ACM capabilities in a nutshell - Contracting Part 4

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ACM extended pricing features

Base Features

This chapter will highlight some of the base pricing feature that ACM offers without explaining them in too much detail as the focus of this blog is more on the extended (or more advanced features).

Future and Basis pricing: setting future and basis price(s) as one of the industries key pricing mechanisms is of course also one of the most common approaches to price a commodity within the ACM solution and in the agri industry. The price fixation here is always against the company's picked future reference, based on futures exchange, commodity and future period. On the basis side, ACM also supports the ability to set multiple secondary basis prices for each fixation to i.e. capture additional related costs like freight or storage.

Flat pricing: Agricultural Contract Management supports two different approaches for setting a flat price

Componentized flat: in this pricing approach a flat price is agreed on the contract.  However, the company may choose to break this flat price into an individual future and basis component, so that they can generate risk (position + MtM + PnL) accordingly.

• Example: contractually a flat price of $15.00 was agreed on, but for internal risk reporting the price was broken out into a future price of $15.10 and a basis price of negative $0.10. Only the contractually defined flat price is used in external communication or in settlement.

Non-hedgeable flat: is a scenario where either the commodity is not hedged or the company decided not to hedge it. The contractually agreed price is not broken out into a future and basis price as in the componentized flat scenario.

Price lifts: describes the process in whicha price fixation is fully or partially unpriced.

• Example: 5,000 BU of a 15,000 BU price fixation have been renegotiated. The 5,000 BU are therefore lifted (= de-priced) in order to set a new price for this quantity.

Price rolls: is the process of rolling a partially priced fixation (only future or basis is priced) from their current (e.g., nearby) future period reference to a new future period.

• Example:  In a soybean contract the basis price is unpriced and the futures is priced against the March future period. The trader rolls the contract to the next available (or any other) future period, which will update the future reference of the fixation to the selected period. The activity of rolling may result in a spread that will get added or deducted to/from the future price. 

Prior to rolling:

1. Basis price is unpriced
2. Future price is priced at $12.10 and priced against March futures

Rolling is executed:

1. Future period is changed from March to May
2. A spread of $0.05 is calculated as the differences of both market prices

After rolling:

1. Basis (still unpriced)
2. Futures price updated to $12.15 (spread was added) and future period is updated to May

Intended Price Type

This optional feature in ACM can be used to control how a contract shall be priced during its initial creation and inherently be used to drive which additional contract terms and condition need to be attached to the contract. It can force the contract to be created as an unpriced, only basis or only futures contract.

Example: in a purchase contract from a farmer the intended price type was set to NPE (No Price Established) and the contract was therefore created without any price fixation. Based on the setting of the intended price type field, the company may choose to print additional terms and conditions along with their contract. Example: “After physical unload the delivering counterparty has X days to establish a price for the delivered quantity. After X+1 days a fee will be charged for every day, the quantity remains unpriced”.

Pricing Methods

Pricing Methods offered by SAP ACM can be used by companies to offer their counterparties (vendors and customers) a structured pricing program to secure larger quantities. Pricing methods are created as master data and are defined with a sign-up period, optional price reference (futures period) and link to applicable fees.

Example:

• An agricultural buying company creates a new pricing method as a program to buy soybeans which is offered to all or selected farmers. This program may offer certain benefits and services to the farmer. Furthermore, the program defines that all prices are fixed against a specific pre-defined future period.
• Farmers that sign-up can commit any quantity of their harvest to this program.
• All farmers that sign-up to the program will receive the same futures and/or basis price. This is an optional step but allows the company to price many contracts across various farmers simultaneously, instead of pricing them separately.
• The company may choose to charge a sign-up or any other fees to the farmers who participate in the program.

Integration into CDOTE (Commodity Derivative Order Trade Execution)

Commodity Derivative Order Trade Execution (CDOTE) enables customers to create and manage broker order / requests for hedging activities directly through SAP.

CDOTE is an additional offering by the SAP commodity management solution portfolio into which ACM is natively integrated. Example:

1. A trader / merchant is creating a physical soybeans sales or purchase contract for 100,000 BU
2. To hedge the risk for this contract the company decides to buy/sell 20 soybeans future contracts at the Chicago Board of Trade (at the CBOT exchange the size of a soybeans future contract is defined as 5,000 BU, which would translate into 20 future contracts to fully hedge the physical contract).
3. The order request for these 20 future contracts can be submitted to the company’s broker via CDOTE. The CDOTE solution provides the required fields, functions, and Apps to capture all for the order relevant information including pricing (e.g., “TAS”) and expiry (e.g., “Fill or Kill”) instructions . The creation of the CDOTE order request can be triggered directly from ACM contract maintenance or pricing FIORI Apps.
4. From CDOTE the created order request is sent to the broker. For this, CDOTE can be integrated into a FIX engine or any other systems which are able to communicate via FIX protocol (FIX = Financial Information Exchange)
5. If the broker is able to fill the requested future contracts fully or only partially, a corresponding fill is sent back to CDOTE. Once the order is filled it automatically prices the future component of the linked ACM contract(s) accordingly (considering price + quantities of the received fill).
6. Afterwards the companies physical and futurs risk position is updated simultaneously to ensure that both positions are always in-sync.

In this article we will not be able to analyze all features of CDOTE, but highlighting some of the solution’s key benefits and offerings:

• Full CDOTE integration from ACM contracts and pricing Apps.
• Create “stand-alone” hedge orders that are not connected to a physical contract
• Support of other order types like EFP’s (Exchange for Physicals) or AA (Against Actuals) as well as Spread Orders to enable future rolls.
• Simultaneous update of futures and physical position
• Ability to define fill sequences. If a very large order for multiple physicals is requested, the fill sequence allows to define which physical contract will be filled first in the event the entire order cannot be filled.

CDOTE provides a range of own Apps for end users to either create, update or monitor their orders incl. status updates of from the broker received fills. More information can be found at the official SAP help site: https://help.sap.com/docs/SAP_S4HANA_ON-PREMISE/888cbe952a0e4a729f8b823d69860929/7fa9ad4f68f04ff990e...