FGV ... Vulnerable To Fluctuations In Commodities Futures Markets !!

Its much maligned downstream segment which has a presence in Malaysia and Canada was largely responsible for the earnings downturn. Some rm105.4 million in losses in the segment were attributed to its derivatives exposure linked to forward and futures contracts as well as negative refining margins for palm oil in Malaysia.

A major concern is the nature of the losses, which mainly comprised commodity contracts that were acquired earlier in 2014. The total contractual amount in FGV’s derivatives book nearly doubled from rm1.18 billion as at Dec 2013 to rm2.34 billion as at Sept 30 2014.

In its financial statements, FGV disclosed that its downstream operations registered an unrealized loss on commodity contracts amounting to rm52 million during 3Q, most of which were attributed to its Canadian operations.

Due to its purchases of forward commodities contracts earlier 2014, the subsequent fall in edible oil prices had resulted in large paper losses.

FGV says the losses were related to the purchase of soybean and canola contracts by its wholly owned Canadian subsidiary Twin Rivers technologies ETGO du Quebec which is exposed to volatile price movements of the soybean and canola.

This explains the drastic increase in its derivatives book throughout 2014, Between March 31 and June 30 2014 some rm1.06 billion worth of futures commodities contracts were acquired for this…

FGV reiterates that TRT ETGO intends to take full delivery of the commodities in question and that they are not used for short term trading.

Futures contracts entered into by TRT ETGO are meant solely to secure raw materials for the company’s commercial crush plan and for speculative activities.

The liabilities of rm129 million imply that TRT ETGO had purchased the futures contract at a price much higher than what the underlying commodities are worth now (Dec 2014).

It is worth nothing that all of the commodity derivatives in FGV’s book have a maturity period of less than a year. This means that upon expiration, TRT will receive the soybean and the canola for use in its crushing and refining operations by June 2015.

With the paper losses classified as liabilities in the group’s derivatives book, actual losses will only be recognized after the contracts are settled. This leaves the group vulnerable to further fluctuations in the futures markets. But it could also mean that the paper losses would start to shrink if edible oil commodities begin to trend upwards in 2015.

Negative mark to market values will always be an issue but the reversal of those positions should be considered when the actual physical trades are completed and positions are squared off.