Question

A Day in the Life of a Contracts Analyst at Cargill

Glynis Gallagher works as a contracts analyst at Cargill Risk Management, which is a business unit within Cargill. Based in Wayzata, Minnesota, Cargill celebrated its 150th anniversary in 2015. Cargill is a truly global company: With operations in more than 60 countries, it markets food, agricultural, financial, and industrial products and services to customers worldwide. The company is one of the world’s top grain traders. In addition, it has global beef operations, and it does business in starches and sweeteners as well. Cargill also processes steel and de-icing salt. Its revenues totaled $109,699 billion in 2017, making Cargill the largest privately owned company in the United States.

Cargill is committed to feeding the world in a responsible way, while also reducing its environmental impact and improving the communities where its employees live and work. Writing in the introduction to his 1979 book Merchants of Grain, author Dan Morgan noted:

Grain is the only resource in the world that is even more central to modern civilization than oil. It goes without saying that grain is essential to human lives and health.… As America became the center of the planetary food system, trade routes were transformed, new economic relationships took shape, and grain became one of the foundations of the postwar American Empire.

Today, as the saying goes, “You can’t walk down the grocery aisle without seeing something Cargill has been involved with in one way or another.” A recent article in Forbes described the scope of the company’s operations:

Cargill, the $135 billion (fiscal year 2014 sales) family-owned food behemoth dominates all roads between the world’s farms and your dinner plate.… Since the company was founded in 1865, the core of its business has always been trading commodities—buying, storing, shipping and selling the crops farmers grow around the world.

Commodities processing is a high-volume, low-margin business; Cargill crushes large quantities of soybeans each day. Because the company is privately held, Cargill can pursue long-term investment opportunities in many global markets. For example, it has had a major presence in India and other emerging markets for decades. The company has made large investments in cocoa, sugar, and food innovation.

The career path of Greg Page, former Cargill CEO and current executive chairman, shows the range of job opportunities Cargill offers its employees. After graduating from college, Page took a trainee position in the Feed Division. In subsequent years, he held a number of positions in the United States and Singapore. He was also involved with the startup of a poultry processing facility in Thailand. Today, Cargill exports roughly 100 million metric tons of chicken from Thailand every year.

Gallagher graduated from a large Midwestern university in 2012 with a major in marketing. She spent fall semester of her senior year studying in northern Italy. Many of her business courses helped prepare her for her current role. She recalls, “Although I never took a course focused on derivatives and trading exclusively, my math and finance courses gave me a solid foundation in order to understand portfolio exposures, fee schedules, and financing options we utilize every day. My marketing courses have allowed me to use this data in a more customer-focused approach on a daily basis.”

Cargill Risk Management is part of Financial Services, one of Cargill’s six platforms that comprise 65 business units. Cargill, through Cargill Risk Management, is a registered limited designation swap dealer with the U.S. Commodities Futures Trading Commission (CFTC). Gallagher must make sure that everything she does for customers complies with CFTC swap dealing guidelines. Cargill and other commodities trade houses are industry members of the Commodity Markets Council, a trade group that serves as a liaison between companies and the government.

Gallagher is a contracts analyst. She says, “I have always been interested in law. Becoming a contracts analyst in such a regulated industry allowed me to gain exposure to contractual language, legal requirements, and the regulatory environment. For example, if you do not set up a contract properly, you are opening yourself up to unnecessary risk.” As Gallagher explains, “In today’s highly regulated and changing business environment, it is essential to protect yourself while completing business transactions. Being part of this facet of the business is a daily challenge. It pushes me outside of my comfort zone to understand a basic question—namely, what is the true risk here for Cargill?”

As noted previously, Cargill Risk Management is a limited designated swap dealer. What’s a “swap”? Swaps, also known as over-the-counter (OTC) transactions, can be complex financial structures that derive their value from something else—a futures contract, for example. Swaps are traded in direct negotiation between buyer and seller; they represent a $700 trillion market. Who uses swaps? Gallagher’s business unit services a variety of customers, including farmers, major airlines, food companies, investment funds, oil companies, and many others.

Gallagher’s business unit works with its customers to provide commodities hedges through swaps and structured products. The commodities in question are often agricultural commodities such as grains (e.g., corn, wheat, and soybeans), as well as beef and other animal proteins. Cargill also deals in metals and energy. Hedging is a financial strategy that allows a customer to lock in the price for a specific commodity purchase in the future. An important part of Gallagher’s job is to work diligently to understand customers’ business objectives, and to ensure contractual terms are aligned with these strategies. The Cargill team assists customers by creating tailored risk management solutions to reduce risks and uncertainty by having more diversified hedging portfolios.

Consider the following example: When a large restaurant chain purchases cooking oil, it must manage budgets and margins to ensure profitability. When the price of oil seeds—a commodity—increases, the company needs to find a way to offset this increase instead of passing along the cost to its customers in the form of higher prices. Of course, market volatility and cost swings are difficult to predict—so how is the restaurant chain able to do this? Helping customers answer this question is an important part of Gallagher’s team’s job.

Summing up her experience, Gallagher says, “I enjoy working with our customers in more than 60 countries throughout the world. With 16 global offices, I am exposed to different cultures and business practices that challenge me to think globally. Understanding where the customer is coming from allows me to succeed in helping them understand and navigate this complex field. Ultimately, I am part of the process which allows enterprises ranging from huge corporations to small farmers succeed in managing their overall risk.”

Requirements>

1. Overview of the Case Study 5-6 sentences
2. Statement of the Problem 1-2 sentences
3. Alternatives to Solve the Problem - List and provide a separate heading for each alternative - 1 - 2 pages
4. Recommendation on the basis of recommendation - 5-6 sentences
5. Implementation plant for recommended alternative - 6 sentences
6. Current Event - Link the case to current update event

Answer 1

1. Founded in 1865, Cargill (family-owned business) core business is trading commodities—buying, storing, shipping and selling the crops farmers grow around the world. Glynis Gallagher works as a contracts analyst at Cargill Risk Management (“CRM”) which is a Cargill business unit. Cargill team assists customers by creating tailored risk management solutions to reduce risks and uncertainty by having more diversified hedging portfolios. CRM is a registered limited designation swap dealer with the U.S. Commodities Futures Trading Commission (CFTC). Gallagher must make sure that everything she does for customers complies with CFTC swap dealing guidelines. She serves a variety of customers, including farmers, major airlines, food companies, investment funds, oil companies, and many others.

2. Gallagher’s works with its customers to provide commodities hedges through swaps and structured products. Market volatility and cost swings makes hedging difficult and increase the risk of losing money.

3. a) Problem: Perfect Hedging. Solution: Find the right hedge ratio by using the hedging ratio formula

b) Problem: Hedging Commodity. Solution: Identify the commodity which has a negative correlation with the commodity