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2020, the Risk Management Litmus Test

Updated: Sep 10, 2020

Digital transformation has been a strong secular trend across all industries since at least 2019. Moving into 2020, the agri trading & processing industry has embraced new data management and analytics technologies at a much greater speed than in the past, catching up with peer industries.

Back in March, we observed that as supply chains and markets get further disrupted, staying in control of your exposures across products, markets, counterparties, exchange rates and margins will be key. We argued that your exposures cannot wait until things return to normal.

Several months later, it appears safe to conclude that the recent disruptions - followed by the differing levels of return to normalcy - have acted as a powerful catalyst shaping the risk management component of the digital transformation of companies.

Risk Management, a steering wheel

Times like these, featuring various levels of stresses across companies, demonstrate the very crucial role of Risk Management in the organization matrix.

For a typical agri and food trading and/or processing company, the primary aims of Risk Management encompass:

· Reducing time from data capture to data analysis and reporting,

· Ramping-up numerical understanding on many levels,

· Communicating key metrics in consistently, accurate and current way,

· Strengthening control with clear, visible boundaries, and

· Improving results by enabling more analysis and dynamic adjustment to market conditions.

Risk Management thus provides a tangible tool for steering the future business, which is understood and used by staff from the CEO/CFO, all the way to the desk trader.

“What you cannot measure, you cannot manage”

The Covid-19 crisis differed from past disruptions in that it forced overnight a digital recalibration of the function.

Executives grappled with basic yet crucial questions:

- Is our reporting timely, consistent and correct?

- What exposures do we have in the books?

- How have their valuations changed?

- What forward margins can we project for the coming months?

- What risk are we currently taking on considering historical behaviour of price components?

- What scenarios can we expect over the course of the next months?

The Litmus Test

The situation shined the light on the efficacy of existing practices and solutions, which ultimately determine the ability to answer the above questions:

- Are we leveraging our internal and external data adequately?

- Are Business and IT working in sync to achieve that?

- Do we have all the necessary analytical tools in place?

- Do we have the right set of metrics to reflect our key exposures?

- Are we generating standard reports across key functional areas?

- Do we have suitable and reliable platforms for stakeholders to discuss?

- Are we in a position to consistently take actions based on the reporting?

For those companies featuring good practices with systematic reporting:

- Are we trading our risk and margin optimally?

The overarching element of a successful reporting transformation lies in a Data Strategy. This will be the subject of an upcoming Post!

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