In a Changing World…Trans-atlantic Opportunities Can Appear In Unexpected Ways.
Skadberg and William (2016) analyze the spatial arbitrage for a trading ﬁrm handling soybeans with terminal facilities in both the U.S. Gulf and Paciﬁc Northwest.
“Simon’s 2015 representation of the solution to spatial arbitrage refers to both an optimization problem and a stochastic problem.”.
Grain is transported to its destination at a slow speed and the harvest can span across weeks.
These conditions favor the appearance of a space trade in the grains.
Figure 1: Soybeans grown in the rural communities surrounding Quebec city is transported to the port on the St. Lawrence river.
G3 in Quebec City is well served by the Quebec Gatineau Railway (and CP, CN).
The export terminal is notably receiving wheat and oil-seeds from Western Canada and the United-States.
At the harvest, the soybeans grown in the region eastern of Montreal is economically cheaper to be exported to Europe (3750 miles away) than locally transferred and processed by rail and truck at Bunge Oilseeds in Oakville, Ontario (450 miles away…).
The soybeans is brought by trucks from Lobinière, Qc to Global Grain Group (G3)(Bunge North-America and SALIC). The beans are loaded in supramax vessels bound to North-Western Europe.
The soybeans, once arrived at a facility in the port of Amsterdam, Netherlands, are crushed by Bunge Europe into soymeal and vegetable oil.
ABCDs buy grain, hedge it and look for opportunities to sell it in the time-space. (Jacques, S and Simondet 2016).
Bunge is an integral part of Agribusinesses the and food markets on six continents.
The cheapest and most efficient chain wins the ports, nominates the vessels and makes the market in a region.
Grain freight movements create the market for the farmers.
By implicitly facilitating the vessel transportation, G3 is also market-maker for other traders.
The conditions favoring the appearance of a space trade in grains and dry-freight at a multi decade–low have lead to an unexpected trans-atlantic trade.
Bunge North America “swaps” the soybeans for soymeal with Bunge Europe to be re-imported as backhaul (in space) and/or later in the year (in time).
The space doesn’t match geo-spatial supply and the soybean refining capacity doesn’t correspond to the requirement of the local market. You can immediately see why the commodity needs to flow.
Bunge understands the embedded optionality of their chartered fleet and terminals. Each of these chartered round voyage equals 60 days of floating storage.
The trade is not risk-free and is seasonal. More freight also means more risk exposure to congestion and weather.
However, on average, the ports on the St-Lawrence river has twice less waiting days than the alternatives in Brazil.
In the physical commodity trading nomenclature, there are 3 types of arbitrages; Geographical, Temporal and Technical.
Confluent factors have given birth to a fourth type of risk-arbitrage, the essence of this one being more of an Industrial nature between two subsidiaries of the same global grain company.
Simon Jacques +1-226-348-5610
Advising the producer, processor and the end-user in North America.
Well said BNP .
Jacques, S (2016) “In a Changing World…Trans-atlantic Opportunities Can Appear In Unexpected Ways.”, https://jacquessimon506.wordpress.com/2016/12/04/21201/, Navigating the commodities markets with Freight and Spreads , December 4, 2016.
Jacques, S (2016) “Mercuria by Mercuria. Traders” – SITCG Part VII
Jacques, S (2016)”The role of the repos and banks”.
Skadberg, K. , William W., Larsen, R. (2015), Spatial Competition, Arbitrage,and Risk in U.S. Soybeans, Journal of Agricultural and Resource Economics 40(3):442–456