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RISK MANAGEMENT IN COMMODITY SUPPLY CHAINS A PRACTITIONERS PERSPECTIVE:

Glossary:
1. Spot market/ Cash market: Physical market where commodities are traded.
2. Futures market: An electronic trading platform which helps in price discovery across
the months (near month to the distant months); futures market trading may or may
not be accompanied by physical delivery of commodities.
3. Long position in a commodity: Holder of the long position has ownership of the
commodity; does not necessary mean physical possession of the commodity. One
can hold a long position either in physical market or futures market.
4. Short position in a commodity: Refers to the sold position. One can hold a short
position either in physical market or futures market.
5. Squared off position: When a long position (either in the physical or futures market)
is offset by an equivalent short position or vice versa.
6. Mark to market (m2m): Terminology borrowed from equity markets, where in a
position (long or short) is benchmarked to the current market value - real time. It
indicates the gain/loss of a long or short position, at the time of bench marking.
7. Basis: Indicates the relationship between cash market price and futures market
price.
8. Basis strengthening: When the cash market prices increase, relative to the futures
market price.
9. Basis weakening: When the cash market prices decrease, relative to the futures
market price.
10. Spreads: Difference between 2 numeric entities. It can be
a. Inter market spread: For eg: difference between price of Cotton (December
futures) in Indian MCX market and ICE market.
b. Inter calendar spread: For eg: difference between futures prices of 2 forward
months such as between December futures and March futures in ICE market.
c. Inter commodity spread: For eg: difference between futures prices of 2
commodities in the same exchange, such as between Corn futures and Soya
bean futures in ICE market.

Jagan Gopinath

11. PnL statement Profit and Loss statement. PnL format of a typical Agri commodity
supply chain company is structured as follows:

Sales price (a)

COGS or Cost of Goods Sold (b)

Gross Contribution or GC (c): a b

Financing charges or Interest charges (d)

Net Contribution or NC (e): c d

Overhead expenses including depreciation expenses (f)

Profit Before Tax or PBT (g): e f

Taxes paid (h)

Profit After Taxes or PAT (i): g - h

12. Capital management: Typically refers to working capital management. Management


of overhead capital and risk capital are also important considerations for commodity
companies.
13. Risk exposure: When there is presence of uncertainty and an exposure to the same,
an organization is getting exposed to risk. It can be of various types such as
a. Currency risk exposure
b. Price position (outright or flat price) risk exposure
c. Basis risk exposure
d. Credit risk exposure
e. Counterparty risk exposure
f. Operational risk exposure etc
14. Hedger: One who has exposure to price position risk on the physical side and takes
an opposite position on the futures side to mitigate the price position risk.
15. Speculator: One who has an outright exposure to price position risk either on
physical side or futures side (without having an opposite position on the other side).
16. Volume of futures trade: Number of contracts that changed hands in a single day of
trade.
17. Open interest in futures trade: Number of outstanding contracts in futures trade.
One fresh long and one fresh short trade increases open interest by one. OI indicates
fresh money coming into the market or exiting the market.
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18. Fundamental analysis: The science and art of collecting data that impacts supply and
demand dynamics of commodities and analysing the data to aid in managerial
decision making.
19. Technical analysis: The science and art of analysing trends in price movements and
arriving at judgement to aid in managerial decision making.
20. Crop balance sheet: One of the most important tools in the fundamental analysis.
Typical crop balance sheet is structured as follows. In India, Cotton crop balance
sheet is structured for the marketing year beginning 1st October and ending 30th
September of the following year.
a. Opening stock at the beginning of the crop season
b. Production during the season
c. Imports during the season
d. Consumption during the season
e. Exports during the season
f. Closing stock at the end of the crop season (a + b + c d e)
21. Derivative instruments: They are instruments whose value is derived from the value
of an underlying asset. For eg: Cotton futures prices derive its value from cash
market prices of Cotton. Cotton options derive its value from the futures market
prices.
22. Options: Derivative instruments based on futures that gives the buyer of the option,
the right, but not the obligation to buy or sell a commodity. Premium is the price
paid by the buyer for getting the rights.
23. Important terms related to shipping:
a. LC: refers to Letter of Credit; a transaction in which a reliable bank acts as a
guarantor to the exporter for the accounts receivable from the importer.
b. BL: refers to Bill of Lading; a document issued by the shipping liner that
transfers title of goods to the holder of the document.
c. INCO Terms: Terms of sale from a shipper to a buyer/importer. For eg: FOB,
C&F, CIF etc. Each INCO term has a different risk profile.

Jagan Gopinath