“Cash-traded ags ‘more profitable’ than futures-traded ones” was the title of a recent Agrimoney.com article.
The piece quotes Olam founder and chief Sunny Verghese by saying:
“On a risk-adjusted basis, we are roughly now 45% cash traded commodity, 55% futures traded commodities,” Mr Verghese said.However, that may not be the most profitable balance.
“If you look at our 25-year history, the risk-return is far better in the cash-traded commodities than in the futures-traded commodities,” he said.
Less complexity = more profit
Mr. Verghese acknowledged that this observation was “a bit counterintuitive“, given the liquidity offered by futures.
“At the end of the day, you feel in future sales commodities, you can hedge out your price exposure.”
You should disagree in one aspect: Less complexity does not equate to more profit.
Less transparency equates to more profit.
It is an issue of information asymmetry.
Cash traded ags are more profitable exactly because they are less transparent and have less liquidity.
Also published on Medium.