Why do dairy traders lose money on deals they thought were profitable?

Most deals that disappoint were not bad deals. The margin was calculated on the purchase and sales price, while costs such as freight, storage, currency and quality differences arrived later and were never set against the deal. By the time the result is known, often weeks or months after delivery, it is too late to act.

An example

With illustrative figures: you buy 100 t of SMP at €2,400 per tonne and sell it at €2,550. Expected margin: €15,000. After delivery, this is what is left:

None of these costs is unusual. Together they take almost half the margin.

Where the margin goes

• Freight and logistics. Rates change between the contract and the delivery, and extra handling or waiting time is charged afterwards.
• Storage. Goods that stay in the warehouse longer than planned cost money every week.
• Currency. A purchase in USD and a sale in EUR without a hedge leaves the margin open to the exchange rate. See How do you manage currency risk when you buy in USD and sell in EUR?
• Quality and weight. Differences in specification or weight lead to discounts or claims.
• Payment terms. A long payment term for the customer and a short one with the supplier costs financing.
• Commission. Brokers’ and agents’ fees that are not included in the calculation.

Why it is noticed late

The purchase invoice for freight arrives weeks after delivery. The storage invoice comes per month. The currency result shows up when the payment is made. If these costs end up in accounting without a link to the deal, nobody sees the result per deal, only the total at the end of the quarter.

How to prevent it

• Calculate every deal in advance with all cost types, not only purchase and sales price.
• Link actual costs to the contract or lot as soon as the invoice arrives.
• Compare the expected and realised result per deal, and look at the differences every month.
• Hedge currency risk on contracts in USD.
• Value open positions at market prices, so you see a falling market before the deal is invoiced. See What is mark-to-market and why does every dairy trader need it?

Deal results and Moo Software

In Moo, every deal starts with a precalculation that includes costs such as freight, storage, commission and financing. Actual costs from purchase invoices are allocated to the contract, order or lot they belong to. Comparing the precalculation with the realised result shows per deal where the margin went. Currency hedges can be linked directly to purchase and sales contracts.

See it with your own data

Want to see the result per deal for your own contracts? Demo buchen or Kontaktieren Sie uns.