fre 501 2013 lab 9 (nov 5 th )
DESCRIPTION
FRE 501 2013 Lab 9 (Nov 5 th ). Overview of Palm Oil Plantation Economics and Policy Corporate Behaviour - Hedging. Mission Statement. Understand how commodity futures markets work, Formulate and refine trading and hedging strategies, Learn and practice risk management, - PowerPoint PPT PresentationTRANSCRIPT
1
FRE 501 2013Lab 9 (Nov 5th)
1. Overview of Palm Oil2. Plantation Economics and Policy3. Corporate Behaviour - Hedging
2
Mission Statement
Understand how commodity futures markets work, Formulate and refine trading and hedging strategies,
Learn and practice risk management,In preparation for future professional roles
3
Palm Oil Overview
4
We all eat palm, some of you put it on your face
Yihai Kerry brands in ChinaBrands in China Icon Products
Arawana “金龙鱼” Edible oils, rice and flour
Koufu “口福” Edible oils and soy milk powder
Wonder Farm “香满园” Edible oils, rice,
flour and grains
Gold Ingots “元宝” Soybean oil, rice and flour
Orchid “胡姬花” Peanut oil and blended oil
Fengyuan “丰苑” Feed meals
Jin Li “金鸝” Specialty fats
Huaqi “花旗” Edible oils, flour and specialty fats
Reyland “銳龍” Oleochemicals
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
05
101520253035404550
Rapeseed Oil
Palm OilSoybean Oil
Million Metric Tons
6
Palm Oil’s place: Top 3 Veg Oils World Supply
7
Palm Oil cultivation
Oil Palm tree is originally from Nigeria, Africa – brought to Malaysia by the BritishOver 90% of cultivated Oil Palm today is in Malaysia and Indonesia
Africans generally eat it unprocessedCultivation hasn’t taken off in a big way in South America – Palm Trees there plagued by ‘bud rot’ – has killed off entire plantations in as little as 2 years
8
Rainforest->Logged->Oil Palm
9
10
Palm – Friend or Foe?
Oil Palm is now closer to 13 mil ha – 5 mil ha in Malaysia8 mil ha in Indonesia
Total US: ~360 mil ha
This chart might
shock you
11
Amazon Deforestation
12
Palm is a long-lived perennialPalm Oil Yield with Age (FFB and Oil)
0 2 4 6 8 10
12 14
16 18
20 22
24 26
28 30
0
5
10
15
20
25
30 FFB YieldOil Equiv
Year from Planting
Mt / year The fruits have ~ 23.5% Oil content
So why does yield drop with age?
13
Harvesting Palm is “high”ly skilled joband a “tall” order
At ~ 6-7 years of age (prime)
At~ 15-20 years of age
14
Oil Palm is perennial but still exhibits SeasonalityCorn and Soybeans are ‘annuals’
J F M A M J J A S O N D -
10,000
20,000
30,000
40,000
50,000
60,000
2011
2010
2009
Mt/monthRainy Season‘Dry’ Season
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Applying Storage TheoryBased on your understanding of commodity storage – should palm oil ‘normally’ be in backwardation or contango?
BackwardationThere’s always more coming next month
Contagos are rare, and great hedging opportunities
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Plantation Economics and Policy
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A brief history of palm (prices)
Jan-01
Aug-01
Mar-02Oct-
02
May-03
Dec-03Jul-0
4
Feb-05
Sep-05
Apr-06
Nov-06Jun-07
Jan-08
Aug-08
Mar-09Oct-
09
May-10
Dec-10Jul-1
1
Feb-12
Sep-12
Apr-13
0
200
400
600
800
1000
1200
1400USD/mt
Peak of commodity speculation
Financial Crisis trough, Crude oil at $30
Following crude oil up
Biofuel policies begin
Change in EU biofuel stance
$750
Plantation Cashflow –long-term30 year investments
18
FY 2
010
FY 2
011
FY 2
012
FY 2
013
FY 2
014
FY 2
015
FY 2
016
FY 2
017
FY 2
018
FY 2
019
FY 2
020
FY 2
021
FY 2
022
FY 2
023
FY 2
024
FY 2
025
FY 2
026
FY 2
027
FY 2
028
FY 2
029
FY 2
030
FY 2
031
FY 2
032
FY 2
033
FY 2
034
FY 2
035
FY 2
036
FY 2
037
FY 2
038
FY 2
039
FY 2
040
(4,000) (3,000) (2,000) (1,000)
- 1,000 2,000 3,000 4,000 5,000
-
50
100
150
200
250
300
350
Cashflow (CPO=$1100) Payback = 8.5 yrsCashflow (CPO = $600) Payback = 12 yrsCost of Production
Cash Flow USD/ha MC
Average cost of ~$250/mt. Current prices ~ $800 >60% Ebitda margin : One of the most profitable cash crops in the world
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Financial modeling and forecasting – with array formulasyield matrix upgrade (practice your quant skills)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 202019 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7
2003 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2004 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2005 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2006 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2007 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2008 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2009 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2010 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2011 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2012 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2013 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2014 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2015 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2016 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2017 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2018 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2019 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2020 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - - 2021 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - - 2022 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 - 2023 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 5.9 2024 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 9.9 2025 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 13.8 2026 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 17.8 2027 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 22.7 2028 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 24.7 2029 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 24.7 2030 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 24.7 2031 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 24.7 2032 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 24.7 2033 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 24.7 2034 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 23.7 2035 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 23.7 2036 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 22.7 2037 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 21.7 2038 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 21.7 2039 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 20.7 2040 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 19.7 2041 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 18.8 2042 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8 17.8 2043 13.4 13.9 14.4 14.9 15.3 15.8 16.8 16.8
Year projected
Year of planting
20
Export Tax Structure Complexity
No Uraian
Export tax rate CPO Prices (CIF Rotterdam) 1 2 3 4 5 6 7 8 9 10 11 12 ≤ $750 750-800 800-850 850-900 900-950 950-1000 1000-1050 1050-1100 1100-1150 1150-1200 1200-1250 > $1250
CIF ROTT > than $750 $750 $800 $850 $900 $950 $1,000 $1,050 $1,100 $1,150 $1,200 $1,250 1 Buah dan Kernel Kelapa Sawit 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%2 Bungkil Kelapa Sawit 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%3 Crude Palm Oil (CPO) 0.0% 0.0% 7.5% 9.0% 10.5% 12.0% 13.5% 15.0% 16.5% 18.0% 19.5% 21.0% 22.5%4 Crude Palm Kernel Oil (CPKO) 0.0% 0.0% 7.5% 9.0% 10.5% 12.0% 13.5% 15.0% 16.5% 18.0% 19.5% 21.0% 22.5%5 Crude Palm Olein 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%6 Crude Palm Stearin 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%7 Crude Palm Kernel Olein 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%8 Crude Palm Kernel Stearin 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%9 Palm Fatty Acid Distillate (PFAD) 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%
10 Hydrogenated Palm Oil (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%11 Hydrogenated Palm Kernel Oil (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%12 Hydrogenated Palm Olein (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%
13 Hydrogenated Palm Kernel Olein (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%
14 Hydrogenated Palm Kernel Stearin (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%
15 Hydrogenated Palm Stearin (Bulk) >20 kg 0.0% 0.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.5% 12.0% 13.5% 15.0%16 RBD Palm Olein 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.5% 13.0%17 RBD Palm Oil 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%18 RBD Palm Kernel Oil 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%19 RBD Palm Kernel Olein 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%20 RBD Palm Kernel Stearin 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%21 RBD Palm Stearin 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%22 Hydrogenated RBD Palm Olein 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 11.5% 13.0%23 Hydrogenated RBD Palm Oil 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%24 Hydrogenated RBD Palm Kernel Oil 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%25 Hydrogenated RBD Palm Kernel Olein 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%26 Hydrogenated RBD Palm Kernel Stearin 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%27 Hydrogenated RBD Palm Stearin 0.0% 0.0% 0.0% 0.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%28 RBD Palm Olein (dalam kemasan) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% 2.0% 3.0% 4.0% 5.0% 6.0%29 Biodiesel dari Minyak Sawit 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% 2.0% 2.0% 5.0% 5.0% 7.5%
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Main Features of tax structure
• Collect Rents• Keep domestic food prices low• Support development of downstream industry – the tax
differential is in effect, a processing subsidy that isn’t an export subsidy and hence doesn’t violate WTO rules
Main Goals of tax structure
• Progressive tax structure• Differentiated across refined products
22
Other countries’ response• India protects its own processing industry with
very high import tariffs for the refined product• China doesn’t mind importing refined product
– it blends it with soybeans and rapeseed. China protects its crushing processing though
• Malaysian refineries have been the largest losers because of Indonesian tax structure – Malaysia introduced similar tax structure this year to help refiners compete
23
Palm – Friend or Foe?
Oil Palm is now closer to 13 mil ha – 5 mil ha in Malaysia8 mil ha in Indonesia
Total US: ~360 mil ha
This chart might
shock you
24
25
Hedging
Hedging an annual crop is a one year cashflow optimization problem – Planting decisions reset every year
Economics of perennial crops differ from Economics of annual crops
How So?
Hedging perennials (any trees or plantations) is a multi-year cashflow optimization problem
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Largest plantations in Msia/Indonesia(total 13 mil ha planted) – quite fragmented
• Sime Darby- 531,000 ha (<4% total)• Golden Agri - 464,000 ha• Astra Agro- 270,000 ha• Wilmar – 255,000 ha• Indofood Agri - 230,000 ha• IOI Corp - 160,000 ha• First Resources- 160,000 ha (1.2% of mkt)
about 12 x RichmondsRichmond is about 130 km² or 13,000 ha
27
First Resources160,000 ha and increasing: produced ~ 600 kt / year in 2012, increasing to ~ 1 mil mt /year in 2020
At $800/mt, this is approximately US$500 mil revenues / year increasing to $800 million in 2020
To hedge 5 years: > $2.5 bn of salesA lot of hedging to do
Plantation Share Prices vs. Commodity Price 2010-2013
60%80%
100%120%140%160%180%200%220%
4005006007008009001000110012001300
GGR-I FR-I AA-I CPO PriceShare Price
Index CPO USD/mt
28
Hedging MattersQtrly EBITDA: FR vs GGR
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
1Q2013 -
50
100
150
200
250
300
350
FR GGR GGR: 50% decline in EBITDA
FR: very consistent EBITDA
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2012 2013 2014 (200)
(100)
-
100
200
300
400 USD mil
EBITDA
CAPEX
NET CASH FLOW
Maximum CPO Price:US $ 1400 / MT
Minimum CPO Price:US $ 400 / MT
UNHEDGED
Range of Outcomes given Commodity Price volatility
30
Tiered Hedges help protect Company’s cashflow
2012 2013 2014 (100)
(50)
-
50
100
150
200
250
300
350
EBITDA
CAPEX
NET CASH FLOW
Minimum CPO Price
400 USD
1400 USDMaximum CPO Price
75 % HEDG
E
50 % HEDGE 25 %
HEDGE
HEDGES$1000 $950 $900
31
32
Ideal Hedge RatiosA function of:• Protecting Price or Profit?• Cash-flow commitments (such as capex, loan
repayments, etc)• Availability of instruments• Availability of counter-parties• Liquidity
EBITDA per mt with varying Hedge levels Does anything look odd?
$600 $650
$700 $750
$800 $850
$900 $950
$1,000
$1,050
$1,100
$1,150
$1,200
$1,250
$1,300
$1,350
$1,400 $200
$300
$400
$500
$600
$700
$800
Unhedged EBITDA50% hedge100% hedge
CPO Price at Settlement
EBITDA per ton CPO
33
34
Plantation ebitda per mt CPO: Hedged with a 50% Swap
$300
$3
30
$360
$3
90
$420
$4
50
$480
$5
10
$540
$5
70
$600
$6
30
$660
$6
90
$720
$7
50
$780
$8
10
$840
$8
70
$900
$9
30
$960
$9
90
$1,0
20
$1,0
50
$1,0
80
$1,1
10
$1,1
40
$1,1
70
$1,2
00
$1,2
30
$1,2
60
$1,2
90
$1,3
20
$1,3
50
$1,3
80
$1,4
10
$1,4
40
$1,4
70
$1,5
00
$1,5
30
$1,5
60
$1,5
90 $0
$200
$400
$600
$800
$1,000
$1,200
$1,400 EBITDA (No Export Tax, Unhedged)
EBITDA (w Export Tax, Unhedged)
EBITDA (w 50% swap hedge @ $1000)
CPO Price
EBITDA
35
Commodity SwapsA Swap is simply a promise between two parties to exchange cashflows – think of this as a series of futures contracts that auto-terminate
A commodity swap usually has a ‘fixed price’ leg and a ‘floating’ price leg
The difference is cash-settled at the end (no delivery)
The simplest commodity swap is essentially like a futures contract that auto-closes at an agreed termination date.
36
Options
• Commodity Options give the buyer the right to purchase (vs futures which give the buyer the obligation to purchase)
• Options can be combined many different ways• Collar is a sold call and bought put (or vice
versa) – a collar pair of options at the same strike price is essentially a swap
37
Why use derivatives like swaps and collars instead of just futures, or OTC contracts
• Leveraging the banks’ cheaper cost of capital– Will need to negotiate ISDAs and CSAs
• Reduces the need to micromanage futures, execution, reduce market impact. Usually did ‘asianing’ swaps – average price over the month
• Swaps are fungible and can be novated to reduce counter-party risk
• Derivatives can more effectively protect the cash-flow needs of the business, at economically sensitive price points
38
Plantation ebitda per mt CPO: Hedged with a 75% Collar
$300
$3
40
$380
$4
20
$460
$5
00
$540
$5
80
$620
$6
60
$700
$7
40
$780
$8
20
$860
$9
00
$940
$9
80
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,
$1,$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000 EBITDA (w Export Tax, Unhedged)EBITDA (w 75% collar: bought put @ 800 and sold call @ 1200)
Sell a call and Buy a Put
39
Economics vs. Statistics• In a historical linear world, statistical
techniques such as normal distributions and regressions work well for forecasting
• In our current complex world, understanding the economics is far more important: what happens if biofuel mandates go away?
• Bank pricing models often use versions of black scholes model to price futures options – what’s wrong with this?
40
41
List of derivative examples:• Swaps• Collars• 3-way collars: – Sold two put options, bought one call option
based on supply curve and food demand, probability of prices falling below $600 virtually negligible
• Extendible swaps, extendible collars• Spread options
42
Refinery Spread-Options• In 2011, the first oil palm plantation/refinery business
to sell PO-GO spread options, made over US$5 mil without refining a drop of oil
• The biodiesel refinery is essentially a physical option on the PO-GO spread. When Palm Oil gets very cheap relative to diesel, the refinery can convert it into biodiesel and sell at the higher price
• This doesn’t work the other way – biodiesel cannot be converted into food
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Concluding Remarks• Understanding the microeconomics is key to
understanding policy repercussions• The spread of Oil Palm and deforestation is
scary, but what’s the root cause? (FRE 540)
• Perennials vs. Annuals economics differ• Taxes can also act like subsidies• Learn to hedge with a variety of instruments,
counter-parties • All ‘structured’ products can be broken down
into basic elements of swaps and options