The Hidden Plumbing of Commodity Finance

Summary

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Odd Lots Podcast — “The Hidden Plumbing of Commodity Finance”

Host: Bloomberg’s Tracy Alloway & Joe Weisenthal
Guest: Lewis Hart (Head of Corporate Advisory and Banking, Brown Brothers Harriman)
Date: June 1, 2026

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Episode Overview

In this episode, Tracy Alloway and Joe Weisenthal dive deep into the largely unseen but vital world of commodity finance—the intricate financial plumbing that keeps global goods flowing. Joined by industry insider Lewis Hart, they unpack the mechanics, risks, and current disruptions in commodity financing, especially in light of recent geopolitical bottlenecks like the closure of the Strait of Hormuz. The conversation balances technical insights with engaging anecdotes, making the veiled world of trade finance accessible.

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Main Themes

• Commodity Finance: Its Scale, Role, and “Invisibility”
• How Banks and Merchants Structure Risk and Capital
• Impacts of Geopolitical Disruptions (Strait of Hormuz, Red Sea) on Working Capital
• The Evolution of the Industry: From Bank Dominance to Institutional Investors
• Challenges of Non-Hedgeable Commodities
• Why Some Commodities Get Futures Markets (and Some Don’t)
• Lessons from Persistent Supply Chain Disruptions (COVID, Russia/Ukraine)
• Anecdotes about Coffee, Cashews, and Onions

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Episode Breakdown & Key Insights

1. What is Commodity Finance? [05:53—07:25]

• Definition and Scale
  • Commodity finance = a $4-5 trillion specialized subset of trade finance, itself embedded in the $20 trillion global goods trade.
  • “It’s like the biggest $20 trillion market that no one talks about.” —Lewis Hart [05:53]
• Why It’s Under the Radar
  • Boring when things go right; only “exciting” in a crisis.
• Who Uses It?
  • Main customers: commodity merchants managing supply chains (not speculators).

2. Mechanics: How Financing Actually Works [07:25—10:09]

• Financing the Motion of Goods
  • Clients buy real goods (e.g., copper, coffee) using secured, revolving credit lines—collateralized by inventories and receivables.
  • Capital needs fluctuate with commodity prices.
  • Lenders “mark to market” collateral continuously: the higher the price, the larger the facility needed.
• Quote:

  “The big variable that is always tricky is what’s the price of that commodity at the time of the loan… This is a floating dollar amount, which is kind of a unique part of it.” —Lewis Hart [09:20]

3. Price Risk & The Role of Futures [11:27—13:25]

• Hedging Volatility
  • Futures help manage price risk—but bring margin call challenges.
• The “Nickel” Lesson
  • Margin calls can destroy liquidity even for “right” positions (reference to nickel market turmoil).
• Quote:

  “Our clients are typically long physical, meaning they own the inventory, and they’re short paper, they’re short futures contracts.” —Lewis Hart [11:52]

4. Collateral, Due Diligence, and Credit Evaluation [14:04—16:36]

• Beyond Price
  • Intense focus on warehouse quality, collateral eligibility, counterparty reputation, and management character.
• The Five Cs of Credit: Character, Collateral, Capital, Conditions, Capacity—with “character” as most important.
  • “Character is really the most important thing in the business when you boil it all down.” —Lewis Hart [15:17]

5. Industry Structure & Evolution [15:32—19:13]

• Historical Trends
  • Market was dominated by European banks; many exited post-Basel IV due to rising capital requirements, administrative complexity, and ESG pressures.
  • Entry of institutional investors; rising diversity of participants.
• Quote:

  “We started 206 years ago in this business… it’s kind of the DNA of our firm.” —Lewis Hart [19:08]

6. Tracking Commodities: Technology & Trust [21:29—23:24]

• Tracking Systems
  • Use of bills of lading, warehouse receipts, and digital marine tracking for real-time collateral monitoring.
• Technology aids, but relationships and trust remain vital.
• Quote:

  “The bill of lading is like… the talisman of trade finance.” —Lewis Hart [21:54]

7. Disruptions: Strait of Hormuz and Supply Chain Shocks [23:24—28:49]

• Current Stress-Test: Strait Closure
  • Impact isn’t just on oil price, but on capital “stuck” in delayed shipments—potentially $100B+ in working capital immobilized.
  • “Our business relies on turning over your balance sheet”—if ships are stuck, capital and liquidity get squeezed.
• Past Shocks: COVID-19, Russia-Ukraine
  • Merchants have increased capital buffers since previous disruptions.
• Quote:

  “Right now, the system is functioning well. Actually the banks are supportive.” —Lewis Hart [28:00]

8. What Happens When Things Go Wrong [29:02—30:51]

• Key Considerations
  • Is the collateral safe? Is the shipping contract robust? Does the merchant have capital to weather delays? Who bears loss?
  • “Frustration of voyage” and demurrage terms come into play.

9. Financing “Non-Hedgeable” Commodities [24:01—24:35, 34:30—36:54]

• Tree Nuts, Cashews, Etc.
  • No readily available futures means reliance on forward contracts and buyer reputation.
• Diversification to Manage Risk
  • Avoid over-concentration on one route or supplier.

10. Why Are Some Commodities Financialized? [39:11—41:32]

• Key Factors for Futures Markets
  • Homogeneity, volatility, storability/perishability (perishables = challenge), and sufficient underlying trade volume.
• Compute Futures?
  • Data center compute power is highly volatile and increasingly seen as a candidate for financialization, much like copper or oil.
• Quote:

  “If you look at the properties of commodities… the more homogeneous the product is, the easier it is to standardize into a financial contract… memory chips and compute are extremely volatile right now.” —Lewis Hart [40:19]

11. On-the-Ground Insights and Early Warning Signals [42:21—44:25]

• Bankers’ information edge:
  • They may see “upstream” price and demand shifts before they show up in government data.
  • Example: Noticing shipping/freight costs spike before the CPI moves.
• Adjusting to New Risk Realities
  • Pandemic and geopolitical shocks force permanent attention to alternative routing and working capital needs.

12. Trade Routes & Workarounds [47:03—48:24]

• Red Sea/Suez Crisis Lessons
  • Rerouting via the Cape of Good Hope increases voyage time and capital needs.
  • If Hormuz remains shut, expect new pipelines and overland solutions.

13. Memorable Quotes & Moments

• “It’s the velocity of the turnover. And right now there is a lot of capital that’s stuck in the strait.” —Lewis Hart [25:39]
• “Our philosophy is we don’t know where the price is going, so we try to be price agnostic. But you can’t help but notice trends, see things early.” —Lewis Hart [42:34]
• “One thing I’d worry about with onions is perishability… putting onions in a warehouse… could be a little dangerous.” —Lewis Hart [45:24]

14. Lighthearted and Engaging Exchanges

• On Coffee Warehouses:

  “I like the smell. I’ve walked through many coffee warehouses… I’m not sure about [Blankfein’s] story.” —Lewis Hart [13:29]

• On Peculiar Trade Associations:

  “One of my colleagues… is on the board of the Peanut Tree Nut Association. And so…” —Lewis Hart [24:01]

• On Onions and Futures:

  “There’s some basis rats.” —Lewis Hart [45:45]
  “Do you know what my favorite onion is? The Texas 1015…” —Joe Weisenthal [45:48]

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Key Timestamps

| Timestamp | Segment/Topic | |------------|------------------------------------------------------------| | 05:53 | Defining commodity finance and its scale | | 07:25 | Consumers of commodity finance—physical merchants | | 09:20 | How secured revolving lines of credit work | | 11:27 | The role of futures and margin calls | | 15:17 | Credit analysis: “Five Cs” and why character matters most | | 19:08 | Why banks have exited or stayed | | 21:54 | Tracking shipments and collateral | | 25:39 | The impact of Strait of Hormuz blockages on capital | | 29:02 | What happens mechanically when shipments are stuck | | 34:30 | Financing non-hedgeable commodities like cashews | | 40:19 | Financializing new commodities: compute as a candidate | | 42:34 | Early signals: How commodity financiers see trends first | | 47:03 | Emergence of new trade routes after chokepoint disruptions |

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Takeaways

• Commodity finance is the quiet backbone of global trade—vast, complex, and only “visible” when things break.
• Flexible secured credit is essential because of volatile, fluctuating commodity prices.
• Risk is managed not only by hedging and collateral, but by deep, trust-based relationships—especially in regions and commodities lacking market infrastructure.
• Every supply chain shock (COVID, Ukraine, Hormuz) increases industry vigilance, capital buffers, and creativity in routing and financing.
• The future could see new forms of commodity finance, as data-center compute, power, or even trucking might become “tradable.”

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Notable Quotes

• “It’s the biggest $20 trillion market that no one talks about.” —Lewis Hart [05:53]
• “Character is really the most important thing in the business when you boil it all down.” —Lewis Hart [15:17]
• “If you look at the properties of commodities… the more homogeneous the product is, the easier it is to standardize into a financial contract.” —Lewis Hart [40:19]

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Further Engagement

Explore more about trade flows, alternative routes, and supply chain updates by following “Odd Lots” on Bloomberg and checking out their upcoming episodes on financial innovation—like the future of compute futures.

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Transcript

[Tracy Alloway]

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Bloomberg Audio Studios Podcasts Radio News.

[Tracy Alloway]

Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Jo Weisenthal.

[Tracy Alloway]

Joe, I think I've told you this before, but way back when I was starting in financial journalism, I really wanted to be a commodities reporter.

[Joe Weisenthal]

I get it. It's a. It seems fun, it seems real. It seems like one of the few areas of finance that's like not just a screen, you know what I'm saying?

[Tracy Alloway]

Where there's one, there's a physicality to it, right?

[Joe Weisenthal]

Yeah, but Also, like, you know, everyone's like, this is a relationship business. But I feel like commodities, you know, everyone in finance has that.

[Tracy Alloway]

Right, do your banker impression again, this

[Joe Weisenthal]

is a relationship, but. Right, but everyone says that in finance this is a relationship business. But actually, commodities seems to be one of those areas where actually there's. That's a real thing and not just a cliche and stuff. So I get it.

[Tracy Alloway]

It seems to be very idiosyncratic, where like, one load of whatever commodity might not be completely fungible with a commodity. Yeah.

[Joe Weisenthal]

Cause we call it commodities, and yet maybe they're not.

[Tracy Alloway]

But, you know, so I had this, like, romantic idea in my head of what a commodities reporter actually does, which is like, I don't know, go on ships and travel alongside, like, human huge things of coal and metal and aluminum and stuff like that, which is probably not realistic. One aspect of commodities that I never really appreciated was how much financialization there actually is in the market, and that there are so many different players in the market. We've sort of touched on it before with the Strait of Hormuz situation where, you know, you have the insurers and then you have the reinsurers and you have, like, insurers for the freight and for the hull and for liability. And it just seems so, so complicated. You have a very similar situation on the financing side.

[Joe Weisenthal]

Sure.

[Tracy Alloway]

And it struck me that we have never actually done a commodity financing episode.

[Joe Weisenthal]

No. And I'm really interested in this because, again, like, one of these things you always hear about capital efficiency. Right. This is very important. And so, okay, here's like, let's say we do not know, I don't know what the cost of moving so and so many kilograms of copper from one place to another is. Whatever that cost is. I probably don't want to tie up all of my capital at that. I probably want to put down a fraction of the thing, borrow the rest, et cetera, then pay off that loan when the ship gets there, et cetera, so that I'm as liquid as possible at any given moment. This is just like, I'm sort of like, this is my first principles. I don't know anything about this space, but I assume that there are a lot of calculations like this within the process of procuring, mining, delivering commodities.

[Tracy Alloway]

Absolutely. So today we are going to learn about commodity finance. We're also going to try to get a handle on what's going on in the commodities world right now, given some of the disruptions that we've seen. And I'm glad to Say, we do in fact have the perfect guest. We're going to be speaking with Lewis Hart. He is of course the head of corporate advisory and banking at Brown Brothers Herriman. So someone who lives and breathes commodity finance.

[Lewis Hart]

Thanks, Tracy. Thanks, Joe. It's great to be here.

[Tracy Alloway]

Would you say you know more about Commodity Finance or 90s hip hop and R and b?

[Lewis Hart]

Oh, that's a tough one. Very close, very close.

[Tracy Alloway]

I'm throwing that out of nowhere. He's a big hip hop guy.

[Lewis Hart]

Tracy knows me well. Tracy knows me well.

[Joe Weisenthal]

We just go back and. We didn't just talk about that.

[Tracy Alloway]

No, we shouldn't. Okay, what's commodity finance like? What exactly are we trying to achieve here?

[Lewis Hart]

It's a good question. And the way I think of it, it's like the biggest $20 trillion market that no one talks about. So you think about global trade. About $20 trillion of global trade in goods goes through trade finance programs. Commodity finance is a specialized subset of trade finance and it's about 4 or 5 trillion dollars.

[Joe Weisenthal]

Okay.

[Lewis Hart]

So as a huge market, it sort of surprises me sometimes that it doesn't get more headlines. But it's not that glamorous. It's kind of boring. And so when things go well, it doesn't really create the drama that headlines are seeking.

[Joe Weisenthal]

Sure. Well, this is the. I mean, to be fair, this is the case with almost anything, which is that you never hear about anything when things are going well and that including any types of finance. And hopefully, you know, ideally you would never hear about any finance because warehouse

[Tracy Alloway]

shipment successfully makes it.

[Joe Weisenthal]

Yeah, right. It wouldn't make for. To be honest, as a journalist, I wouldn't.

[Lewis Hart]

Client pays receivable on time.

[Joe Weisenthal]

Yeah, Client pays receivable on time. When I think about finance generally, I think about like, who is a consumer of financial services and what services are they actually, I guess purchasing or who. When do people find the need for finance? Right. So a homeowner occasionally needs financials or a home buyer suddenly needs. Is a purchaser of the financial services through a mortgage. Right. Etc. What is a canonical or modal example of a consumer of commodity finance?

[Lewis Hart]

Sure. Well, it's really the business of financing motion. And so the classic example would be a commodity merchant.

[Joe Weisenthal]

Okay.

[Lewis Hart]

Commodity merchant kind of evokes a lot of history. Right. You think back to Renaissance Italy and the Meta cheese and all the merchants that kind of pioneered global trade in those days and actually goes back even farther. You can go back to even the BCS and see trade finance happening. But the typical Consumer is a physical merchant. And they may be in the energy space, they may be in the metal space, or they may be in the agricultural space. Their job is not to speculate on prices. Contrary to popular belief. You think commodity trader. Most people think speculation. That's actually not what they do. They are essentially supply chain managers. That's their role. And, and they are the largest consumers of commodity finance.

[Joe Weisenthal]

And what are they purchasing?

[Lewis Hart]

They're purchasing. You said it well at the beginning. Shiploads of copper, cathode, containers of coffee, green coffee, unroasted coffee in burlap bags.

[Joe Weisenthal]

No, but like, so when I get a mortgage, I am purchasing the ability to have to have a minimal monthly payment that's spread out over 30 years.

[Lewis Hart]

Yeah.

[Joe Weisenthal]

So that is what, when I like entering, when I interface with the bank or whatever, a mortgage broker, I am purchasing the ability, ability to not destroy all my liquidity when I buy a house. So what are they not setting aside the commodity that they're purchasing, what are they purchasing from the bank?

[Lewis Hart]

Yeah. So essentially the basic product is a line of credit, a secured line of credit. And that line of credit, kind of like a credit card, can be used to buy eligible commodities. So it's a line of credit that's self liquidating, meaning once you make the loan, you know what the client's buying and you know what the source of repayment is. That's very different than, than other types of lending that take much longer to repay.

[Joe Weisenthal]

Okay.

[Lewis Hart]

So it's very short term, it's self liquidating and it's secured by inventory. And then when the inventory is sold, it's secured by the account receivable that results from the sale of the inventory. The receivable gets paid and then it keeps happening again and again. It revolves up and down. The big variable that is always tricky is what's the price of that commodity at the time of the loan. And these structures are designed to give clients flexibility to buy the copper, whether it's $6 a pound, $4 a pound, $7 a pound. It's hard to predict these capital needs. And that's. Most lenders like fixed amounts. This is a floating dollar amount, which is kind of a unique part of it where the value of the loan changes as the price of the commodity changes.

[Tracy Alloway]

Oh, that's interesting. Wait, okay, so why do they need that flexibility?

[Joe Weisenthal]

Yeah, explain that further.

[Lewis Hart]

Yes. So good question. So think about a client who's buying a pound of coffee, right? Think about your local coffee shop here. That coffee bean traveled 2,000 miles from somewhere, likely in South America, it went through a whole process of milling and exporting. It went on a ship, it ended up at a roaster in the US and finally made its way to a retail shop and in Manhattan. There's a ton of capital involved there. That client likely agreed to buy that coffee several months in advance. The time when they actually fix the contract and pay is when the coffee ships typically. And at that point we don't know if the price is going to be $3 a pound, $2 a pound, $1 a pound. And so the, the capital needs, you kind of configure them out within a band. But sometimes things happen that actually change what you thought. And so we. The unique thing about a commodity lender is they're marking to market that inventory. So if you pledged me a pound of copper, I'll lend you $0.75, $0.80, maybe more of the value of that copper, whether it's $3 a pound, 350 a pound or 250 a pound.

[Joe Weisenthal]

Where does the commodity futures market be? Play into this? Because when we're talking about the unpredictable nature of we don't know, the price of commodities fluctuate. You can lock in prices in many commodities and not all. And I want to get into that non financialized commodities. But to some extent, doesn't the futures market solve part of the problem of the variability of the pricing?

[Lewis Hart]

In one sense it solves the price risk. So one of the key risks in commodity finance is the price risk. So if I'm lending against copper and the price goes down, I better be careful. Right. My capital could be impaired. So you use the futures market, the derivatives market, to hedge that price risk. So we like to say our clients are typically long physical, meaning they own the inventory and they're short paper, they're short futures contracts. That works really well. But when prices go up, that means they have to post margin calls. So if I have a $3 a pound copper shipment and the price goes to 350 while it's on the water coming from Chile to Georgia, that client says I need to borrow more money to keep my hedge open. And until the ship arrives and the client pays for the copper that hedges on and you don't know what that margin call is going to be.

[Joe Weisenthal]

This is what happened with like nickel a few years ago.

[Tracy Alloway]

Yeah.

[Joe Weisenthal]

Where you had entities that were long nickel and still got destroyed by the margin calls that they experienced, even though they were on unlucky on some level, on they were on the right side of the train.

[Tracy Alloway]

This is A slight tangent, but you brought up coffee just then. I think both of us read Lloyd Blankfein's book in preparation for having him on the podcast. And he was talking about how when he was at J. Aaron, they had the huge warehouses of coffee beans and apparently they smelled really bad because they would rotate, I guess, or like there be. Yeah, yeah.

[Joe Weisenthal]

What are you doing? Yeah.

[Tracy Alloway]

Is that true? Do coffee beans actually smell bad in large mouths?

[Lewis Hart]

I mean, I like the smell. I've walked through many coffee warehouses. Yeah, there are a lot of them in New Orleans. There are a lot of them in New Jersey. They're basically burlap bags full of green coffee. Unroasted, it smells pretty good. So I don't. I'm not sure about that story. But the good warehouses store them well. They don't really degrade that quickly. You know, they have a pretty good shelf life and they can last for a pretty long time before they start to. To decay. But you have to keep moisture away. There are things you have to do to secure the quality of them. And the good warehouses are expert at handling those bad.

[Tracy Alloway]

Okay, so this is actually a serious question then. When you're doing due diligence for a loan, what are the factors that you're taking into account? Would you look at something like the quality of the warehouse that commodities are going to be stored in?

[Lewis Hart]

Absolutely. You would look at, you would have location, eligibility requirements. So you'd say, I will lend against coffee that's in this warehouse, this warehouse, or this warehouse, but not coffee that's in this warehouse for whatever reason. So that's a big part of your diligence. That's one risk. The bigger risks are really what we touched on. Price risk, counterparty risk is the second one, international risk, which I'm sure we'll talk about. Where is the good that you're financing? Hopefully it's moving. Sometimes it may not be. Not at the moment. Yeah, exactly. In some cases it may not be. And, and the biggest one I think that Brown Brothers Herman particularly focuses on is the management. The owners of the business. What are their motivations? What's their reputation? What's their character? We have something we call the five Cs of credit. It's kind of an old adage. And those are character, collateral capital conditions. And the most important one, we think is character, the character of the borrower, which really comes out when markets get volatile, how people behave. And these are, you started saying accurately, this is a super relationship focused business. Character is really the most important thing in the business when you boil it all down.

[Joe Weisenthal]

So just to be clear here, when we're talking about, okay, a client comes and whatever, they have a need for some coffee or whatever. The other side. Is this coming off of Brown Brothers Herrmann's balance sheet? Are you a middleman for this or is it your own balance sheet or both?

[Lewis Hart]

Historically, this market was dominated by banks. It was sort of a group of banks, particularly European banks, that dominated, I would say in the last 10 years. Many of those banks have actually stepped away from the market for a variety of reasons. And as a result, there are not that many in the US who really specialize in this. We're one of them. But there are plenty of European banks that really understand this business. And, and what we've seen is you're seeing more and more interest in this asset class from institutional investors. So they like short term floating rate inflation protection uncorrelated to the broader equity markets. There's some really attractive features in this. Yeah, it's historically been a very small group of banks, but it's starting to expand into the institutional investor world.

[Joe Weisenthal]

So are you selling that, reselling that risk?

[Lewis Hart]

In many cases, we're typically holding the majority of it.

[Joe Weisenthal]

Okay.

[Lewis Hart]

But we will syndicate risk out to other investors from time to time as well. And we have some partners that we work with. We have different banks that will essentially buy risk from Brown Brothers. But we're always holding a significant portion of the risk on our balance sheet.

[Tracy Alloway]

Data centers need electricity, AI needs copper, reshoring needs steel. And gold's run may tell you something about how the world is repricing money and debt. All of those point back to real assets. The RAX ETF is an actively managed one stop real asset shop. From gold to commodities to natural resource equities, adjusting as conditions change. Visit vaneck.com raaxpod to learn more. An investor should consider the investment objective, risks, charges and expenses of the fund carefully before investing. To obtain a prospectus and summary prospectus which contain this and other information, visit vaneck.com Please read the prospectus and summary prospectus carefully before investing. RACS is distributed by Vaneck Securities Corporation distributor.

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[Tracy Alloway]

how come the banks have exited the business? Is that just like a 2008 regulatory capital story or something else?

[Lewis Hart]

It's definitely a Basel story to some extent. I think as Basel4 has kind of taken hold, you see more and more capital requirements that make it harder to issue letters of credit and things like that. So that's definitely part of it. I think another big part of it is just the administrative intensity of running this business. If you think about tracking all this collateral as it's moving around the world, you need people now. Over time digitization is going to take hold here, but you still need know how you need people and it's not easy to kind of run this business every day if you don't have the right people. We're fortunate to have a very experienced team that knows how to do this. We started 206 years ago in this business, so we've literally been doing it for over two centuries. And that's a big part, I think, of why we've stayed committed. It's kind of the DNA of our firm. I think over time you're seeing some banks coming back into it, but you also saw in the energy space in particular, first of all, big problems. In 2015 during the correction, banks lost some money and then you had ESG pressures, particularly around European banks that caused Some to say, you know, I don't really want to be in the business of financing this commodity or that commodity. I'm going to shift my resources more to the renewable sector, for example. So those are, you know, all the factors that I think have contributed to it. But there is a group of banks globally that has stayed committed to this business, business through kind of thick and thin and knows how to do it, has produced good returns, very low losses over time.

[Tracy Alloway]

You know, you mentioned tracking commodities and shipments. How do you do that exactly? And is it different to what I can do?

[Joe Weisenthal]

Maps Go?

[Tracy Alloway]

Yeah, Maps Go is pretty cool. I was looking up something the other day. It was a cargo of fertilizer leaving Saudi Arabia. It was pretty easy to see, like where the ship had left from and where it was going and whether it was on time. So what exactly are you doing?

[Lewis Hart]

So the bill of lading is like, I call it the talisman of trade finance. It's this really cool document. It's a title document when it's negotiable. So there are four words to the order of that. When those four words are printed on a bill of lading, that means that whoever to the order of the word after that, they essentially control those goods. Those bills of lading have numbers and you can type those numbers into. For example, Bloomberg Terminal has the Marine Tracker app. We look at that. So we're using public source data to really track that collateral when it's necessary. You typically don't need to do that unless it's something's going wrong, because ships tend to go where you think they're going to go. But that is a tool with technology that makes it much easier to actually track your collateral while it's on the water. Once it goes into a warehouse, you typically get a warehouse receipt, which also can be a title document. Very important if it has those four important words. And in that case, you're often talking to the warehouse directly. So you may say, the client may say, I'd like to release these five bags of coffee or one cappuccino to sell to this roaster. Is that okay? And our team is actually saying, yes, please release those. But that's on trust, what we call a trust receipt. And then they have to give us an account receivable to replace that within a certain number of days.

[Joe Weisenthal]

Interesting. Okay, so obviously in the backdrop of this conversation is the closure of the Strait of Hormuz. And we'll get to that in a second. But it does raise a question I sort of hinted at in the beginning we all know that oil flows through the Strait of Hormuz and there's a futures market for it that allows some ability to reduce volatility or take out concerns. Pistachios also flow through the Strait of Hormuz. There's no, as far as I can tell, there's no pistachio futures. I just looked it up on the terminal and I'm curious, first of all, a, do you do commodity finance for commodities that don't have hedging instruments?

[Lewis Hart]

So one of my colleagues, this may shock you, is on the board of the Peanut Tree Nut Association. And so is it actually called the Peanut Tree Nut Tree Nut Association. It's a big trade organization and we happen to finance.

[Joe Weisenthal]

Peanuts aren't tree nuts, hence the name has to be segregated.

[Lewis Hart]

You need peanuts and tree nuts in the title. It's very, very important, very specific. So we, we actually are active in lots of non hedgeable commodities. Like cashews is a good example. Pine nuts, pistachios, less so. But, but all kinds of non hedgeable commodities. That would probably surprise you.

[Joe Weisenthal]

How does that change the calculus of commodity finance when that instrument doesn't exist?

[Lewis Hart]

Yeah. So thinking about what's happening in the street, first of all, we're not the largest player in the Middle East. I think more of the European banks, but certainly we're watching it closely. And I think what the media is really focused on is kind of the oil side of the story. So you keep hearing 20% of global oil is trapped. The largest disruption in the history of the oil market. Those are all true. You see lots of activity in the price, although it's mostly in the front month, the front of the curve, not in the back of the curve. What I think we're interested in actually in the lens of a commodity banker versus the lens of an oil research analyst is how much capital is actually trapped. Because our business relies on turning over your balance sheet. The commodity merchant and the commodity banker. The fundamental principle is that self liquidating nature. So you buy it, you sell it, you collect, and then you do it again.

[Tracy Alloway]

It's velocity of money.

[Lewis Hart]

It's the velocity of the turnover. And right now there is a lot of capital that's stuck in the strait. And I see lots of different reports. Is it something like 1500 commercial vessels, some number like that? I think that's what the Pentagon said recently. That's a lot of working capital. So doing some rough math, that's tens of billions of dollars, maybe it's more than 100 billion, but it's A massive number. And when all that gets trapped and you have potentially margin calls related to hedges on those inventories, that can really strain your liquidity if you don't have the right financing structure behind you. And that's why in these situations, you need a bank that understands your business. So if you were going to load an affirmative, which is like, typically 700,000 barrels of oil, that's the capacity of an affirmative vessel. Before February 28, the cost of that might be 40 million, $45 million. Today, it's more like 70, $75 million. And so overnight, the cost of your single shipment went up a significant amount. And how do you finance that? Back to the earlier point, you need a bank that can be flexible enough to write a line of credit that allows you to do financing under a certain. Yeah, guideline.

[Tracy Alloway]

So how are the banks actually handling this at the moment? Because on the one hand, like, okay, the cost of actually shipping stuff has gone up. On the other hand, the value of the underlying collateral, you know, assuming it's oil or maybe steel or something like that, has also gone up. But on the other hand, as you point out, balance sheets are probably a little more restricted if you have these huge sums that are already tied up because the ships aren't actually moving.

[Lewis Hart]

Yeah. So I think going back to Covid and then Russia, Ukraine first, you had this huge supply chain disruption. We all remember images of container ships off the coast of Long Beach. Two years later, we had the Russian invasion of Ukraine and this huge disruption in natural gas flows from Russia to Europe. People didn't forget about those things. So companies went out and raised more capital so that they were ready for the next exogenous event. So I think.

[Joe Weisenthal]

Sorry, when you say companies.

[Lewis Hart]

Commodity merchants. Okay, Commodity merchants in this case. Yep. Commodity merchants specifically went out as a result of the volatility in those two events, raised more capital. So they're coming into this crisis well funded. And so so far, things are working okay. Actually, there's not evidence that things are breaking. If this lasts for months and months and months, who knows where it goes? But right now, the system is functioning well. Actually, the banks are supportive. The commodity merchants are dealing with the liquidity needs. They have enough liquidity. We haven't heard of any major issues yet, but it's a matter of time. And if the strait doesn't open sooner than later, then I think you could see big strains because there's so much trapped capital there.

[Tracy Alloway]

What actually happens mechanically, if I've financed a particular shipment and is now hypothetically stuck in the Strait of Hormuz, like what conditions start to kick in.

[Lewis Hart]

Yeah. So I think putting. If you're channeling your inner commodity banker, the first thing you're looking at is, is my collateral. Okay. Right. So if it's a shipment of oil, is, you know, the crew. Okay. Is the ship in the right place? Is it going to be at risk of, you know, being in a war zone and having impairment? Once you sort of get over that, you're looking at the insurance, making sure the insurance coverage is there. You're looking at what does the charter contract say between the merchant and the ship operator. And that's going to govern sort of who pays for this detention. Voyage frustration. They're different terms, but all those are

[Tracy Alloway]

going to be is voyage frustration an actual term?

[Lewis Hart]

Yes. Frustration of voyage.

[Joe Weisenthal]

Yes.

[Lewis Hart]

And so this is, you know, demurrage is a common term. That's when the merchant is slow to load a vessel or slow to discharge a vessel. This is something a little different because this is essentially a war zone. The ships can't leave. And so it has happened historically, but it hasn't happened in a long time. And I know everyone is sort of looking at the contract, figuring out what the losses and costs are and then figuring out who's responsible for what. It's not a single answer. It's case by case. But first you're looking at the collateral, then you're looking at, does my client have enough capital to withstand this? How many months, days, hopefully years could they withstand if this actually never opened?

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[Joe Weisenthal]

know, what would be the equivalent of workouts with clients? I mean, you know, here is a clearly something that's not their fault. It's an exogenous shock and so forth. You probably would like to have that client be with you five years from now when hopefully, hopefully the Straits open in five years and so forth. And so do you have like, okay, like here's money, some owe us, but this would be really stupid to put the screws to you now to collect that. Maybe they have the capital, could make the payment, but it would be very unwise in the long term to put the screws to the client to get that payment back, given that life is long and so forth.

[Lewis Hart]

Yeah, we operate under the principle that you don't put all your eggs in one basket. So supplier diversification is a really important part of commodity risk underwriting. And that means if a client has 100% of their supply coming from one region, you might get a little anxious about that credit and say maybe not for us. So typically there's enough diversification that a single ship or series of ships that are stuck in one place doesn't cause the company to kind of seize up. You know, there may be some of that out there, but we're not seeing that with our clients.

[Joe Weisenthal]

I'm sorry, I want to just go back to something because I didn't understand. So you mentioned your colleague who's on the Peanut Tree Nut Association.

[Lewis Hart]

Yes, yes.

[Joe Weisenthal]

From the perspective of Brown Brothers Herriman, how does commodity banking or finance work differently for some of these more niche commodities which where the client does not have the ability to go short to contrast the physical.

[Lewis Hart]

Yeah, so you're, you're always in non hedgeable commodities. You're also measuring price risk.

[Joe Weisenthal]

Yeah.

[Lewis Hart]

Typically in something like cashews as an example. Yeah, they typically, they cashew supply chain. Super interesting by the way. It starts typically in West Africa. It comes in something called raw seed. It then gets shipped to Southeast Asia, Vietnam, India, and they extract this kernel and the kernel is what you eat. And there's actually toxic liquid in between the shell and the kernel. Long story, but it's sort of a fun supply chain. And then it gets exported in edible form, typically from places like Vietnam. And so it's a very long supply chain. And typically what you're relying on there, because the price does move a lot is a forward contract. And that forward contract may not be financially settled as it is in the futures market. It may be. I've sold this all to XYZ buyer at ABC price.

[Joe Weisenthal]

Some maker of like sweets or something like that.

[Tracy Alloway]

Yeah.

[Lewis Hart]

Think about if you like cashews, if you go to your local grocery store, it's probably whoever sits in between your local grocery store and our client that is packaging and salting and all those things.

[Tracy Alloway]

So I was looking up the toxic liquid that comes from cashews and it's urushoil. I'm not sure I'm pronouncing that right, but the stuff that comes from poison ivy, which I am currently suffering from. So this is. Yeah, this is interesting to me.

[Joe Weisenthal]

Very interesting to know. But it's interesting too. Like I remember when we were in Alaska talking about, we were talking about some of the fishing that happens out there. How much fish goes to Asia?

[Tracy Alloway]

Oh yeah. For processing. Yeah.

[Joe Weisenthal]

And it's really interesting to think from just like these pure commodity standpoints how I imagine a lot of the value added the supply chain is not actually accruing to the original origin of the commodity, but rather the entity that can do processing most efficiently through some combination of technology, environmental standards, labor costs and so forth. I imagine a lot of the value add in a cashew comes there.

[Lewis Hart]

Yeah, yeah, it's, it's, I'd say a lot of the value is happening kind of in the midstream at that point. In between, in between the upstream, which would be the farm for example, in West Africa and the client at the end.

[Joe Weisenthal]

Yeah, the retailer.

[Lewis Hart]

So that's definitely true. Interesting fact about the peanut Tree nut market is that it's also full. I want to keep saying that it's full of family businesses. And the other thing we do a lot of is work with family businesses. So you sort of look at this intersection of commodity trade, finance, family business, and in the middle of those two overlapping circles is the peanut tree nut industry.

[Joe Weisenthal]

Got it.

[Tracy Alloway]

Just going back to collateral. You know one of the tropes or jokes that often gets brought up in commodities markets, it's like I put on a physical oil trade and like, oh no, now I'm going to have to actually settle and take delivery of like 50 barrels of oil in my studio apartment or something like that. If you're in commodity finance, is taking delivery of actual collateral, like is it a disaster for you the way it is for other investors, or is it kind of. That's what it's there for. These are all collateralized loans.

[Lewis Hart]

Usually you wouldn't take delivery if you didn't intend to. So usually it means something went wrong. There are certain products where you actually buy the commodity physically with a contract to sell it back in the future. It's a form of inventory financing called a repurchase agreement. But typically your goal is to manage the credit. So it's a good company that doesn't default on the loan and therefore you avoid having to get out of the loan the second way, which is liquidating the collateral. So you try to avoid that at all costs if you had to. The good news is you can typically sell it in the location where it exists. So if it's in a tank in Houston and it's X barrels of oil, you kind of say to someone else, hey, can I sell you this? It's sitting here and they'll quote you a price. So it's not as dramatic as actually arriving at our doorstep. And we try to avoid having to do that. That's part of our job. Something has gone wrong if we're doing that. But it has happened before over our 206 year history.

[Joe Weisenthal]

Once again, going back to unhedgable commodities, and I asked this for a different reason is one of the things, and it's sort of commodity ish, one of the things that's very hot right now, or a lot of people are hoping that compute futures are going to be a thing and that people will trade capacity of an H100 Nvidia chip in the way. And there are some nascent efforts and I don't know if this is going to take off, but I'm curious if there are any intuitions that we can build based on existing markets of what types of commodities lend themselves to financialization in that way. So we don't have. We have oil futures and we have cotton futures. We don't have pistachio futures. Is there anything that we can look at and say, yes, this type of market lends itself to financialization on an exchange, whereas this one doesn't. So as in our minds, we can help try to predict whether this will logically apply to something like compute futures.

[Lewis Hart]

Yeah. So if you look at the origin of the futures market, it was really designed to help fund farmers manage their price risk. So think of a grain farmer in Iowa.

[Joe Weisenthal]

Yeah.

[Lewis Hart]

Planting.

[Joe Weisenthal]

This is what they teach you in the textbook.

[Lewis Hart]

The Farmer, the Farmer and the hedge and all that.

[Joe Weisenthal]

Bring it tomorrow.

[Tracy Alloway]

Not the onion farmer.

[Lewis Hart]

But if you look at the properties of the commodities, I think it's a few things. One is how homogeneous is the product. So the more heterogeneous the product is, the harder it is to standardize into a financial contract. Two is volatility. If there's no futures market and it's moving all over the place, there's going to be a lot of demand from a producer, from end user for a futures market. So actually memory chips and compute are extremely volatile right now. We've been thinking a lot about whether that's a good candidate for a futures contract.

[Tracy Alloway]

Interesting.

[Lewis Hart]

And if you're, if you are a fab that's producing chips right now, you love the price you're getting. Right. I mean, maybe you've sold some of it forward below the market, but as you're kind of rolling your contracts, it's very profitable. Right. And could you lock that in on the other side? If you're an electronics consumer of chips, you'd love to be able to hedge that price and hedge your consumption. So I actually think it's a great candidate for the futures market. Whether it takes off, I'm not sure, but I know some of the exchanges are spending a lot of time on this right now.

[Tracy Alloway]

I don't know when this particular episode is coming out. We're recording on May 27th, but. But very soon at our live show, May 28th.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

We will have an episode dedicated to, you know, hearing from one company that is trying to create a compute exchange and futures market, basically. So that'll be interesting.

[Joe Weisenthal]

Yeah, Very interested in this question.

[Lewis Hart]

I think part of the big story with compute, by the way, that's underfollowed, is copper. So I think everyone talks about power, you know, and power is really Important and there needs to be lots of power capacity in order to build the AI revolution. Copper is as important. And you see copper prices at record highs largely because of how much copper data centers are consuming, because of all the electrical capacity that needs to be in that infrastructure.

[Tracy Alloway]

So do commodity financiers, do they have good insight into like trends in commodity prices just by virtue of being able to see like actual supply and demand on the ground?

[Lewis Hart]

In general, our philosophy is we don't know where the price is going, so we try to be price agnostic. But you can't help but notice trends, see things early. And one example would be in 2020 when Covid hit, you just saw freight prices skyrocketing. I think well before the market you saw things like steel going up quickly and those prices being passed down the supply chain. So you definitely can see things that kind of feed into like the ppi, ultimately the cpi. When you live upstream the way we do in kind of these metal energy AG supply chains, you often see things first and before they actually get transmitted into the economic data. Now it's just one side of it, so it may not be conclusive, but it certainly provides us with lots of interesting information.

[Joe Weisenthal]

There's not a trucking future, trucking capacity futures market. But it occurs to me like, okay, here is a situation in which you have this sort of idiosyncratic moment and then it probably wouldn't have made sense. I don't know. Actually trucking in your mind could that eventually be a candidate for. Because you have these explosions of price. And so in the explosion of price moment probably everyone's like, oh, I wish I could hedge this. Right. But then you don't really know is this a permanent fixture or is this just a post Covid thing where there was a one time price readjustment? Because if it's a one time price readjustment, you don't really need a futures market. And we don't really know from memory is this a one time price readjustment or is this a new permanent fixture of the memory landscape? But answering that question would be an important part of whether it's worth it to build out a futures market. But I'm just curious, in the post Covid environment, were there people kicking around the idea of freight futures or something like that? And there are awakes to this volatility.

[Lewis Hart]

There's not super liquid, but there are tanker contracts.

[Joe Weisenthal]

Yeah, I just noticed this. Cape says, but it looks like there's almost no liquid.

[Lewis Hart]

Yeah, there's not the bid ask is Pretty wide. But people do try to make markets so dry, bulk freight, you can go long or short. Trucking, I think, is a good candidate for it, I think because trucking in a lot of ways follows the diesel market because the biggest kind of variable cost of trucking is. So there's already an incentive to hedge that little bit. It's not perfect, but it's pretty highly correlated.

[Joe Weisenthal]

Tracy hinted at this. Were onion futures to be legalized, would onions themselves. So you've mentioned.

[Tracy Alloway]

Now we're just doing hypothetical.

[Joe Weisenthal]

You mentioned there are two conditions that high price volatility and homage. Homogeneity of the underlying commodity. Yes. Would onions meet the. Can't meet the conditions such that were they to be legalized, they would be a good candidate for financialization?

[Lewis Hart]

Well, one thing I'd worry about with onions is perishability.

[Joe Weisenthal]

Yeah.

[Lewis Hart]

You know, so I think putting onions in a warehouse, if you had a physical settlement process, could be a little dangerous, you know, because you can only store them for so long.

[Joe Weisenthal]

Yeah.

[Lewis Hart]

But onions, they are pretty homogenous, as far as I know. I mean, maybe I'm missing like a specific.

[Joe Weisenthal]

Well, purple onion.

[Lewis Hart]

Specific type of onion. Yeah. So there's some basis. Rats.

[Tracy Alloway]

Yeah.

[Joe Weisenthal]

You know, my favorite onion is the Texas 1015. Do you know what that is?

[Tracy Alloway]

No, I've never heard of that. What is that?

[Joe Weisenthal]

Yeah, it's a type of yellow onion that I think was created at Texas A and M University. It's really sweet and tasty.

[Tracy Alloway]

I have to try that.

[Joe Weisenthal]

No, no. I mean, it's like any other Texas

[Tracy Alloway]

A and M propaganda.

[Joe Weisenthal]

Believe me, I would be the last person to advocate for Texas A and M propaganda. No, look up Texas 1015. It's a really nice onion, man.

[Tracy Alloway]

I've got big onion growing plants.

[Joe Weisenthal]

Oh, my God. It's the official state vegetable of the state of Texas, according to Google's AI overview. You. So I have no idea if that's true.

[Lewis Hart]

No way. I'm gonna have to.

[Joe Weisenthal]

Yeah, it's worth. Yeah, no, they're good. They're good.

[Tracy Alloway]

All right. Well, we're learning all sorts of things in this conversation. I just want to go back to the idea of seeing some trends before they kind of burst into the public consciousness. So one of the reasons I was tracking a ship last week was because it was going with its payload of fertilizer. It was going from Saudi Arabia's Yambu port to Ping to Bangladesh. So basically, they had trucked a bunch of fertilizer from the, like, Gulf of side of Saudi Arabia over to the African side of Saudi Arabia. And we're going round. Are you seeing any new, like, trade routes being established as a result of what's going on in the Strait of Orbit?

[Lewis Hart]

Totally. Great question. I think we saw that starting actually with the Houthi issue in the Red Sea. And if you think about voyages, for example, from Shanghai to northern Europe, take that route, which is a pretty big route. They used to go through the Suez Canal. Suez Canal kind of closes because ships are not comfortable taking that risk. Suddenly they're now routing around the Cape of Good Hope. And back to my point, on kind of this age of bottlenecks and disruption, that's adding 10, 15, maybe more in terms of shipping days, which adds to the working capital requirement, adds to the cost, the day rate on the ship, the insurance. So absolutely seeing a lot of that. And I would guess if the Strait of Hormuz conflict continues for a lot longer, there is going to be a lot of creativity in terms of how to discharge cargoes from those ships, get them to safer ground, and then export them in some other way. I would imagine if I were Saudi Arabia, I'd be thinking about building pipelines going the other direction. I'm sure that's happening all over the Middle east to try to avoid the Strait. Even if it does subside, I think people are still going to want to find alternatives because we've realized how reliant we are on this one choke point.

[Tracy Alloway]

All right, Lewis Hart, thank you so much for coming on. All thoughts.

[Lewis Hart]

That was so much fun. It's great to be here.

[Joe Weisenthal]

That was really, really interesting. Enough.

[Lewis Hart]

Learned about the onion question was good. Yeah, that was good,

[Tracy Alloway]

Jo. I always enjoy those commodity discussions. I feel like I learn a lot of things. Like that Urshahl is also found in cashews. I had no idea. And it sucks when it gets on your skin because you've been gardening.

[Joe Weisenthal]

I also learned that there's a peanut tree nut association. I learned about that.

[Tracy Alloway]

Why didn't they call it, like, groundnut tree nut association? Are there just, like, not enough popular groundnuts?

[Joe Weisenthal]

Is peanut a groundnut?

[Tracy Alloway]

That's what I thought.

[Joe Weisenthal]

I have no idea.

[Tracy Alloway]

Doesn't it grow on, like.

[Joe Weisenthal]

I have. I have. I have no idea. No, I did think. I love that conversation, I guess, you know.

[Tracy Alloway]

Yes.

[Joe Weisenthal]

Commodity, as you said, there's a sort of romantic, exciting element of commodities that's very real. I mean, it's. And it still exists. The fact that you're having to, like, reroute trade flows in real time.

[Tracy Alloway]

Yeah. The fact you're seeing new trade routes established.

[Joe Weisenthal]

You know what I want to do an episode on is Asian food processing, because it's really interesting to think about. Commodities are grown all over the world, or agricultural commodities in particular are grown all around the world. But essentially, well, more and more of our food come from East Asia, even though we don't think of East Asia as being a big agricultural powerhouse, per se.

[Tracy Alloway]

Fish Stat blew my mind when we heard it last year also. Okay, so I just googled this. I feel like we've been doing a lot of, like, searches during this conversation.

[Joe Weisenthal]

That's actually a sign of a good

[Tracy Alloway]

episode, but apparently peanut is just another word for groundnut. I always thought peanut was a type of groundnut, but it turns out they're just like, interchangeable terms. Yeah. So in Asia and India, they'll talk about groundnut oil, which is just peanut oil.

[Joe Weisenthal]

Interesting.

[Tracy Alloway]

We're learning a lot.

[Joe Weisenthal]

There you go.

[Tracy Alloway]

The one other thing I wanted to say is, you know, it's becoming a cliche at this point, but Lewis was talking about the idea of all this capital tied up in the Strait of Hormuz. Right. And like, it's okay now, but in a few months. But the longer it goes on, like, the more problematic it becomes. And this seems to be like the overriding theme of this entire shock. Right?

[Joe Weisenthal]

You know, it's interesting. Yes, absolutely. Because we are recording this May 27th. So tomorrow will have been the three month start of the war. I don't know when this episode is coming out, but it's also interesting to think that, you know, a couple months ago, when we were doing commodity episodes, we would say, like, the exact time of the episode. Like, oh, we're recording this at 10:30, but now it just feels like this is just this interminable thing that's part of the background. We're actually so deep into it that it just like, yeah, it's probably going to be closed a year from now too. And it just feels like it has this feeling of permanence that now it suddenly becomes. Yeah, I suppose things could change by the time this episode comes out, but it almost feels like it probably won't.

[Tracy Alloway]

We've definitely stopped doing the minute by minute timestamp. Okay, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracee Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Kerman Rodriguez at Kermanrman Dashiell Bennett at dashbot, Kalebrooks at Kael Brooks and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content go to bloomberg.com oddlots we have a daily newsletter and all of our episodes and you can chat about all these topics 24. 7 in our Discord Discord GG oddlots

[Tracy Alloway]

and if you enjoy Odd Lots, if you like it when we talk about the non existent onion futures market then please please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

[Joe Weisenthal]

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