OVERVIEW OF TOMATOTRADE

Transcription

1 OVERVIEW OF TOMATOTRADE TomatoTrade is an always-on, neutral, international trading platform designed specifically to serve the commodity trading needs of the global processing tomato industry. The proprietary system, unaffiliated with any other processing tomato industry entity, will provide an efficient and structured means for both spot and forward contracting of specific processing tomato commodities, including but not limited to bulk tomato paste. The platform, developed after nearly two decades of research and work with input from industry leaders, will be easy-to-use, inexpensive, and custom-tailored to the industry. TomatoTrade will also offer a spectrum of informational products, further aiding in an industry entity s ability to maximize production and economic efficiencies. INTRODUCTION TO DOCUMENT This document will define terms relating to how the processing tomato industry views outputs, discuss the concept of a formation of a commodities trading mechanism for the industry, and briefly discuss such a platform s value. TERMS DEFINED FROM THE PERSPECTIVE OF TOMATOTRADE How might the processing tomato industry most accurately define product? How might the industry most accurately define commodity? How are the two related? What is the significance for the industry of accurately and precisely defining each and then distinguishing the two? Stated in simplest terms, an industry entity markets a product, and exchanges or trades a commodity. Conveyed best through example: a petroleum company markets specific types of gasoline products to consumers, who purchase these products at fueling stations. The petroleum company refines their gasoline products from crude oil, an example of which is the commodity WTI, or West Texas Intermediate. WTI is not marketed, but exchanged, through a highly-structured mechanism called an exchange. Very specifically 1

2 defined, with strict parameters (notably sulfur content), governmental agencies regulate and oversee the exchange of this commodity. Working with clearing banks, such exchanges as the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYME) facilitate the fluid transfer of volumes of WTI, as well as derivatives including futures and futures options. Strictly defined, highly regulated, and financially secured via clearing banks, such exchanges allow for non-industry entities ( speculators ) to participate in oil (and other commodities) exchange. Due to the financial backing of clearing institutions, both industry entities and speculators may take positions in oil markets, and then, before contract expiry, close out through offset trades. The vast majority of positions on oil are closed out or simply expire, the process facilitated through clearing mechanisms. Only a small percentage of physical oil actually changes hands. This process engenders and facilitates a number of benefits, including increased liquidity, the ability to hedge, and depending on a specific market theory, a mechanism for price discovery. Virtually unregulated, proprietary spot and forwards trading mechanisms allow for at-themoment trade or contracting for forward (in the future) delivery. While forward contracts specify a delivery date in the future, they are not futures. Strictly defined, a future contract is a type of forward contract that is highly structured and highly regulated. Practically defined, a basic (non-futures) forward is an unregulated (or very relatively lightly regulated) contractual instrument for delivery of a specified volume of a material at some future time in consideration of trade. The financial industry and governmental entities view such unregulated means, where the intrinsic material changing hands and means of trade is less strictly defined than formally codified and regulated commodities such as WTI, to be over the counter or OTC. While unknown (like their total value and volume) due to the private nature of OTC mechanisms, most of the intrinsic, underlying commodities traded on OTC markets likely get delivered. From TomatoTrade s perspective, highly regulated platforms such as CME or NYME are 2

3 exchanges and OTC platforms are trading mechanisms or trading platforms. TomatoTrade is designed to be such an OTC or trading mechanism / platform. Due to processing industry volumes, likely no exchange, as defined by TomatoTrade, will be formed within the coming decades. Furthermore, I define commodities such as WTI to be formal commodities due to their high level of regulation and strict exchange structure, and commodities that are not regulated from an economic change-of-hands perspective and that are traded on an OTC mechanism to be informal commodities. Others may have made similar definitions in the past. I created these definitions out of experience with the development of TomatoTrade specifically for the processing tomato industry. ANALYSIS OF THE PROCESSING TOMATO INDUSTRY OVER TIME REGARDING THE OUTPUT OF PRODUCTS AND COMMODITIES Initially, the processing tomato industry exclusively produced products. These included catsup, barbecue sauce, and cans of diced tomatoes, tomato puree, etc. The process flowed from the planting of processing tomato seeds to release of products from processing facility in one continuous progression, with no notable temporal buffers interposed between any of the stages of product creation. This structure proved problematic, as industry entities had just approximately 100 days (summer harvest season) to create a year s worth of product. This necessitated estimating, with a less-thanideal margin of certainty, just how much of each product to produce in those approximately 100 days. With the introduction of bulk processing of tomato paste and other bulk processing tomato outputs, the finishing process could proceed over the remainder of the year, and producers could adjust their output based on demand. From TomatoTrade s perspective, this stage in the evolution of the processing tomato industry represents the first step in creating an informal commodity. Today, the bulk production of tomato paste is a multi-billion dollar industry, one that can benefit through the introduction of a commodities trading mechanism for a number of reasons. Without 3

4 two more steps, however, bulk processing tomato outputs are still strictly products, and not commodities. THE INFORMAL COMMODITIZATION OF BULK TOMATO PASTE AND OTHER PROCESSING TOMATO INDUSTRY OUTPUTS STEP 2 Simply stated, at least two of the major producers in a given geographic area need to agree to standards for at least one of their outputs, say California-originated Hot Break 31% NTSS Tomato Paste. Once this standard is set, and the parties agree to adhere to this standard for the informal commodity type (EXAMPLE: TomatoTrade California Hot Break 31% NTSS Tomato Paste, or ( TTCALH31 )), then it may be traded. Why does this standard need to be set? Tomato paste is not a formal commodity, so therefore from a trading standpoint, it is unregulated and can vary widely in its characteristics, and thus now may only be marketed and not traded a potential buyer cannot bid with confidence on a commodity of characteristics that may vary widely among a variety of originators participating on a trading mechanism he or she doesn t really know what he or she is going to get. For practical purposes, each salient aspect of the commodity must essentially be the same, or similar to a high degree, among all made available for trade. THE TRADE OF PROCESSING TOMATO INDUSTRY INFORMAL COMMODITIES INCLUDING BULK TOMATO PASTE STEP 3 The final step in the commoditization and trade of bulk tomato paste and other processing tomato industry outputs is the establishment of a neutral OTC informal commodity trading platform specific to the processing tomato industry: TomatoTrade. Once registered, producers may create as many listings as they please and set their terms, with only price a variable. Buyers may bid, and producers may re-offer, ultimately settling on a price. All listing and trading is anonymous, until settlement, at which point parties 4

5 exchange information and they enter into either a spot trade agreement for the listing, or a forward delivery agreement. SALIENT BENEFITS OF TRANSITIONING FROM AN EXCLUSIVELY PRODUCT-BASED MARKETING MODEL TO A HYBRID PRODUCT-BASED MARKETING / INFORMAL COMMODITIES TRADING MODEL. 1. Increased volume. Through spot and forward contracting, producers may increase their factory throughput, reducing costs overall. 2. Reduced expense. Trading is less labor intensive than marketing. 3. Hedging with forward contracts, which ultimately aids the marketing side of a business by ensuring increased revenue. 4. Price discovery through increased volume and liquidity. 5. Always-on business. TomatoTrade will remain operational continuously, with global reach. 6. New markets. TomatoTrade will expose a producer to new markets. 7. Cash settlement option. TomatoTrade may in the future introduce a cash settlement option, if a contracted forward price differs from current spot price, the difference may simply be settled with no delivery necessary. FUTURE BALANCE How might the industry, and specific companies, strike a balance between volume of output marketed as product and volume traded as an informal commodity? The industry should ease into this new evolutionary step, and only actual results and subsequent augmentation of business models based on those results will tell. Currently, by TomatoTrade s definitions, 100% of all outputs are marketed as product, despite the robust nature of these outputs for informal commoditization and trade. Once the industry 5

6 begins to adopt this new approach, we may see a 95% marketing product / 5% trading informal commodities balance, and it may stay at that level, solely to act as a hedge for the much larger marketing effort. We may eventually see a balance, or a Only time will tell, but as previously stated, the industry is ready and should make a foray into this new evolutionary stage. The Chicago Mercantile Exchange began as a simple butter and egg trading floor. A plan for informal commoditizing at least some of the contemporary industry s outputs and hence trading is long overdue. Ed Darack 6