In the tank or on the plate? Bioenergy vs. Food. It's game on.

by Michael Arbow, MBA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Jeffery Rubin in his book “Why your world is about to get a whole lot smaller” talks about triple digit oil prices and the effects this will have on our economies one being the push to bio-energy; energy derived from plants such as corn, sugar cane, palm oil.  Interestingly as the price of these commodities has risen the Chinese have sought out other plants capable of producing an oil substitute.  They have recently moved to and focused on cassava, a tropical plant whose root we use for animal feed, tapioca pudding and ice cream.  While the ingenuity is admirable the effects of this and new government regulations forcing the consumption of bio-energy is having distributing ramifications namely a growing trade-off between crops for fuel or crops for food.  The upshot of this is an unstable equilibrium in food commodity prices which looks set to continue for the foreseeable future.

 

What all this means to the food processors and bio-fuel makers is that price volatility may become the new normal and having a better economic understanding of price movement causality may be beyond the skill sets of the accounting department and conceivably the more traditional risk management team.

 

 

For more on the food/energy trade-off click on the link to a New York Times article:

http://tinyurl.com/3b6tfgz

 

For more on Mr. Rubin’s thoughts on energy prices, click on the link:

http://www.jeffrubinssmallerworld.com/blog/

What can my phone bill tell companies about their hedging practices?

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

When studying for my undergrad economics degree, we spent a lot of time learning what happen in the perfect world when all participants had perfect knowledge.  Then we figured out what would happen when introducing a few imperfections into the equation and that told us how the world economy works.  My teachers almost seemed to view such imperfections as a nuisance in the field of economic study.

 

This all seemed totally unrealistic to me, and the wrong approach.  Some attention was given to human behaviour, but not enough.  In fact that may be where we should start, and at least it is getting some more attention now.  Our economic system is based upon imperfect markets and knowledge.  Where imperfections do not exist, they get created.

 

As a small example, my phone bill now runs to several pages and has all sorts of detail about the various savings I’ve made under my particular calling plan. There are discounts for calling certain numbers, for calling at different times of the day or week, for letting the company take payment directly from my bank account, etc., etc.  All the discounts sound wonderful except that I seem to keep paying more and more for my phone bill!

 

I would rather be billed for simple low cost calls and get a bill that is understandable to me.  However, the phone company knows perfectly well that its charging structure makes it almost impossible for me to compare its costs with the costs of using a competitor, at least not without spending an inordinate amount of time that I don’t have.  In fact, I get the same sort of billing from all utility companies.  And of course, when it is very difficult to compare my utility provider’s costs with those of a competitor, I am less likely to change provider.

 

Many companies do not have the time to properly analyse their hedging instruments and costs and end up relying on their banks for advice.  However, in doing this, perhaps it’s worth bearing in mind that my phone company has set out to make it difficult for me to compare other solutions for a reason – and that reason is not necessarily to save me money or provide me with the optimum service for me.

Einstein

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc

www.RSDsolutions.com

info@RSDsolutions.com

 

 

I am currently sitting in my hotel room in a relatively small Midwestern town waiting for a conference to start tomorrow at which I am speaking.  Not really feeling all that great so I decided to take a break and read a book that I picked up last week titled “The Quantum Ten”, by Sheilla Jones.  I am really enjoying the book (so far).  It is about the birth of quantum mechanics and the personalities of the people who created this very important paradigm shift in physics.

 

As I was reading along I read the following quote by Einstein who is talking about his well known days in the Swiss Patent Office, where he had to go as no one would accept his thesis(s) and thus he could not get a position as a physics professor or researcher.

 

“  “In a way”, said Einstein, “this saved my life; not that I would have died without it, but I would have been intellectually stunted.”  “

 

Upon reading that I thought about what the outcomes might be if we take all of the people coming out of MBA programs and Financial Engineering programs and give them jobs that are quite different for what they have been groomed for.  That would allow for maturation of the knowledge, development of a better world view, and especially in the case of risk would avoid academic group think.

 

How many of our graduates are “intellectually stunted” because they are pushed into a specific line job too early – before they have had time to develop.  Every wine drinker will get this concept.

Was Rodney Dangerfield once a Risk Management Consultant?

by Michael Arbow, MBA

Partner RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The legendary American comedian Rodney Dangerfield is famous for his stellar role in the comedy movie classic Caddyshack and is renowned for his catchphrase "I don't get no respect" or if you wish to ignore the double negative "I get no respect, I tell ya". Recently while updating RSD Solutions’s information on the US government website GovWin.com, I got a better understanding of where Mr. Dangerfield was coming from. When completing the company profile you are asked for the classification of your business utilizing the widely accepted North American Industry Classification System (NAICS); a list of 19,720 industries. And yes you guessed it; Risk Management Consultants are not listed and to add insult to injury, of the 108,521 words used to describe these industries, the word “risk” is not one of them. 

This is telling on innumerable levels and perhaps explains why company risk managers struggle (at times) to have a meaningful impact in their organizations. This also brings up the disconnect between the desire to manage risk and actually implementing a risk management solution. Hopefully when the NAICS tables are updated from 2007, risk management will get the respect it deserves. 

Price increases begat production increases begat production decreases begat,…

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

First year economic students need look no further to witness the basic world of supply and demand than in the world of cotton.  With historic high prices of cotton recently reached due to 3 years of poor crops (fall in supply) and increased wealth in the emerging economies (increased demand) the expected follow through is happening namely farmers globally are planting more cotton.  Assuming the weather co-operates the world store of cotton will soon start to increase – cotton commodity prices are already reflecting this possible reality.  However, the story doesn’t end there.  With world population growth – another 40 million in Asia alone over the next 4 years, wealth creation compliments of the US Federal Reserves quantitative easing the rate of increase in the demand for soft commodities (food) is outstripping productivity gains for the foreseeable future.  The result: the shift to increased production will mean a decrease in production of another soft and with that the price of that soft will increase.

What does this mean in the risk world?  For suppliers and users of soft commodities you are in for a wild and volatile ride and that is before natural disasters enter the picture.  The world has entered a new period of price movements which are more inter-connected and caused by shifts in production from one commodity to another rather than just meeting demand through increased planted acreage.  This, I believe will lead to greater price volatility and threaten the existence of firms not adapting through more sophisticated risk strategies.  It is time to re-think the “normal”.

For more on the price of cotton follow the link to this Globe and Mail article:

http://tinyurl.com/4s7ue63

Free Lunch Seminar: Rick Nason to speak on “Managing through Complexity”

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Over the next few months, Dalhousie University's Faculty of Management is offering an Executive Leadership Series in various cities across Canada.  These “lunch and learn” seminars will deal with subjects ranging from social media to creating value-added employees to risk management. 

 

This month, Rick Nason, Associate Professor in Finance will be hosting three free lunch and learn events looking at business risk but through the thought processes of science.  This interesting mash-up of disciplines recently gained Mr. Nason a featured article in the Risk Management Association Journal - the prestigious and thought leading journal in the area of risk management and strategy.

Seminar dates and locations:

• Thursday, April 14 – Toronto at the RBC Royal Bank, 20 King St W, 10th Floor
• Thursday, April 7 – Halifax at the Kenneth C. Rowe Building
• Wednesday, April 13– Ottawa at the RBC Royal Bank, 90 Sparks Street, 2nd Floor

We hope you can make it and remember – it’s free!

 

For more information and registration for this free event and the series follow the link:

 http://bit.ly/fVbTVG

The Loonie: A new safe haven currency

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

The past few weeks have been filled with world altering events and uncertainty and the end story for those in Japan, much of the Middle East and the Euro-zone has yet to be written. With uncertainty, the appreciation in the price of gold has happened and is expected but what is not expected is an unwavering Canadian dollar (CAD). In terms of world currencies, when the going gets tough, generally, the tough go the US dollar (USD). However since February 1^st the CAD has traded above par to the USD and that is with long Canadian government interest rates at 80 basis points below comparable US debt and 7 bps below German debt (each holding AAA debt ratings). 

To me this suggests that the CAD is becoming a safe haven currency.  This move is substantiated by double digit immigration and high levels of international capital inflows both of which demonstrate that Canada is globally the preferred place to live and invest.  This new disconnect – that is the Canadian (resource based?) currency as a safe haven, is something to be proud of for Canadians but it will and can cause problems for our exporters. 

Bank of Canada Governor Mark Carney stated last week that the world is in a multi-decade commodity boom.  The effect of this according to economist Patricia Croft and David Rosenberg is that over the next 3-5 years a $1.20 USD/CAD exchange rate could prevail. To me, the trend has become fact.  For Canadian exporters and those investing in the United States, what steps is your organization taking to ease the potential pain?