The Hidden Plumbing of Commodity Finance

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Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway and I'm Joe.

Why isn't thal 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's a it seems fun, it seems real. It seems like one of the few areas of finance that's like not just a screen, you know what I'm saying.

There's no there's a physicality yeah right, yeah.

But also, like you know, every was like this was a relationship business. But I feel like commodities, you know, everyone in finance.

Has that, right, do your banker impression again?

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 it's a real thing and not 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 and yes, 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 and travel alongside like huge things of coal and metal and aluminum and stuff like that, which is probably not realistic. One aspect of commodities 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 Strait of Hormuz situation, where you know, you have the insurers and then you have the reinsurers, and you have like insurers for the freight 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 it. I probably want to put down a fraction of the thing, borrow the rest, et cetera, then pay off that loan when the ship gets there, et cetera, so that I'm 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 the 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 Harriman, 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 nineties hip hop and R and B Ooh.

That's a tough one. Very close, very close.

I'm throwing that out of nowhere. He's a big brillion hip hop.

We just go back and to talk about that.

No, we should just go it. Okay, what's commodity finance? Like, what exactly are we trying to achieve here?

It's it's a good question, and the way I think of it, it's like the biggest twenty trillion dollar market that no one talks about. So you think about global trade, about twenty trillion dollars of global trade in goods goes through trade for programs. Commodity finance is a specialized subset of trade finance, and it's about four or five trillion dollars.

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 I mean, 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.

Warehouse shipment successfully makes it right.

It wouldn't make for it to be honest. As a journalist, I wouldn't.

Client pay is receivable on time, client phase receive a lot of 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 home one or occasionally needs financials, or a home buyer suddenly needs is a purchaser of the financial services through a mortgage, right, et cetera. What is a 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. Commodity merchant kind of evokes a lot of history, right, you think back to Renaissance Italy and the Mediceese and all the merchants that kind of pioneered global trade in those days, and actually goes back even farther, you can go back to even the BCS 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 spec 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, shiploads of copper cathode containers of coffee, green coffee, unroasted coffee in bare lap bag. No.

But like, so when I get a mortgage, I am purchasing the ability to have a minimum monthly payment that's spread out over thirty years. So that is what when I like entering, 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 now, It's not I I said, the commodity that they're purchasing. What are they purchasing from the bank.

Yeah, So essentially the basic product is a line of credit, Okay, 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, 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 gets 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 six dollars a pound, four dollars a pound, seven dollars 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 two thousand 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 three dollars a pound, two dollars a pound, one dollar a pound, and so the capital needs you kind of can figure them out within a band. But sometimes things happened that actually change what you thought. And so the unique thing about a commodity lender is their marking to market that inventory.

So if you pledge me a pound of copper, I'll lend you seventy five cents, eighty cents, maybe more of the value of that copper, whether it's three dollars a pound, three fifty a pounds, or two fifty 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 non financialized 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 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 head that price risk. So we like to say our clients are typically long physical meaning they own the inventory, and they're short paper. There's 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 three dollars a pound copper shipment and the price goes to three point fifty while it's on the water coming from Chile to Georgia. That client says, I need to

borrow more money to keep my hedge open. And until the ship arrives and the client pays for the copper that hedge is 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, where you had entities that were long nickel, it still got destroyed by the margin calls that they experienced. Even though they were on unlucky on some level, they were on the right side, the right side.

Yeah, this is a slight tangent. But you brought up coffee just then. I think both of us read Blank Finds book in preparation for having him on the podcast, and he was talking how about how when he was at Jay Aaron they had the huge warehouses of coffee beans, and apparently they smelled really bad because they would like rot, I guess, or like.

There'd be yeah, what are you doing? Yeah?

Is that true? Do coffee beans actually smell bad in large mouths?

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, roasted good. All's pretty good. So I don't I'm not sure about that story. But the good warehouses store them well. They don't really degrade that quickly. You know, 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 backs.

Okay, so this is actually a serious question. Then when you're doing dou dillens 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 the yeah, exactly, in some cases it may not be. And the biggest one I think that Brown Brothers Harriman 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 seeds 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 barrower, which really comes out when markets get volatile, how people behave and these are you started saying accurately. This is a super relationship focused 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, a client comes and whatever they have, need for some coffee or whatever. The other side is this coming off of Brown Brothers Herman's balance sheet. Are you a middleman for this or is it your own Bilan sheet or both.

Historically this market was dominated by banks, Okay, sort of a group of banks, particularly European banks that dominated. I would say in the last ten 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 there are 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 rates, 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, 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 youet.

How come the banks have exited the business. Is that just like a two thousand and eight regulatory capital story or.

Something definitely a Basil story to some extent. I think as Basil four 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. So that's definitely part of it. I think 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 to know how you need people, and it's not easy to kind of 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 two hundred and six years ago in this business, so we've literally been doing it for over two two centuries, and that's a big part I think of why we've stayed committed. It's kind of the dna our of our firm. I think. You know, 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 twenty fifteen 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 you know, 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 know you mentioned tracking commodities and shipments. How do you do that exactly? And 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 like where the ship had left from and where it was going and whether it was on time. So what exactly are you doing?

So? You know, 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 lating have numbers, and you can type those numbers into For example, Bloomberg Terminal has the Marine Tracker 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 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 wallets 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, I'm the client, may say I'd like to release these five bags of coffee or one cappuccino to sell to you 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 andform moves, and we'll get to that in a second. But it does raise a question was sort of hinted in the beginning. We all know that oil flows through the strait of horror moves, and there's a futures market for it that allows some ability to reduce volatility or take out concerns. Pistascios also flow through the strait of horm moves. There's no as far as I can tell, there's no pistacio 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 one of my colleagues, this may shock you, is on the board of the Peanut Tree Nut Association, and.

So it's actually called the Peanuts Nut.

Tree Nut Association. It's a big trade organization and we happen to fine.

Tree nuts hence the name has to be.

Segregated peanuts and insurant title. It's very very important, very specific. So we we actually are active in lots of non hedgeable commodities like cashews is a good example, pine nuts, pistachios less so, 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 of the European banks, but certainly we were 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 twenty percent 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 commodity 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 commodity merchant and the commodity banker. The fundamental principle is that self liquidating nature. So you buy, you sell it, you collect, and then you do it again.

It's velocity of money.

It's the velocity of the turnover. And right now there is a lot of capital that's stuck in the strait and it you know, I see lots of different reports. Is it something like fifteen hundred commercial vessels some number like that. I think that's what the Pentagon said recently. That's a lot of working capital. So you know, doing some rough math, that's tens of billions of dollars. Maybe it's more than one hundred 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 afromax, which is like typically seven hundred thousand barrels of oil, that's the capacity of an Afromax vessel. For February twenty eighth, the cost of that might be forty million, forty five million dollars.

Today it's more like seventy seventy five 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, you know, 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.

Yeah. 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 when you think companies, commoudit.

Emerchants, commodity merchants in this case, YEAP commodity 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 so far things are working okay. Actually there's not evidence that things are breaking. If this lasts for months and months and months, you know, who knows where it goes. But right now the system is functioning well. Actually, the banks are supportive, the commodity 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 strait doesn't open sooner than later, then I think you could see, you know, big strains because there's so much trap capital there.

What actually happens mechanically if I've financed a particular shipment and it is now hypothetically stuck in the strait of horror moves like what conditions start to kick in?

Yeah, so I think putting if you're channeling your inner commodity banker, the first thing you're looking at is is my collateral? Okay? Right, So, if it's a shipment of oil, is you know, the crew okay, is the ship in the right place? Is it going to be at risk of, you know, being in a war zone and having impairment.

Once you sort of 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 sort of who pays for this detention. Voyage frustration, they are different terms, but all those are going to be.

Voyage frustration an actual term.

Yes, frustration of voyage yess. And so this is you know, to merriage is a common term. 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.

It'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 own?

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 exaugnous shock, and so forth, you probably would like to have that client be with you five years from now when hopefully hopefully the straits opened 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 capitol and 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.

Yah, 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 client has one hundred percent of their supply coming from one region, you might get a little anxious about that credit and say, maybe not for us.

So 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. You know, there may be some of that out there, but we're not seeing that all right with our clients.

I'm sorry, I want to just go back to something because I didn't understand. So you mentioned your colleague who's on the Peanut tree Nut Association. Yes, yes, what how like from from the perspective of Brown Brothers hereman, how does like 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.

Yes, so you're you're always in non hudgeable commout. You're also measuring price risk, typically in something like Cashew's as an example, they typically they CASHU supply chain is super interesting by the way it starts typically in West Africa. It comes in something called raw seed. It then gets shipped to Southeast Asia, Vietnam, India, and they extract this kernel and the kernel is what you eat, and there's actually toxic liquid in between the shell and the kernel.

Long story, but it's sort of a fun supply chain, and then it gets exported in edible form, typically from places like Vietnam, and so 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, and that forward contract may not be financially settled as it is in the futures market. It may be I've sold this all to XYZ buyer at.

ABC price, some maker of like sweets or something.

Think about if you like cashew is 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.

So I was looking up the toxic liquid that comes from cashews and it's urshoil. I'm not trying pronouncing that right, but the stuff that comes from poison ivy, which I am currently suffering from. So this is yeah, This is interesting to me.

Really interesting to know. But it's interesting too. Like I remember when we were in Alaska talking about we were talking about some of the fishing that happens out there. How much fish goes to Asia, Yeah, for processing. Yeah, And it's really interesting to think from just like 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 add and a thin cashew comes there.

Yeah, Yeah, it's it's I'd see a lot of the value is happening kind of in the midstream 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.

Got it.

Just going back to collateral, you know, one of the tropes or jokes that often gets brought up in commodities markets. It's 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 fifty 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. These are all collateralized loan.

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 experts 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 prince. So it's 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 two hundred and six year history.

Once again going back to unheedgeable 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 H one hundred 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 in that way, So we don't have we have oil futures, and we have cotton futures blue and pistacio futures.

Is there 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 grain farmer in Iowa planting. This is what they teach you in the textbook, the farmer and the hedge and all that bring it to market onion. But if you look at the properties of the commodities, I think it's a few things. One is how homogeneous 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 end user for a futures market. So actually, memory chips and compute are extremely vauatile right now. We've been thinking a lot about whether that's a good candidate for a futures contract. And if you are a fab that's producing chips right now, you love the price you're getting, right, 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, you know, I'm not sure, but I know some of the exchanges are spending a lot of time on this.

So I don't know when this particular episode is coming out. We're recording on May twenty seventh, but very soon at our live show it will have we will have an episode dedicated to, you know, hearing from one company that is trying to create a compute exchange futures market basically, so that'll be interesting.

Yeah, very interested in this question.

I think part of the big story with compute, by the way, that's underfollowed is copper. So I think everyone talks about the 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 a 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 twenty twenty when COVID hit. You just freight prices skyrocketing, I think went 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 agg 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 future trucking capacity futures market, but it tends to be 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 truck actually trucking, Like is that 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 a moment, probably everyone's like, oh, I wish I could hedge this right, But then you don't really know is this a permanent fixture or is just this just a post COVID thing where there was a one time price readjustment. Because if it's a one time price readjustment, you don't really need a future as a market. And

this we don't really know, like from memory, is this like a one time price readjustment? 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, and there are it wakes to this volatility.

There's not super liquid, but there are tanker contracts.

Yeah, I just noticed this, Cape Cape says, but it looks like there's almost no Look.

Yeah, there's not. The bid ask is pretty wide, but people do try to make markets, so drive bulk freight, you can go long or 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 a little bit it's not perfect, but it's pretty highly correlated.

Tracy hinted at this, were onion futures to be legalized, would onions themselves you.

Mentioned, now we're just doing hypothetical.

You mentioned there are two conditions that the high price volatility and homage homogeneity of the underlying commodity. Would onions meet the can't 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 perishability. Yeah, you know, so, I think putting onions in a warehouse, if you had a physical settlement process, could be a little dangerous, you know, because you can only store them for so long. But onions, they are pretty homogeneous as far as I know. Maybe I'm missing like a specific, specific type, so there's some basis res you know. My favorite it.

Onion is the Texas ten fifteen Do you know that you Yeah, it's a type of yellow onion that I think was created at Texas A and M University. It's really sweet and tasty.

That's a fake, no, no, I mean it's like any other Texas A and M propaganda.

YEA, believe me. I would be the last person to advocate for Texas A and M propaganda. Now look up Texas ten to fifteen. It's a really nice onion.

And I've got big onion growing plans.

My good. It's the official state vegetable of the state of Texas. According to Google's AI overview, so I have no idea if that it's true, No way I'm going to have to Yeah, they're good, they're good.

All right, Well, we're learning all sorts of things in this conversation. I just want to 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 Yamboo 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 trade routes being established as a result of what's going on in the straight.

UPA rights, I totally great question. I think we saw that starting actually with the Huti 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 you know, ten fifteen maybe more in terms of shipping days, which adds to the working 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 Strait of Hormu's 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 to 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.

Yeah, yeah, that was really really interesting enough learned about the onion question was good.

That was good, Joe. I always enjoy those commodity discussions. I feel like I learn a lot of things like that. Ershaul 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 ground nut tree nut association? Are there just like not enough popular ground nuts?

It's peanut a ground nut, That's what I thought. I have no idea.

Doesn't it grow on.

Like I have? I have? I have no idea, No, I did think. I love that conversation. I guess you know. Yes, commodity, as you said, there's a sort of romantic, exciting element of commodities. It's very real. I mean it's and it still exists. The fact that you're having to like reroute trade flows in real time.

Yeah, they're saying new trade routes established.

You know what I want to do an 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 we're 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.

The Alaska fish stat blew my mind yea 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.

It's actually a good episode.

But apparently peanut is just another word for ground nut. I always thought peanut was a type of ground nut, but it turns out they're just like interchange the terms. Yeah, so in Asia and India they'll talk about ground nut oil, which is just peanut oil.

Interesting.

We're learning a lot there, you go. One other thing I wanted to say is, you know, it's becoming a cliche at this point, but Lewis was talking about the idea of all this capital tied up in the strait of our moves, right, and like it's okay now, but 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, because we're recording this May twenty seventh, so tomorrow will have been the three month start of the war. Yeah, I don't know when this episode is coming out. But it's also interesting to think that, you know, a couple months ago, when we were doing commodity episodes, we would say like the exact time of the episode, like recording this at ten thirty, right, But now it just feels like this is just this interminable thing that's part of the background. We're actually so deep into it that it's just like, yeah, it's probably gonna be closed a year from now to it. It just feels like it has this feeling of permanence that 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 stopped doing the minute by minute times damp. Okay, shall we leave it there.

Let's leave it there.

This has been another episode of the Authoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Alaway.

And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our producers Kerman Rodriguez at Kerman armand dash Ol Bennett at Dashbot, Calebrooks at Klee Brooks and Kevin Lozano at Kevin Lloyd Lozano and form our odd Laws content. Go to Bloomberg dot com slash odd Lots, where have a daily newsletter and all of our episodes, and you can shout about all these topics twenty four seven in our discord Discord dot gg slash od lots.

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