Complexity in cocoa trading systems

Cocoa is a deceptively complex commodity which means that CTRM systems for cocoa trading must include commodity-specific functionality that supports:

• Certifications by counterparty and lot
• Traceability when blending and processing lots
• Conversions between weights, packaging types and semi-finished products
• Pricing based on theoretical and actual nib yields
• Multiple exchanges in different currencies
• Comprehensive auditing
• Other commodities as well.

 

Generic and legacy CTRM systems often cannot support all the nuances and complexity of cocoa and cacao trading, leaving trading teams using multiple tools and spreadsheets to manage their contracts and risk teams with a delayed, incomplete picture.

Conversely, a good commodity management system that can support each aspect of cocoa trading can make a significant material benefit to your organisation. The right cocoa commodity manager can be used by trading and logistics teams to manage all your operations, whilst providing real-time intraday updates to risk and management teams.

The benefits of this commodity management approach include reducing errors and operational risk, reducing complexity across the organisation, and ensuring all team members have all the information they need to create the best results, without creating greater administrative burdens in other areas of the business. But these benefits can only be realised if the technology is comprehensive enough to allow each team to manage their role digitally – either in the commodity management system or in an integrated ERP. For every action that requires an offline process such as a spreadsheet, more of these benefits are lost to the business.

What does a cocoa trading system need to address?

Firstly, any system for cocoa needs to address the operations that any commodity management system should support. Counterparty and contract management from purchase to sales, allocations, positions, hedging and futures, MTM, P&L, and FX are all essential for any commodity management or CTRM system, but may involve additional complexity in cocoa in markets, as we explore below.

Blending and processing

There are several stages within cocoa supply chains where the product is transformed: from cacao to cocoa, to a range of semi-finished products including butter, cakes, and liquor. This means that the commodity management system needs to be able to handle all the operations involving virtual lots, certifications and pricing calculations during transformation between these different products.

The system should also be able to manage different types of product blending; whether different lots of beans are combined to meet a sales contract or incoming shipments are processed together, forming one blended final or semi-finished product.

And because the many semi-finished products are typically priced and hedged based on ratios to cocoa bean prices, the system must have a powerful, flexible pricing engine that can calculate these conversions based on theoretical and actual nib yields.

Allocations

When allocating stock, the first consideration is ensuring the commodity management system can manage conversions between different weights and packaging types, as well as between different products.

And for some specialty products, such as organic or other types of certified cocoa, maintaining a segregated supply chain, where these products are kept physically separate from non-certified cocoa is vital. A good commodity management system not only includes checks and controls to ensure allocations are accurate, but also creates an audit log of all activities and storage each lot undergoes so that these allocations can be audited with confidence.

Certifications and traceability

Traceability and certifications add a great deal of complexity to cocoa trading, so we recently summarised the key issues in a separate post. Certification challenges include helping organisations complete their calculations for mass balance certifications by ensuring the quantity sold as certified matches the certified purchase amount. They also include managing multiple certifications and maintaining them as cocoa shipments are blended or processed.

Traceability is another critical component of cocoa trading. A good commodity management system plays a key role in maintaining traceability across your operations as it automatically tracks stock from purchase to sales contracts, through any processing that occurs, and creates a digital audit of every stock movement. Software such as Gen10’s Aud.It can also help cocoa traders improve traceability all the way to the farm level.

Currencies, exchanges, and accounting

Cocoa traders may need to protect against currency risk as the two main cocoa exchanges are traded in GBP and USD. As cocoa is linked to both the dollar and the pound, this exchange rate offers an active arbitrage market, meaning that cocoa commodity management systems need to be able to handle complex pricing and FX.

A commodity management system like Gen10’s CommOS allows risk teams to see their live intraday position so that they can ensure their hedging is relevant and traders have accurate MTM and P&L reports. It also uses the business’ own complex pricing formulae to create and send invoices, as well as using integrations to accounting or ERP software to update data such as counterparty credit lines as soon as invoices are paid.

Not just cocoa

Whilst all of these complexities demonstrate why it is important to use a commodity management system designed for cocoa, it is also important to consider any other functionality your business may need. Chocolate producers often need to procure large amounts of sugar and dairy products alongside cocoa, and traders may be involved in a wide range of agricultural commodities.

It’s therefore important to understand how a CTRM or commodity management provider deals with multiple commodities. For example, Gen10’s CommOS includes customisations for over 100 commodities, but these are all managed on one cloud code base. This means that our clients can trade the commodities they need in one system, and that any relevant updates for other commodities are automatically applied to our cocoa functionality too whenever they are applied.

 

The complexities of cocoa trading make this an interesting market with many opportunities. However, to take full advantage, organisations need to be able to manage complexity and collaborate across business functions. It is therefore essential for cocoa trading companies to have a good cocoa commodity management system in place to manage the full cocoa lifecycle efficiently and safely in one connected commodity management process.

If your CTRM system cannot manage every aspect of your cocoa business, get in touch with us to discover the impact cocoa commodity management could have for you.