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FCStone’s 10 Mistakes of Hedging
in No Particular Order
1. Accounting
2. Not Setting Goals
3. Delayed Hedging
4. Married to the Market
5. Misunderstood Margin Calls
6. Lack of Good Risk Policy
7. Trade by Committee
8. Identifying the Difference
between Hedging v. Speculation
9. Lack of Strategy Adjustments
10. Lack of Professional Help
From John Gretzinger’s
presentation on Wednesday.
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Bruce and Mary Jo Bates enjoy the scenery.
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Carl and Carole Boyett have fun in the snow.
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SIGMA staff also had time
to enjoy the view!
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Rod Smith, Allie McAllister, Joanne and
Frank Greinke on the slopes.
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Thank You SIGMA Sponsors
SIGMA extends its most sincere thanks to those companies that made some of the special events possible, or those contributions which allowed SIGMA to upgrade functions beyond what registration fees covered.
We couldn’t throw a signature SIGMA meeting without your help! Please let these sponsors know how much we appreciate their continued support.
- ADD Systems
- American Express
- Armor Safe
- Boyd Coffee Company
- CITGO Petroleum Corporation
- CitiCapital
- Delta Consultants
- Dresser Wayne
- Dunkin Brands
- Energy Recruiters Inc.
- Exxon Mobile
- FCStone, LLC
- Firestream Worldwide
- Fleet One
- FuelQuest
- Gilbarco Veeder-Root
- Hudson Capital
- Mark VII Equipment
- Matrix Capital Markets Group, Inc.
- McLane Company
- Merrill Lynch
- Miller Brewing Co.
- Nestle Waters USA
- PDI
- The Pinnacle Corporation
- Skyline Electronic
- Price Displays
- Subway®
- Tanknology
- TelaPoint Inc.
- TransMontaigne Product Services, Inc.
- VeraSun Energy
- Wright Express LLC
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“The education at this year’s conference will be hard to top,” said Conference Chairman Rod Smith. “With headliners like Phil Verleger and Nancy Yamaguchi, the industry expertise coupled with SIGMA’s marketer expertise made for the best education schedule we’ve seen at the Executive Leadership Conference.”
Just under 200 people—a greater number than in years past—attended the conference, and with daily snowfall, skiing got better and better throughout the trip.
Education
Philip Verleger kicked off the meeting with some expertise insight into energy prices, particularly ethanol’s role. He forecasted that economic events including global warming, Wall St. investors’ actions, and/or government regulations (particularly regarding ethanol) could force higher energy use.
Verleger started by referencing a Nixon speech from 1971, where the president projected to the year 2000. One of Nixon’s goals included an increase in domestic oil production, at a time when the U.S. stocked a limited amount in reserves, and he supported advancing ethanol technology.
“Nixon didn’t allow for the market,” Verleger said. “A changing market structure is more important in price determination than resource availability, as proved by the surge of $78 per barrel, which really changed things.” From 2004-2006, economic growth boosted demand and Environmental Protection Agency (EPA) sulfur limitations decreased gasoline imports, and Congress exaggerated the problem by adding an MTBE squeeze via the EPAct of 2005. In the same time period, the U.S. experienced an increased use of options for hedging, which adds to downward pressure on prices through delta hedging — exemplified in the 1987 stock market crash.
“OPEC will have a harder time stabilizing price today because of the volatility in the market caused by hedging,” Verleger added. “Central bankers encourage mature stable growth and Silicon Valley hopes to double its money at oil’s expense in the hedging arena.” Thus, with a volatile commodity market for oil, more and more Americans will turn to alternative fuels as the answer, persuaded by this motto: “Consumers will pay less, farmers will be better off and the U.S. will be less dependent on the Middle East.”
Verleger claimed, however, that President Bush and Congress created a supply of ethanol for which there is no demand. EPAct of 2005 mandated 12 billion gallons of ethanol, but Pres. Bush wanted 35 billion gallons.
“This is the first Presidential proposal like this made with so few facts,” Verleger stated. “There is no governmental data on ethanol use, or the number of flex fuel vehicles. I don’t think ethanol could replace more than 14 million in 2012 with a 10 percent mix. We need at least 40 million flex fuel vehicles and from what I can tell, there are less than 1 million today. Plus, the car life averages 15-20 years.”
Verleger also warned that ethanol will threaten the supply of jet and diesel fuel, which will not improve national security, not to mention the food v. fuel argument. “We produce 10 billion bushels of corn each year. This year, corn went from $2 a bushel to $5 a bushel, which will also increase the price of food,” Verleger stated. “For example, chicken or anything that’s fed mostly corn as feed. We’ve already seen increases at the grocery store in these items.”
Verleger concluded with an industry comparison. He said the telecommunications model does not fit the oil industry, and warned that the government’s mandates for alternative fuels did not allow ample time for the proper infrastructure.
“Ten years is not enough time to change the system,” Verleger asserted. “Cell phones are dispensable—cars are not. Cell phones last a year or two—cars last 15 years. The logistics are different and the infrastructure requires welders, not people who bury cable lines.” In the end, Verleger advised SIGMA marketers to get ready for alternative fuels. Cutting to the chase, ELC
Chairman Rod Smith asked: “Should I invest in the ethanol infrastructure as a marketer today?”
“Yes. Politics is making you go there,” Verleger responded. “Build it and they will come.”
David Holt highlighted the federal legislative agenda for 2007, from CAFE standards to the Farm Bill looking more like an Energy Bill, and threw out some issues that should be considered in Washington, D.C.
“We’re experiencing the March of the Lemmings,” Holt said. “There are no new ideas coming out of D.C. They’re holding a parade of hearings on global warming, geopolitics of oil, vehicle efficiency, and the like, but the truth is there is a total of 40+ bills coming through Congress concerning energy, and all of them are targeting the 2008 presidential race, where all roads lead through Iowa.”
According to Holt, CAFE standards make up a part of the debate, but climate change is the newsmaker and there’s too much focus on alternative fuels as the golden answer. He recommends the following issues to consider during the energy debate: subsidies, mandates, infrastructures, environmental impact, costs, price volatility, energy security, military use (with diesel in particular).
He claimed that other issues, including: refinery capacity, domestic energy policy, overlaps in laws and regulations, consistency, Gulf of Mexico concentration, highway and pipeline infrastructure, need more attention. “Basically, the debate can be boiled down to environmental protection v. renewable fuels,” Holt concluded. “The problem here is the 13-year-lapse between energy bills.” Tuesday’s education featured two of the best rating ELC sessions: (1) SIGMA’s CEO Roundtable; and (2) Nancy Yamaguchi on alternative fuels.
Marketers filled the room to hear from their peers during the SIGMA CEO Marketer Roundtable, where five of SIGMA’s best shared their business strategy for 2007—they discussed new ideas, things they’ll be doing differently, and thoughts on upcoming challenges. The SIGMA CEO Outlook 2007 Panelists included: Mike Newman, NOCO Energy Corp.; Jeff Kramer, Prima Marketing, LLC; Ed Burke, Dennis K. Burke, Inc., and Frank Greinke, SC Fuels.
Mike Newman started the roundtable discussion by explaining how his company, NOCO Energy Corp., handles their Financial Modeling. Newman said NOCO determines potential ROI via detailed budgets, using scenarios by establishing hurdle rates. It never hurts to be conservative, and NOCO operates using conservative numbers more often than not.
“It’s important to conduct an after-project review to learn how to do it better the next time around,” Newman noted. “We also use the Monte Carlo simulation, which provides a percentage of the likelihood of making money or losing money at any given location.”
Jeff Kramer explained his experience with installing a ommunication network in remote locations like West Virginia and western Pennsylvania, where he markets fuel. “It’s hard to install communication networks due to geography,” Kramer said. “I did the WAN myself and I guess I know just enough to be dangerous.”
He started by standardizing his POS equipment for a bandwith of 720. He chose to work with Verizon for 85 percent of his sites, using cable for the other 15 percent. He estimated the cost around $2,500 to install at each store, but that did not include the DVR itself, which is another $2,200. Kramer used Remote Video out of Portland, OR for the DVR installation.
“Maintenance isn’t bad yet,” Kramer stated. “But the system is still new. Over time it does make you more efficient.”
Advantages include: faster credit card processing; reducing card lines; faster approvals; remote video allows him to monitor stores without being on location and correct daily reports remotely, electronic price signs controlled by the office, checking pumps for maintenance remotely; loyalty programs a possibility in the future, but they are expensive; and kiosks for hiring employees.
Ed Burke of Dennis K. Burke, Inc. encouraged SIGMA members to surf the new internet wave of online video producing, like 30-second spots on YouTube, a consumer media company for people to watch and share original videos worldwide through a Web experience.
Ed created his own video on “How to Make Biodiesel,” shown during his presentation, and also available on the Dennis K. Burke, Inc. Web site. “I can shoot a 30-second commercial for $700-800,” Burke said. “You can communicate faster by using a 90-second internet video over email than you can with the best editorial content. Take advantage of YouTube and the like!” Burke advised to his fellow marketers to check into the alternative fuels industry, which he said is booming with capital. Burke warned that it will be two years before supply catches up with demand for the fuel, but the marketers with the product will be in the best shape.
“There’s no partisan line in politics when it comes to alternative fuels,” he said. “Heck, the EPA is my quasi sales force!” Frank Greinke ended the session on a high note by sharing his company’s scorecard, a business tool that tracks SC Fuels’ customers, employees, and shareholders as company constituents. “Coming up with the measurements was difficult,” Grienke said, “but color coding allows for easier tracking of fundamental changes in our company. The hardest part is determining what measurements to track for each constituent.” SC Fuels interviewed middle-managers and above with blind surveys for the scorecard data, which allows Frank to find salesmen which might not be performing well and truck routes that may be inefficient fast an easy. Frank also engages his advisory board into the company’s scorecard, where he can lso check to see how the company is staying on target for its vision and other various strategies.
Nancy Yamaguchi, following a hard act of SIGMA’s best, wooed the audience with her presentation, “Don’t Underestimate the Power of Oil.” She proposed that policy is the main driver for alternative fuels, much like Verleger, but reminded marketers that consumers are price sensitive. “Price will drive their decision,” Yamaguchi stated. “When given a choice, they will choose what hits their pocket books the least.”
She sees the greatest successes for alternative fuels as a way to enter the conventional fuels in the forms of blends, such as B2, E10, etc. Her forecasts show demand for motor fuel in the future as high in growth.
According to Yamaguchi, a volumetric shortage will create the second tier of demand for alternative fuels. She pointed to the MTBE phase out (a policy driven force in the market) and the role ethanol played during this time period as the perfect example.
Data from the National Corn Growers Assoc. shows a need for more farmers to transition from soy beans to corn crops in order to achieve the crop usage needed to create 33 billion gallons of ethanol. She predicted that E85 will remain a small market, just 3.7 bpd in 2015 and that ultimately, economic and political factors will affect the decision of whether to import product, corn/soy, or oil. “We, as a nation, want to rely less on foreign oil,” Yamaguchi said, “but we buy by cost at the pump. Lowering our foreign-oil dependence requires opening off-shore drilling and building more refineries.”
She explained that consumers feel competing desires. The public wants to reduce foreign crude imports but they also oppose expanding domestic production and expanding U.S. refineries. They want a locally produced, small-scale alternative fuel option but they also want it at the same price as conventional gasoline, or lower!
Yamaguchi recommended that SIGMA members plan for more policies; more mandates; and commodity price swings. “Stay involved with SIGMA for policy making influence,” Nancy stated. “ Give customers what they want. ‘Go green’ and differentiate yourself from ‘greedy big oil!’”
Yamaguchi thinks the U.S. is turning a corner on demand for biofuels but several key factors do play a role. Like Phil mentioned, the refining industry is losing expertise in its field to retirement. Jet fuel production in the U.S. will also play into how biofuels get implemented via mandates and other policies.
“Alternative fuels have become an important part of the mix,” Yamaguchi concluded. “But the more successful future likely will involve complementing rather than competing with traditional fuels.” Tuesday’s sessions ended with Gilbarco’s Richard Browne and Veeder-Root’s Kent Reid. Brown asked the audience to envision the station of the future. He described “The Station of 2015,” where customers won’t fill up their tank when they stop for fuel because it will cost too much. His model suggested gasoline will project to $5.00 – 8.00 a gallon, meaning more transactions for your c-stores.
He then reviewed several case studies, including airline self check-in, Starbucks, and the CVS loyalty program. “CVS did an excellent job with getting customers back into their stores within a week or two,” Browne said, “by creating a customer loyalty program with coupons printed at the register based on the products they purchase in a given quarter.”
Browne suggested that such programs will be in future c-stores as well, with ads at the pump via screens touchscreen monitors for ordering food, etc. “The increase in bandwith will increase what you can offer your customer,” Browne said.
He also mentioned that Gilbarco is testing self check-out computers in the market now and hopes to deliver the product by the end of this year, bringing c-stores on the same level as grocery stores and big-box retailers like WalMart. Browne predicted that the UL approval spec could be issued by maybe September 2007, or the end of this year, which he said would be a great pace. Reid added that the Weights and Measures conference will be held in July.
Reid presented product information about how to manage your inventory effectively. He said in the 90s, the industry focused on managing inventory; marketers lost money at every site because of delivery errors, leaks, theft, temperature, Stage II issues. The true potential damage, however, meant spending more money to clean up the site than to it would cost you to just eliminate your losses.
Veeder-Root came up with a solution then, in underground leak detections, and now they committed to providing the products marketers need to deliver E85 to customers, but they come with high maintenance costs because of thealcohol. UL held an industry forum in November to gather input, and as Browne said earlier, Veeder-Root projected an end of the year timeline for UL certified pumps.
On Wednesday, Corey Henriksen recommended that SIGMA members expand, refinance and re-evaluate their financial holdings now, as it’s a very good lending and borrowing environment. Unlike the 90s, investors choose to back petroleum retailing stores because their return surpassed other business ventures. With short-term rates remaining about the same and long-term rates increasing slightly, but still remaining low, Henriksen advised SIGMA members to act today.
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