I remember when we were in Alaska, we were talking about some of the fishing methods out there. How much fish goes to Asia for it to be processed? It's really interesting to think from just these pure commodity standpoints, how I imagine a lot of the value added the supply chain is not actually accruing to the original origin of the commodity, but rather the entity that can do processing most efficiently through some combination of technology, environmental standards, labor costs and so forth. I imagine a lot of the value added in a cashew comes there. Yeah. I'd say a lot of the value is happening in the midstream. Okay. Point. In between the upstream, which would be the farm, for example, in West Africa and the client at the end, the retailer. So that's definitely true. Interesting fact about the peanut tree nut market is that it's also full. I want to keep saying that. It's full of family businesses. And the other thing we do a lot of is work with family businesses. So you sort of look at this intersection of commodity trade finance, family business, and in the middle of those two overlapping circles is the peanut tree nut industry. Going back to collateral, one of the tropes or jokes that often gets brought up in commodities markets is like, I put on a physical oil trade and like, oh no, now I'm going to have to actually settle and take delivery of like 50 barrels of oil in my studio apartment or something like that. If you're in commodity finance is taking delivery of actual collateral, like, is it a disaster for you the way it is for other investors or is it kind of, that's what it's there for? Is there all collateralized loans? Usually you wouldn't take delivery if you didn't intend to. So usually it means something went wrong. There are certain products where you actually buy the commodity physically with a contract to sell it back in the future. It's a form of inventory financing called a repurchase agreement. But typically your goal is to manage the credit. So it's a good company that doesn't default on the loan. And therefore you avoid having to get out of the loan the second way, which is liquidating the collateral. So you try to avoid that at all costs. If you had to, the good news is you can typically sell it in the location where it exists. So if it's in a tank in Houston and it's experels of oil, you kind of say to someone else, hey, can I sell you this? It's sitting here and they'll quote you a prize. So it's not as dramatic as actually arriving at our doorstep. And we try to avoid having to do that. That's part of our job. Something has gone wrong if we're doing that. But it has happened before over our 206 year history. Once again, going back to unhedurable commodities. And I asked this for a different reason is one of the things and it's sort of commodity ish, one of the things that's very hot right now or a lot of people are hoping that compute futures are going to be a thing. And that people will trade capacity of an H100 and video chip in the way and there are some nascent efforts and I don't know if this is going to take off. But I'm curious like if there are any intuitions that we can build based on existing markets of what types of commodities lend themselves to financialization that way. So we don't have, we have oil futures and we have cotton futures, but we don't have pistachio futures. Or anything that we can look at and say yes, this type of market lends itself to financialization on an exchange whereas this one doesn't. So as in our minds, we can help try to predict whether this will logically apply to something like compute futures. Yeah. So if you look at the origin of the futures market, it was really designed to help farmers manage their price risk. So think of a green farmer in Iowa. Yeah. Plantings. This is what they teach you in the textbook. The farmer. The farmer in the hedge and all that. Bring it to market. But if you look at the properties of the commodities, I think it's a few things. One is how homogenous is the product. So the more heterogeneous the product is the harder it is to standardize into a financial contract. Two is volatility. If there's no futures market and it's moving all over the place, there's going to be a lot of demand from a producer for a future market. So actually memory chips and compute are extremely volatile right now. We've been thinking a lot about whether that's a good candidate for a futures contract. Interesting. And if you're a fab that's producing chips right now, you love the price you're getting. Sure. I mean, maybe you've sold some of it forward below the market, but as you're kind of rolling your contracts, it's very profitable, right? And could you lock that in? On the other side, if you're an electronics consumer of chips, you'd love to be able to hedge that price and hedge your consumption. So I actually think it's a great candidate for the futures market, whether it takes off, I'm not sure, but I know some of the exchanges are spending a lot of time on this, right? Yeah. So I don't know when this particular episode is coming out or recording on May 27th, but very soon at our live show, we will have, we will have an episode dedicated to, you know, hearing from one company that is trying to create a compute exchange in futures market, basically. Yeah, very interested in this question. I think a part of the big story with compute, by the way, that's under followed is copper. So I think everyone talks about power, you know, and power is really important and there needs to be lots of power capacity in order to build the AI revolution. Copper is as important and you see copper prices and record highs largely because of how much copper data centers are consuming because of all the electrical capacity that needs to be in that infrastructure. Do commodity financiers, do they have good insight into like trends in commodity prices, just by virtue of being able to see like actual supply and demand on the ground? In general, our philosophy is we don't know where the price is going. So we try to be price agnostic, but you can't help, but notice trends see things early. And one example would be in 2021, COVID hit, you just saw freight prices skyrocketing. I think well before the market, you saw things like steel going up quickly and those prices being passed down the supply chain. So you definitely can see things that kind of feed into like the PPI, ultimately the CPI. When you live upstream, the way we do in kind of these metal energy ag supply chains, you often see things first and before they actually get transmitted into the economic data. Now it's just one side of it, so it may not be conclusive, but it certainly provides us with lots of interesting information. There's not a trucking capacity futures market, but it occurs to me like, okay, here is a situation in which you have this sort of idiosyncratic moment. And then it probably wouldn't have made sense. I don't know. But the trucking, like, is it in your mind, like could that eventually be a candidate for? Yeah. Because you have these explosions of price. And so in the explosion of price moment, probably everyone's like, I wish I could hedge this, right? But then you don't really know, is this a permanent fixture or is this just a just a post-COVID thing where there was a one time price re-adjustment, because if it's a one time price re-adjustment, you don't really need a futures market. - Yeah. - And we don't really know like for memory is this like a one time price re-adjustment or is this a new permanent fixture of the memory landscape? But answering that question would be an important part of whether it's worth it to build out a futures market. But I'm just curious like in the post-COVID environment, were there people kicking around the idea of freight futures or something like that? - Yeah, and there are. - There are different wakes to this volatility. - There's not super liquid, but there are tanker contracts. - Yeah, I just noticed this. - There's a king, capes says, but it looks like there's almost no liquid. - Yeah, the bid ask is pretty wide, but people do try to make markets. So, dry bulk freight, you can go longer short. Trucking, I think is a good candidate for it. I think because trucking in a lot of ways follows the diesel market, because the biggest kind of variable cost of trucking is diesel consumption. - So there's open-to-hedge that. - A little bit, it's not perfect, but it's pretty highly correlated. - Tracy and I did have this. Were onion futures to be legalized? Would onions themselves, you've mentioned-- - Now we're just doing hypothetical futures. - No, it's too close to your market. - You mentioned there are two conditions that the high price volatility and homogeneity of the underlying commodity. Would onions meet the conditions such that were they to be legalized? They would be a good candidate for financialization. - Well, one thing I'd worry about with onions is parish ability. - Yeah, right. - So, I think putting onions in a warehouse, if you had a physical settlement process, could be a little dangerous, because you can only store them for so long. - But onions, they are pretty homogenous. As far as I know, maybe I'm missing like a specific - Well, purple onion. - Pacific type of onion. - Yeah, so there's some basis rest. - You know my favorite onion is the Texas 1015. Do you know what that is? - I've never heard of that one before. - Yeah, it's a type of yellow onion that I think was created at Texas A&M University. It's really sweet and tasty. - That's a traffic. - No, no, no, it sounds like-- - It sounds like-- - It's like any other Texas A&M propaganda. - Believe me, I would be the last person to advocate for Texas A&M propaganda. Now, look up Texas 1015. It's a really nice onion. - And I've got big onion growing plans. - Oh my God, it's huge. - It's the official state vegetable of the state of Texas according to Google's AI overview. So I have no idea if that's true. - No way, I'm gonna have to try this. - Yeah, yeah, they're good, they're good. - All right, well, we're learning all sorts of things in this conversation. I just wanna go back to the idea of seeing some trends before they kind of burst into the public consciousness. So one of the reasons I was tracking a ship last week was because it was going with its payload of fertilizer. It was going from Saudi Arabia's Yambu port to Bangladesh. So basically they had trucked a bunch of fertilizer from the like Gulf side of Saudi Arabia over to the African side of Saudi Arabia and we're going round. Are you seeing any new like trade routes being established as a result of what's going on in the straight apart? - Yeah, and I had totally great question. I think we saw that starting actually with the Houthi issue in the Red Sea. And if you think about voyages, for example, from Shanghai to Northern Europe, take that route, which is a pretty big route, they used to go through the Suez Canal. Suez Canal kind of closes because ships are not comfortable taking that risk. Suddenly they're now routing around the Cape of Good Hope. And back to my point on kind of this age of bottlenecks and disruption, that's adding 10, 15, maybe more in terms of shipping days, which adds to the work in capital requirement, adds to the cost, the day rate on the ship, the insurance, so absolutely seeing a lot of that. And I would guess if the straight of Hormuz conflict continues for a lot longer, there's going to be a lot of creativity in terms of how to discharge cargoes from those ships, get them to safer ground and then export them in some other way. I would imagine if I were Saudi Arabia, I'd be thinking about building pipelines, going the other direction. I'm sure that's happening all over the Middle East to try to avoid the straight. Even if it does subside, I think people are still going to want to find alternatives because we've realized how reliant we are on this one choke point. - All right, Lewis Hart, thank you so much for coming on all thoughts. That was so much fun. - Thank you. - It was great to be here. - It was a lot fun. - Yeah, that was really, really interesting enough. - Learned about our show. - The onion question was good. Yeah, that was good. (upbeat music) (upbeat music) - Joe, I always enjoy those commodity discussions. I feel like I learn a lot of things like that Urshol is also found in cashews. I had no idea. And it sucks when it gets on your skin because you've been gardening. - I also learned that there's a peanut tree nut association. I learned about that. - Why didn't they call it like a groundnut tree nut association? Are there just like not enough popular ground nuts? - It's peanut or groundnut. - That's what I thought. - I have no idea. - Doesn't it grow on like? - I have no idea. No, I do think I love that conversation. I guess, you know, commodity, as you said, there's a sort of romantic, exciting element of commodities that's very real. I mean, it still exists. The fact that you're having to like, reroute trade flows in real time. - Yeah. - The fact that you're seeing new trade routes established. - You know what I wanted to do in episode on is Asian food processing. Because it's really interesting to think about commodities are grown all over the world, or agricultural commodities in particular, are grown all around the world. But essentially, more and more of our food come from East Asia, even though we don't think of East Asia as being a big agricultural powerhouse per se. - Well, the Alaska fish stat blew my mind. - Yeah. - When we heard it last year. Also, okay, so I just Googled this. I feel like we've been doing a lot of like searches during this conversation. - Yeah. - It's actually a set of a good episode. - But apparently peanut is just another word for groundnut. I always thought peanut was a type of groundnut, but it turns out they're just like interchangeable terms. Yeah, so in Asia and India, they'll talk about groundnut oil, which is just peanut oil. - Interesting. - We're learning a lot. - There you go. - And one other thing I wanted to say is, it's becoming a cliche at this point, but Lewis was talking about the idea of all this capital tied up in the straight-of-war moves, right? And it's okay now, but-- - And a few months. - But the longer it goes on, like the more problematic, it becomes, and this seems to be like the overriding theme of this entire shock, right? - You know, it's interesting. Yes, absolutely, 'cause we are recording this May 27th, so tomorrow would have been the three months start of the war. I don't know when this episode is coming out. But it's also interesting to think that a couple months ago, when you're doing commodity episodes, we would say the exact time of the episode, we're recording this at 10.30. But now it just feels like this is just this internal thing that's part of the background. We're actually so deep into it that it's like, it's probably gonna be close to your from now to it. It just feels like it has this feeling of permanence that even now it suddenly becomes, yeah, I suppose things could change by the time this episode comes out, but it almost feels like it probably won't. - We definitely stop doing the minute-by-minute times-down. Okay, shall we leave it there? - Let's leave it there. - This has been another episode of the All Thoughts Podcast. I'm Tracy Alleyway, you can follow me at Tracy Alleyway. - And I'm Jill Weissenthal, you can follow me at the stalwart. Follow our producers, Kermann Rodriguez, @KermannArmenDash, she'll be in it at Dashbot. Kale Brooks, @KaleBrooks, and Kevin Luzano @KavenLoydLuzano. And for more AdLos content, go to bloomberg.com/adLos where we have a daily newsletter and all of our episodes. And you can chat about all these topics, 24/7 in our discord, discord.gg/adLos. - And if you enjoy AdLots, if you like it, when we talk about the non-existent onion futures market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes, absolutely add free. All you need to do is find the Bloomberg channel on Apple podcasts and follow the instructions there. Thanks for listening. (upbeat music) (soft music) (soft music)