Answering questions you wouldn’t know to ask

Ag Energy gains deeper insights into commodity risk management with SAS^® BookRunner^®

During the financial crisis of 2008, the natural gas market experienced its own chaotic fall. The price of natural gas peaked at almost $14 per MMBtu before plummeting to just above $3 only nine months later. Those involved in the industry at that time still remember the lessons of that extreme volatility.

“It was absolute chaos. It wasn’t a rational time in the market,” recalls Bob Webb, Director of Portfolio and Risk Management for Ag Energy Co-operative. “You experience hard and fast the importance of risk management and the necessity of having an accurate handle on your positions.”

The dramatic rise and fall of natural gas prices confirmed Ag Energy’s decision to implement a software solution for managing its commodity portfolio. The Canadian natural gas and electricity co-op buys natural gas at wholesale prices and supplies it to 375 agribusinesses across Ontario. Its members range from small farms and greenhouses to large agricultural producers and agri-tech firms such as ethanol plants.

“I’ve used SAS BookRunner for more than 20 years,” says Webb, who turned to SAS while at a different energy company after a frustrating year trying to make a well-known energy trade risk management (ETRM) product generate the necessary results. “At that former company, I had said let’s go back to the drawing board and find software that will actually work. SAS BookRunner gave us what we wanted, so I felt comfortable recommending it to Ag Energy years later.”

Adding value through analytics

Using SAS BookRunner, Webb enabled Ag Energy to accurately reflect its commodity portfolio and trading positions, and expand to a deeper level of analytics. “SAS BookRunner has been very helpful in terms of drill-down analytics,” Webb says. “We now answer questions daily that we couldn’t have answered a few years ago. Not only that, we wouldn’t have even known to ask the questions at all.”

The ability to answer bigger questions has brought significant value to the co-op. In addition to offering energy to members at near-wholesale prices, Ag Energy shares the success of its profitable commodity portfolio. “When we have a good year, we return the profit as patronage shares and dividends back to our members,” Webb says. “We’ve been able to return both for several years.”

Ag Energy has multiple divisions that must be organized in SAS BookRunner while maintaining the discipline of segregating duties between groups in the front, middle and back offices. To balance its natural gas portfolio, each division enters its own transactions into SAS BookRunner. A risk analyst then blends them together to expose where the sales or supply portfolio is out of balance – enabling the company to address those areas.

“I still remember popping champagne the day we were able to balance to the gigajoule using SAS BookRunner,” Webb says. “I’m proud to say we’ve been balanced ever since.”

The SAS platform also enables Ag Energy to move data easily between SAS BookRunner, its customer information system and its accounting software. This shared data is used to generate enterprise-level reports for the executive team as well as specialty reports for sales, portfolio, risk and finance, as well as the co-op’s members.

SAS BookRunner also enables the creation of risk models in a centralized environment. “Recently I asked my risk analyst to explain how unexpected changes in market pricing were impacting our portfolio. What are the moving parts that are causing this shift in mark-to-market and why? A few years ago, trying to answer this question would have been like throwing darts at a dartboard. Now she can slice and dice the data and provide a meaningful answer.”

Keys to success

When asked about the keys to implementing and running a successful commodity risk system, Webb highlights the importance of a pragmatic approach and quality vendor support. “One thing that can cause an ETRM package to crash and burn is if it’s so complex that end users can’t fully appreciate all that’s happening,” he says. “If you can’t get something to work right, and you can’t fix it, you’ll end up washing your hands of the software unless you can get help. Thankfully the SAS support team is second to none.”

Webb is excited to continue harnessing his team’s analytical skills to take full advantage of the platform. As Ag Energy expands into carbon credits, foreign exchange and other new markets, he believes the growing expertise of his young analysts will help generate ideas and solutions the veteran risk manager never thought possible.

With SAS BookRunner, Ag Energy is better positioned to weather the next round of drastic market fluctuations. “To stay on top of things, one of our philosophies is to stay current with technology,” Webb says. “Once you have analytical tools, it makes you want to analyze other things and ask questions you wouldn’t have asked before. It becomes addictive.”