What does back-to-back trading mean and how do you manage it?

In back-to-back trading you buy and sell the same product, in the same quantity and for the same delivery period, at roughly the same moment. You do not hold the product in stock: often it goes straight from the supplier to your customer. Your margin is the difference between the purchase and the sales price, minus costs. Back-to-back is common in dairy ingredient trading, especially for traders without their own storage.

How does it work?

An example: you buy 48 t of sweet whey powder from a producer in the Netherlands and sell the same 48 t to a food manufacturer in Germany, delivery in March, in two loads. The trucks load at the producer and drive directly to your customer. You have a purchase contract and a sales contract that belong together. Your position for this product and period stays at zero.

Why traders use it

• Limited price risk. Purchase and sales prices are fixed at the same time, so a market move afterwards does not affect your margin.
• No storage or stock financing. The product does not pass through your warehouse.
• Speed. You can act on a customer request without first building stock.

Where the risks are

Back-to-back limits price risk, but it does not remove all risk. Most problems come from differences between the two contracts:

• Terms that do not match. Different Incoterms, quality specifications or tolerances on purchase and sale. If the supplier may deliver ±5% and your customer accepts ±2%, the difference is yours.
• Payment terms. You pay the supplier in 14 days and your customer pays in 60. You finance the gap and carry the credit risk on your customer.
• One side changes or fails. The supplier cannot deliver on time, or the customer postpones or cancels. The other contract still stands, and you suddenly have an open position.
• Deviating weights. The supplier loads 24.3 t; the customer contract says 24 t.
• Currency. If you buy in USD and sell in EUR, you carry currency risk. See How do you manage currency risk when you buy in USD and sell in EUR?

How to manage it

• Link both contracts. Record which purchase belongs to which sale, so a change on one side is visible on the other.
• Compare terms side by side before you sign: quality, quantity tolerance, delivery period, Incoterm, payment terms and currency.
• Make a precalculation that includes transport and other costs, not just the price difference.
• Check your position. A back-to-back deal should net to zero. If it does not, one of the two sides has changed. See How do you track your position in dairy ingredient trading?

Back-to-back trading in Moo Software

Order management in Moo Software supports back-to-back orders and direct deliveries alongside call-off orders. Purchase and sales sides are linked, so positions, planning and stock update together when an order is entered or changed. Credit limits help control exposure on customers, currency hedges can be linked to the contracts involved, and contract authorisation based on the four-eyes principle adds a check before a deal is final.

See it with your own deals

Want to see how Moo keeps purchase and sales aligned? Book a demo or contact us.