How does Nibulon Manage Risk? An Interview with the Chief Risk Officer
Sylvain Bettinelli is Chief Risk Officer for Nibulon, the largest grain exporter from Ukraine. Founded in 1991, Nibulon owns 388 silos and over two million tonnes of grain storage, along with a network of 25 transshipment terminals and an export terminal in Mykolaiv. The company cultivates 82,000 ha of agricultural land in Ukraine. Before joining Nibulon, Sylvain spent six years with Cargill and five years with Bunge.
A conversation with Sylvain Bettinelli from Nibulon
Good morning, Sylvain. Could you please tell me a little about Nibulon’s business model?
We are mono-origin Ukraine, and export around 6 million tonnes of grain per year all over the world. We grow around 10 percent of that 6 million tonnes. Of the exports, 40 percent is corn; 40 percent is wheat; and the rest is barley, soybeans and sunflower seeds. We sell about 40 percent CIF and 60 percent FOB. We have more than 7,000 employees.
We are still growing, with a target to export 8 million tonnes within a few years. We only originate out of Ukraine, and we will continue to expand in Ukraine, so we are different from the big international grain traders who are multi-origin.
We have sizeable fixed costs in terms of infrastructure: our own fleet of trucks, of barges and tugboats, as well as storage and export loading terminals. To maximise our infrastructure capacity, we need to export between 500 and 600,000 tonnes each month.
We look to use our infrastructure to earn a margin at every stage through the supply chain. It is a similar model to, say, Cargill in the US. They earn money from the farmer to the port, and not only from FOBS to CIF. It is the same for us.
We also buy when farmers want to sell. We always give them a price. We never tell them that we don’t want to buy. We have to maintain their loyalty if we want them to sell to us the following year.
As you say, it is an origination model similar to a Bunge or Cargill.
Nibulon wanted to implement a state-of-the-art western style of risk management. And that was why I was hired. In terms of risk management, I apply everything here that I learned at Bunge and Cargill.
How do you manage your price risks?
We are first and foremost physical traders, so we always favour physical forward deals when we look at hedging our price risks.
However, we cannot always find physical buyers when we want them, so we supplement this physical trading activity with hedges in the futures and options markets on the CBOT, as well as on the MATIF.
We can only hedge the flat price risk with derivatives. We are left with the basis risk – the difference between the price in Ukraine and the futures prices. We can only ‘hedge’ this basis risk through our physical sales.
Corn is easy to hedge as the correlation between Ukrainian and US corn is very good. The correlation on wheat is not as good. We still use the futures, but we have to be more active.
And then we have products like barley where there is no futures market, and hence no means to hedge. You either have to find a buyer, or you have to take a position and accept the outright price risk.
China and Saudi Arabia are the main buyers of Ukrainian barley. Saudi Arabia buys through tenders. We have to take a risk with these tenders. Either we buy the barley first and go long into the tender, or we have to short the tender and try to cover the physicals afterwards.
Do you use the Platts Black Sea benchmark?
It would be very useful for us in terms of managing our price risk, but as a risk manager I can’t use this new Black sea wheat contract until it is more liquid, and I fear it is the same for other big players. It is a question of the chicken or the egg! Once it is liquid, we will be one of the main users of it!
What risks keep you awake at night?
The only risks that keep me awake at night are the risks that can’t be managed. The biggest is political risk. In 1992, the Ukrainian government imposed an export ban on wheat. It took most exporters several years to work through the consequences of that ban.
The Ukrainian government is currently looking at changing the rules for inland water transportation. If the rules change, it can alter the rationale of former investments. And that is very difficult to manage.
Our other big risk is that we are mono origin; if we were to have a bad crop in Ukraine it would affect us more than it would affect a multi-origin, multinational like Bunge or Cargill, or pure traders without assets. We couldn’t supply our customers with South American or US corn rather than Ukrainian corn. In addition, we need volumes through our supply chain in order to cover those fixed costs and make profits.
The other risks are manageable. We have a refined way of looking at risks on a timely basis, both volumetric and VAR, stress tests etc etc.
Russia has imposed and implemented export quotas on wheat. Is there any possibility that Ukraine would do the same?
Theoretically yes, because it happened less than 10 years ago. But in practice no; we don’t think it will happen. Ukraine is dependent on agricultural exports for both tax revenues and foreign exchange. Besides, the harvest is expected to be very good and we see only a limited chance that dry weather will impact negatively production, so there is no reason to impose export quotas.
It has rained recently in Ukraine; is there still a risk of drought?
It has been dry, but it was never a drought. In the past when we have had a similar dryness, we have lost between 8 and 12 percent of our production. Knowing that, the risk to the coming crop is very limited.
It is true that there has been a lack of rain, but what is crucial is what happens in the next two to three weeks. It has been raining for the past few days, and more rain is expected.
Do you see Ukraine expanding production further?
Improved agricultural yields have been driving our production increases. Ukraine has the potential to increase yields even further before they get anywhere close to yields in Europe or the US. The increase in yields has come through better agricultural practices and increased inputs.
Irrigation has played a major role, but there is a problem of land ownership in Ukraine. When the big state co-operative farms were broken up the land was sold or given to the cooperative members. They only got a small acreage each. Most of the farmers now don’t own the land they farm but lease it on short term leases from the owners. For irrigation you need at least a three-year lease to get a return on your investment. If you don’t own the land you don’t invest in it.
There is legislation moving through Parliament that will allow these small farmers to sell their land to Ukrainian owners first to facilitate the consolidation of these small holding, but land reform is always a sensitive issue in every country. This process could take five to ten years or so to implement.
What is the biggest challenge that Ukraine faces as far as grain exports are concerned?
South American countries have seen their currencies devalue significantly over the past few years, and their grain exports have become super-competitive. That is a challenge for other origins, but we are well placed geographically in the Black Sea to supply the main wheat, corn and barley importers, whether Egypt, Turkey or Saudi Arabia or even Asia.
And what is the biggest challenge that Nibulon faces?
Our challenges are different every year! It is a very competitive business; you can never sleep on your situation whether in terms of origination or exports. Competition is intense every year and we have to fight all the time.
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