Terminology

A

ABCD

Shorthand for the large global agricultural commodity trading groups, classically Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus, sometimes extended to include other very large traders such as COFCO, Olam and Wilmar which are then abbreviated as ABCD+.

Absolute Advantage

Absolute advantage is the ability to produce goods more efficiently than others, while comparative advantage focuses on producing goods at the lowest opportunity cost, guiding optimal specialisation and trade.

AIS

Automatic Identification System used to track ships transporting commodities.

Alpha

In a linear regression, the intercept term, the expected value of the dependent variable when the explanatory variable is zero.

Anchoring bias

The tendency to rely too heavily on the first piece of information encountered (the "anchor") when making decisions, affecting subsequent judgments.

APS/DOP

APS means Arrival Pilot Station, and generally refer to a time charter contract term of where a vessel will deliver. DOP means Dropping Outward Pilot, and likewise refer to a time charter contract term, this time where a vessel will redeliver. Taken together, they are the shortest form of a time charter, i.e. from arrival at the loading port to redelivery at the last discharge port. Alternatively a vessel can deliver at DOP last discharge port, before ballasting to loading port for charterers account.

Arbitrage

Buying a good at a lower price in one market and selling it at a higher price in another.

Arbitration

A private dispute resolution process based on an arbitration agreement, in which one or more arbitrators determine a dispute and issue an award that is normally final and binding, subject to applicable law. In commodity and shipping markets, arbitration is commonly used under sale contracts, charter parties and trade association rules.

Assets

In commodity trading, assets refer to essential infrastructure like refineries, ports, railroads and storage facilities. These assets enable efficient transportation, processing and storage, providing traders with logistical and competitive advantages.

Asset school

A view of shipping that treats the vessel mainly as a capital asset and focuses on shipping cycles, fleet supply, leverage, asset values and long term earnings.

B

Backhaul

A voyage direction commonly regarded as the return leg relative to a fronthaul. It often earns a lower headline rate, but may improve the vessel's position for subsequent employment.

Backtesting

The comparison of model estimates with realised outcomes to assess whether the model is correctly calibrated and whether exceptions occur at the expected frequency.

Back to back position

A matched physical purchase and sale intended to offset volume and broad price exposure, while possible mismatches in timing, location, quality, documents and performance remain.

Backwardation

Backwardation is a market condition where futures prices are lower than current spot prices, often indicating short-term supply constraints or high demand.

Balance Sheet

In trading, a market accounting framework that organises available supply, expected demand and the resulting surplus or deficit over a defined period.

Ballast Cost

Ballast costs refer to the expenses incurred when a vessel sails without cargo, often to reposition for its next load. These costs include fuel, crew and operational expenses, impacting overall shipping profitability.

Baltic Exchange

A London based membership organisation that publishes shipping market benchmarks and freight indices used for market reference and for FFA settlement.

Baltic freight indices

A family of freight benchmarks published by the Baltic Exchange. It includes composite indices such as the Baltic Dry Index, vessel class indices such as the BCI, BPI, BSI and BHSI, time charter averages and individual voyage and time charter route assessments. Dry bulk assessments may be quoted in USD per day or USD per metric tonne and may be used for market reference or derivative settlement.

Basis

The difference between the cash price of a commodity and its futures market price.

Basis - Form

Basis risk driven by quality, grade, or processing differences between what is hedged and what is delivered or benchmarked.

Basis premium

The extra amount, positive or negative, over an index or derivative implied value that is required for a physical deal, often set to meet a profit target or a risk limit.

Basis Risk

The risk that a physical exposure and its hedge do not move together because of differences in benchmark, location, timing, quality, vessel characteristics, contract terms, operations or counterparty performance.

Basis - Space

Basis risk driven by location differences between the cash commodity and the futures delivery point or benchmark location.

Basis - Time

Basis risk driven by timing differences, such as seasonality or different delivery months.

Basis trading

Trading and hedging built around changes in basis, the difference between a cash price and the price of the hedging instrument.

Bear Market

A downward trend in prices of agricultural products like coffee due to oversupply.

Benchmark

A standard reference price, rate or index used to compare, value, hedge or settle a physical or financial exposure.

Berth

A designated place at a port where a vessel lies for loading, discharging, waiting or other operations. A berth may be located alongside a quay, jetty, pier or terminal structure.

Beta

In a linear regression, the slope coefficient, it measures sensitivity of the dependent variable to changes in the explanatory variable, in this book it is used to size the hedge.

Bid

The price a grain processor is willing to pay for a bushel of soybeans.

Bill of Lading (B/L)

A Bill of Lading is a document issued by a carrier to a shipper, serving as proof of shipment, a contract for carriage and a title document for goods.

Broker assessment

A broker's estimate of the prevailing market rate submitted under an index methodology, rather than necessarily being an average of completed transactions.

Bunker Adjustment Factor

Bunker Adjustment Factor is a legal clause that adjusts freight rates based on fuel price changes, moving energy risk to freight buyers.

Bunker fuel

Fuel delivered to and intended for use on board a vessel for propulsion or auxiliary machinery. Depending on the vessel and applicable rules, bunker fuel may include residual fuel oil, very low sulphur fuel oil, marine gas oil, liquefied natural gas, methanol, biofuels or other marine fuels.

C

Call option

An option giving the holder the right, but not the obligation, to buy the underlying at the strike price or, for a cash settled contract, to receive a payoff when the settlement value exceeds the strike, subject to the contract terms. A freight call can protect a charterer against a rise in the relevant freight benchmark.

Carbon

In shipping, "carbon" refers to the carbon emissions produced by vessels which are regulated to meet environmental standards, influencing operational costs and sustainability practices.

Carry In / Carry Out

Carry in is the stock available at the beginning of a defined period, while carry out is the stock remaining at the end of that period.

Cash-and-Carry Trade

Cash-and-carry trades involve buying a commodity at the spot price, storing it and selling futures contracts. Profits come when futures prices exceed spot plus storage costs, exploiting contango market conditions.

Cash Commodity

Physical agricultural goods like barley available for immediate delivery.

Cash Flow

Cash flow refers to the movement of money into and out of a business, showing its liquidity and ability to meet financial obligations.

Cash Market

A marketplace where farmers sell their harvested crops, such as rice, for immediate payment.

CBOT

Chicago Board of Trade, a futures market widely used as a benchmark for North American corn, soybeans and wheat.

CFR

Cost and Freight is a commodity term where the seller covers costs and freight, except insurance, to the buyer's designated port.

CFR matrix

A table of delivered CFR values by origin and shipment month, calculated by adding aligned FOB and freight values in the same unit.

CFTC

Commodity Futures Trading Commission, the United States regulator for commodity futures, options and other derivatives markets.

Charterer

The party that hires a vessel or purchases carrying capacity from a shipowner under a charter party.

Charter Party (CP)

A Charter Party is a formal contract between a shipowner and a charterer outlining terms for vessel hire, specifying the duration and type of charter arrangement.

CIF

Cost, Insurance and Freight is a commodity term where the seller covers costs, insurance and freight to the buyer's designated port.

Clearing house

An organisation that provides clearing, netting, margining, settlement and default management for eligible contracts. Where it acts as a central counterparty, it interposes itself between the original counterparties, becoming the buyer to every seller and the seller to every buyer. Clearing may cover exchange traded derivatives and eligible over the counter contracts, including cleared e.g. MATIF or FFAs.

COA

Contract of Affreightment, an agreement to carry an agreed quantity of cargo over one or more voyages during a stated period, usually without assigning a named vessel to every shipment.

Commodity

A basic physical good, such as grain, oilseeds, sugar, biomass, metals or energy products that are traded in large quantities. A commodity is sufficiently standardised that one unit can generally be exchanged for another unit of the same grade, quality and quantity without materially changing the value received by the buyer or seller.

Commodity balance sheet

A market accounting framework in which beginning stocks, production and imports are allocated between domestic use, exports and ending stocks over a defined period.

Commodity basis

The difference between the cash price of a commodity and the relevant futures benchmark.

Comparative Advantage

The ability of a party to produce a particular good or service at a lower opportunity cost than others. Influences trade patterns in agricultural commodities.

Complex adaptive system

A system in which decentralised participants adapt to local information and incentives, causing aggregate outcomes to emerge through feedback rather than central direction.

Confidence level

The probability threshold attached to a risk estimate. A 95 per cent confidence level means that the VaR threshold is expected to be exceeded on about 5 per cent of observations under the model.

Confirmation bias

The tendency to seek, interpret and remember information that supports one's existing beliefs, while ignoring contradictory evidence.

Contango

A term structure where forward or futures prices are higher than the current spot or nearby price, often reflecting storage and financing costs.

Contract Month

The specified month when a futures contract for soybeans must be settled by delivery or offset.

Contract Theory

Studies how contracts are designed to align incentives, manage information gaps and ensure optimal outcomes between parties with differing interests.

Convenience yield

The economic benefit of holding physical inventory that is immediately available for consumption, processing or delivery.

Convergence

The tendency for the futures price and the relevant cash price to move towards each other as the futures contract approaches expiry, supported by arbitrage and delivery mechanics.

Correlation

A statistic that measures how two variables move together, often summarised by a correlation coefficient from minus one to plus one.

Cost of carry

The total cost of holding a storable commodity over time, including finance, storage, insurance, handling, shrinkage and possible quality loss.

COT

Commitments of Traders report, a regulatory report that groups futures and options positions by participant category.

Counterparty

A counterparty is the other party involved in a financial transaction, such as a trade or contract, responsible for fulfilling the agreement.

Counterparty basis risk

The risk that default or non performance by the physical counterparty removes the expected cash market offset while the financial hedge remains in place.

Crop Yield

The amount of crop produced per unit area, a critical measure in agricultural productivity.

Currency Exchange Rates

The value of one currency for the purpose of conversion to another.

D

Deadweight tonnage (DWT)

The maximum weight a vessel can carry safely, including cargo, fuel, stores, and water. E.g. A 38,000 dwt vessel might only carry 37,230 mts cargo as she carries 770 mts fuel, stores and water.

Deliverable Grades

Quality specifications for agricultural commodities, such as sugar, that must be met in futures contracts.

Delivery Month

The month designated for the physical delivery of a commodity, such as oats, under a futures contract.

Delivery point

An exchange approved location where a futures contract can be delivered, it anchors delivery economics and convergence.

Demand

The desire for a good (e.g. agricultural products such as corn), affecting their market prices.

Demurrage

Demurrage is a charge incurred when a chartered vessel is delayed beyond the agreed loading or unloading time, covering the owner's costs for the delay.

Derivative

A financial instrument like a futures contract derived from an underlying agricultural commodity.

Despatch

Relates to demurrage. Despatch is a payment from the shipowner to the charterer as a reward for completing loading or unloading faster than the agreed laytime, typically calculated at around half the demurrage rate.

Disintermediation

The process of removing intermediaries in a supply chain or transaction, allowing direct interaction between producers and consumers.

Draft Survey

In bulk shipping, a draft survey measures a vessel's displacement before and after loading/unloading to determine the exact cargo weight.

E

Econometrics

Applying statistical methods to forecast crop yields and commodity prices based on historical data.

Economies of Scale

Cost advantages reaped by companies when production becomes efficient. Relevant in large-scale farming and freight operations.

Edge

Here understood as trading edge. A trading edge is a strategy that consistently outperforms competitors, such as superior market analysis or faster information access, enabling better decisions which leads to profits.

Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) posits that asset prices fully reflect all available information, making it impossible to consistently outperform the market.

Elasticity

A measure of how much the quantity demanded or supplied of a good changes when its price changes. Important for predicting market reactions to price shifts.

Equilibrium Price

The market price at which the quantity of a good supplied equals the quantity demanded. Mostly a theoretical concept.

EU ETS

The EU Emissions Trading System (ETS) limits greenhouse emissions by allowing companies to trade carbon allowances too incentivise carbon reductions across key sectors.

Event risk

The exposure created by a discrete external shock that changes prices, trade flows, logistics or contractual performance.

Exchange

A marketplace such as the Chicago Board of Trade where agricultural commodities are bought and sold.

Exchange delivery

The transfer of an eligible commodity, or the title or delivery documents representing it, under the rules of a physically delivered futures contract. The process connects futures positions to the deliverable cash market and is distinct from cash settlement.

Exchange tender

The notice and procedure by which a short position holder initiates delivery under a physically delivered futures contract, subject to exchange rules on eligible goods, locations, documents and timing.

Execution risk

The risk that delays, document errors, quality failures, vessel performance, port problems or counterparty conduct alter or prevent the expected commercial result.

Exercise

The act of utilizing the right to buy or sell an agricultural commodity as specified in an options contract.

Expected shortfall

The average loss conditional on losses exceeding the VaR threshold, used as a measure of tail risk.

Expiration Date

The last day an option on a grain futures contract can be exercised by the holder.

Externalities

A side effect of an industrial or commercial activity that affects other parties without this being reflected in market prices, such as environmental impacts of freight transport.

Extrapolation bias

The tendency to assume that recent trends or events will continue into the future, often leading to over-optimistic or pessimistic predictions.

F

FFA option

A cash settled option linked to a freight index, where a call protects against a rise in the benchmark and a put protects against a fall.

FFA strip

A combination of monthly or quarterly Forward Freight Agreements used to cover a longer forward period.

Financialisation

The growing role of financial markets, instruments, institutions, benchmarks and financial performance measures in economic activity and corporate decision making.

Flat Price

Flat price refers to the outright market price of a commodity, without adjustments for basis or spreads.

FOB

Free on Board (FOB) is a shipping term indicating that the seller covers costs and risks until goods are loaded.

Forward Contract

A private agreement to deliver a certain amount of wheat at a predetermined price in the future.

Forward Freight Agreement (FFA)

A cash settled derivative linked to a specified freight index or route assessment over an agreed settlement period. An FFA transfers exposure to movements in the benchmark, but it does not provide a vessel or guarantee the cost or earnings of a particular physical voyage. Differences in route, vessel, timing, contract terms and performance can leave residual basis risk.

Freight basis

The difference between a physical freight rate or realised vessel earnings and the relevant freight index or FFA benchmark.

Freight fallacy

The error of treating the full spread between an FOB price and a delivered sale price, such as CFR or CIF, as ocean freight alone. The spread may also include port and handling terms, financing, insurance where applicable, timing, quality and basis effects, documentary and execution risk, optionality and the trader's margin.

Freight matrix

A table of freight costs by origin, destination, route and shipment month, expressed in a common unit for use in delivered price calculations.

Freight Rate

The cost associated with transporting grains and other agricultural goods from producers to markets.

Fronthaul

A voyage direction commonly regarded as the higher paying leg in a trading pattern. The headline rate must still be assessed against voyage duration, ballast, costs and the vessel's position after discharge.

Fundamental Analysis

Evaluating factors like weather and crop reports to predict future prices of agricultural commodities.

Futures Contract

An agreement to buy or sell a specific quantity of an agricultural product, such as corn, at a future date and price.

G

GAFTA

The Grain and Feed Trade Association, is a global trade association that standardises contracts, arbitration and best practices in the international grain, feed and agricultural commodities market, promoting fair trade.

Game Theory

Game theory studies strategic decision-making, where individuals' choices impact others' outcomes. It's used in economics to analyse competitive interactions, helping predict behaviours in markets, negotiations and competitive business environments.

Going for the Money

The "Going for the Money" bias is the tendency to focus on high-reward opportunities, often ignoring associated risks or long-term sustainability. In shipping this is often what is the fronthaul, i.e. a money grabbing leg to a region trading a negative premiums, thus locking in a big positive premium to go there now.

Grading

Assessing the quality of agricultural products like cotton to determine their market value.

Grain Broker

A grain broker is an intermediary who facilitates transactions between buyers and sellers of grain, managing negotiations, logistics and market insights.

Grain Elevator

A storage facility that collects grain from farmers before it is sold or shipped.

Grain Futures

Futures contracts specifically for trading grains such as wheat, corn and soybeans.

Grain Terminal

A facility where bulk grains such as wheat and corn are stored and transferred for shipping.

H

Hedging

The deliberate reduction or reshaping of an identified risk through an offsetting or otherwise compensating exposure. Hedging may use futures, FFAs, swaps, options, physical offsets, matched purchases and sales, or contractual terms. A hedge can reduce benchmark risk while leaving basis, liquidity, credit and execution risk.

Hedging Pressure

Hedging pressure refers to the impact on futures prices caused by producers and consumers hedging against price risks. Typically, excess selling by producers (or buying by consumers) shifts futures prices.

Hedging Ratio

The quantity of hedge instrument required per unit of exposure to reduce risk, often estimated from a regression as a beta.

Herding Bias

The tendency to follow the actions or decisions of a larger group, often disregarding individual analysis or personal judgment.

Historical simulation

A risk estimation method that uses observed historical market changes or portfolio losses to construct an empirical loss distribution without imposing a specific parametric distribution. VaR can then be estimated from the relevant loss percentile.

Holding Costs

Expenses associated with storing agricultural commodities, including warehousing and insurance.

I

ICE

Intercontinental Exchange, an exchange on which commodity contracts such as Sugar No. 11 are traded.

Incentives

Incentives are motivators that shape behaviour by aligning actions with desired outcomes. In markets they drive decisions on pricing, efficiency and risk-taking, influencing participants' strategies and overall market dynamics.

Incoterms

Incoterms, or International Commercial Terms, are globally recognised rules defining responsibilities between buyers and sellers in international trade such as FOB or CIF. They clarify who handles costs, risks and logistics at each stage of delivery, ensuring smooth transactions.

Initial Margin

The initial deposit required to enter into a futures contract for commodities such as wheat or corn.

Input Costs

Expenses for seeds, fertilizers and equipment necessary for agricultural production.

Inspection

Examination of agricultural products to ensure they meet quality standards before export.

Insurance

Protection against losses due to crop failure or spoilage during transportation of agricultural goods.

Inventory

Stored agricultural products such as grains awaiting sale or shipment.

J

Just-in-Time Inventory

A supply chain strategy where goods are delivered exactly when needed to minimize storage costs at destination.

K

Keel

A key structural element of a ship running lengthways along the lower section of the ship's hull, supporting the ship's framework and aiding stability.

Kernel density estimator

A statistical method that estimates a smooth probability distribution from observed data by placing a kernel function around each observation.

L

Laycan

Laycan, or Laydays/Cancelling dates, specifies the time range within which a vessel must arrive to commence loading, with failure to meet dates risking contract cancellation.

Laytime

The agreed time allowed for loading or discharging under a charter party, used to calculate demurrage when exceeded.

LIFFE

London International Financial Futures and Options Exchange, a former exchange name still commonly associated with London white sugar contracts.

Liquidity

The ease with which an agricultural commodity such as wheat can be bought or sold in the market.

LME

London Metal Exchange, an exchange used for trading and hedging base metals and related contracts.

Loading

The process of loading cargo, such as grains, onto a vessel for transportation.

Load Line

A marking indicating the maximum depth to which a ship can be safely loaded with cargo.

LC (Letter of Credit)

Also called a documentary credit, an LC subject to UCP 600 is an irrevocable undertaking by an issuing bank to honour a complying presentation under the credit's terms. Banks examine documents rather than the goods, services or performance to which the documents relate.

Logistics

The management of transporting agricultural products from farms to distribution centres and markets.

LOI (Letter of Indemnity)

In shipping, an LOI is a contractual undertaking intended to indemnify a party that agrees to act without a document or protection it would normally require, for example when a carrier delivers cargo without presentation of an original bill of lading. An LOI does not remove the underlying legal risk, may be unenforceable if it supports unlawful or fraudulent conduct, and is only as reliable as its wording, governing law, signatory authority and the credit of the issuer and any guarantor. Use should follow recommended wording and legal review where relevant.

Long

A trader who buys futures contracts expecting the price of an agricultural commodity, such as corn, to rise.

Loss limit

A maximum acceptable loss set by policy for a trade, desk, or portfolio over a given horizon.

M

Marginal Cost

The cost added by producing one additional unit of a product. Vital for production decisions in farming and shipping.

Marginal Revenue

The additional income from selling one more unit of a good. Used to maximize profits in commodity trading.

Margin Call

A broker's demand for an investor to deposit additional funds to cover potential losses in futures trading.

Market equilibrium

A price and quantity, or set of prices and quantities, at which planned supply and planned demand are mutually consistent under the relevant market rules and constraints. Equilibrium does not imply that prices are constant or that the market is free from shocks.

Market Order

An order to buy or sell an agricultural commodity immediately at the best available price.

Market Structure

Market structure defines how a market is organised, including the number of buyers and sellers, product differentiation and entry barriers. It shapes competition, pricing power and efficiency within an industry.

Mark to Market

The process of revaluing a position using current market prices, producing recognised gains, losses and possible margin flows.

MATIF

Marché à Terme International de France, the name commonly used for Euronext agricultural futures such as milling wheat and rapeseed.

Merchandising

Managing committed physical flows by securing supply, making sales and executing logistics reliably, with the objective of maximising realised margin subject to delivery obligations, basis risk and operational risk.

Moving Average

A statistical tool used to analyze price trends of commodities like soybeans over time.

Multimodal Transport

Using multiple transportation modes, such as ship and rail, to move agricultural goods efficiently.

N

Nearby Month

The closest expiration month for a futures contract on an agricultural commodity.

Netback

The value of a commodity at a stated reference point, calculated by taking its value at another point and deducting the specified downstream costs required to move, process or sell it between the two points. A netback is not final profit unless all relevant costs, overheads, risk charges, financing and taxes are included.

Net Weight

The weight of agricultural goods without any packaging or containers. Important in trading.

Niche Market

A specialized segment for unique agricultural products like organic grains or exotic fruits.

Normalcy Bias

Normalcy bias is the tendency to underestimate the possibility or impact of a disaster, leading individuals to assume that things will continue as usual, even in crisis situations.

Notice of Readiness (NOR)

A formal notice that the vessel is ready to load or discharge, it typically triggers the start of laytime under the charter party.

O

Ocean Freight

The cost associated with shipping agricultural products, such as wheat, by sea routes.

Open Interest

The total number of outstanding futures contracts for an agricultural commodity such as wheat.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen. Crucial in decision-making for resource allocation in agriculture and freight.

Optionality

Optionality in commodity supply chains provides flexibility to adapt sourcing, logistics and delivery routes based on market conditions, costs, or demand shifts. This adaptability helps manage risks and capture pricing advantages.

Option Contract

A financial derivative that gives the right, but not the obligation, to buy or sell a commodity, e.g. corn.

Origin

In commodity trading origin refers to the geographical location where a commodity is produced or sourced, such as a country or specific region. Origin impacts factors like quality standards, trade agreements and logistics, and often influences pricing, availability and transportation routes in global markets.

OTC (Over-the-Counter)

OTC (Over-the-Counter) hedging involves customised, privately negotiated financial contracts between two parties to manage price risk outside standardised exchanges. Common in commodity trading, OTC hedges provide flexibility in terms, quantities and settlement enabling businesses to tailor risk management to specific exposures.

Overbought (or oversold)

A market condition where prices of commodities, such as soybeans, have risen too quickly and may decline, or the opposite.

Overconfidence bias

The tendency to overestimate one's knowledge or abilities, often leading to excessive risk-taking and flawed decision-making.

Oversupply

When production of an agricultural commodity exceeds demand, leading to falling prices.

Overtrading bias

Occurs when traders make excessive transactions, often driven by overconfidence or impulsivity, which can increase costs and reduce profitability.

P

Percentile

A value below which a stated percentage of observations lies, subject to the calculation convention used. In a loss distribution, the 95th percentile is the threshold that approximately 95 per cent of observed losses do not exceed.

Perfect Competition

A market structure characterized by many competitors selling identical products. Leads to price-taking behaviour in commodity markets.

Physical arbitrage

An executable trade that captures a price difference between physical states after transport, storage, finance, processing, operational costs and risk are included.

Physical contract delivery

Performance of the delivery obligation under a sale contract. The place and time of delivery, required documents, transfer of risk and other consequences depend on the contract, incorporated trade rules and applicable law.

Physical trading

The buying and selling of commodities with actual or potential delivery, together with the management of logistics, quality, documents, finance and contractual performance.

Policy gate

A rule based acceptance check, for example requiring that estimated VaR is below an allowed threshold before a trade is approved.

Port

A maritime facility where ships dock to load or unload agricultural cargo such as grains and soybeans.

Port congestion

Delays caused by capacity constraints at ports, such as berth availability, which increase effective voyage time and can tighten vessel supply.

Premium

The price paid for an option, or an amount by which one price exceeds a stated reference. In an option contract, the premium is paid by the buyer to the seller for the contractual right, whether or not the option is later exercised or produces a positive cash settlement.

Price basis risk

The risk that the cash price and the futures or index benchmark do not move in parallel after the hedge is established.

Price Discovery

The process by which market prices for agricultural commodities are determined based on supply and demand.

Price Taker

A price taker is a market participant who accepts prevailing prices, having no power to influence them, often due to high competition.

Procurement

The process of purchasing agricultural commodities, such as grains, from producers for processing or resale.

Profit and loss (P&L)

The net financial result of a position or trade after price changes and relevant costs.

Put option

An option giving the holder the right, but not the obligation, to sell the underlying at the strike price or, for a cash settled contract, to receive a payoff when the settlement value is below the strike, subject to the contract terms. A freight put can protect a shipowner against a fall in the relevant freight benchmark.

Q

Quality Control

Ensuring agricultural goods meet specified standards before they are marketed or exported.

Quantity Survey

An assessment of the amount of agricultural commodities, such as wheat, available for trade.

Quay

A platform lying alongside water for loading and unloading ships carrying agricultural products.

Quota

A limit on the amount of a particular agricultural commodity that can be produced or imported.

R

Rail Freight

Transportation of agricultural commodities such as corn and soybeans via railroad networks.

Real optionality

Operational flexibility over route, timing, storage, specification, destination, redelivery or contract extension that can improve the physical result.

Regression

A statistical method to estimate the relationship between a dependent variable and one or more explanatory variables, used here to link route rates to indices and to estimate hedge ratios.

Residual basis risk

The risk remaining after hedging because the physical exposure and benchmark differ in route, timing, vessel characteristics, contract terms, operations or settlement.

Risk budget

The amount of risk allocated to a strategy or desk, often expressed as a VaR limit or loss limit.

Risk management

The process of identifying, measuring, evaluating, limiting, transferring, monitoring and reporting risks so that exposures remain consistent with the firm's objectives, capital, liquidity and approved risk appetite.

Rolling correlation

Correlation computed over a moving window to track how relationships change over time.

Rolling window

A fixed length look back period that moves forward through time for repeated calculations, such as correlations or regressions.

Roll Over

Extending a futures contract by closing the current position and opening a new one with a later date.

S

Sentiment

Market sentiment reflects the overall attitude of investors toward a particular market or asset, influencing buying, selling and price trends.

Settlement price

The official price set for a contract and day, used for daily settlement and margin calculations.

Shipbroker

An intermediary who matches shipowners and charterers and assists negotiation and execution of fixtures.

Shipowner

The party that owns a vessel and earns freight or hire by employing it in the market.

Speculation

Trading agricultural futures contracts with the aim of profiting from anticipated price movements.

Spot Market

A market where agricultural commodities such as rice are bought and sold for immediate delivery.

Standard deviation

A statistic measuring the dispersion of observations around their mean. It is expressed in the same unit as the measured variable and is sensitive to extreme observations.

Stevedore

A stevedore, or dockworker, is a labourer responsible for loading and unloading cargo on ships at ports and terminals.

Storage Costs

Expenses incurred for storing crops such as wheat and corn until they are sold.

Stress testing

The measurement of losses under severe but plausible scenarios that may not be represented adequately in the normal historical sample.

Strike price

The price or rate specified in an option contract against which exercise or cash settlement is determined. For a call, the cash payoff at settlement is based on the amount by which the settlement value exceeds the strike. For a put, it is based on the amount by which the strike exceeds the settlement value, subject to the contract terms.

Supply and demand

A framework for analysing how planned quantities offered and requested interact with prices. In actual markets, clearing also depends on institutions, contracts, capacity constraints, expectations, information, regulation and bargaining, so the framework is an abstraction rather than a complete description.

Supply Chain

The entire process of producing and delivering agricultural products from farms to consumers.

Systemic Causation

Systemic causation refers to outcomes resulting from complex interactions within a system rather than from single, deliberate actions. In freight trading, factors like global demand shifts, fuel costs and regulatory changes collectively influence prices. Recognising systemic causation helps traders understand that market movements often stem from interconnected forces, not individual intentions.

T

Tariff

A tax imposed on imported agricultural goods, affecting their market prices and competitiveness.

TC rate

The time charter daily hire rate, usually quoted in USD per day.

TC route

A defined time charter trip or route specification used to assess or model daily hire, including the vessel class, delivery area, redelivery area, expected duration and other stated assumptions.

Technical analysis

The analysis of price, volume, open interest and related market data to identify patterns, momentum, trend or other trading signals. It is a decision tool and does not guarantee future price movements.

Tenor

The time to maturity of a contract, or the specific contract month, used to describe where on the forward curve a hedge is placed.

Tick Size

The minimum price movement of a trading instrument such as a futures contract for corn.

Time charter (TC)

A charter where the vessel is hired for a period at a daily hire rate, with responsibilities split between owner and charterer as specified in the charter party.

Time charter equivalent (TCE)

A voyage earnings measure that converts net voyage income into an equivalent daily rate. It is generally calculated as voyage revenue less voyage costs, divided by the voyage duration in days. The result depends on the cost, commission, time and operational assumptions used. S

Tonne mile

A measure of freight demand calculated as cargo volume in tonnes multiplied by transport distance.

Trading matrix

3x3 framework that compares relative value across FFAs, physical freight, and vessel markets to structure trading decisions.

Trading Opportunity Framework, TOF

A structured five-step approach to formulating and evaluating a trade idea – from clearly defining the market opportunity, through setting up hedges and assessing risks, to planning profit targets, exit strategy and execution of the trade.

Trading school

A view of shipping that treats freight capacity as a tradable flow and focuses on spot execution, timing, access, spreads and optionality.

Transformation margin

The expected value after transformation, less the value before transformation, execution costs and the required risk allowance.

U

Uncertainty

In Knightian terms, uncertainty involves outcomes that are inherently unpredictable and unmeasurable, unlike calculable risks. It reflects unknown probabilities, requiring decision-makers to rely on judgment rather than statistical prediction. Related to risk.

Underlying Asset

The agricultural commodity, such as wheat, upon which a futures or options contract is based.

Unloading

The process of removing agricultural cargo from a vessel or vehicle at its destination.

Upside Potential

The possibility that the price of an agricultural commodity, such as coffee, will increase.

Utilisation Rate

The extent to which storage or transportation capacity for agricultural commodities is used.

V

Value at Risk

An estimated loss threshold for a position or portfolio over a specified period and at a specified confidence level. It is not the maximum possible loss.

Value Chain

The series of steps involved in producing and delivering an agricultural product to the market.

Variable Costs

Costs that vary with the level of production, such as fuel expenses in transporting crops.

Variation margin

The daily cash transfer arising from changes in the marked value of a cleared derivative position.

Vessel

A ship used in transporting agricultural goods such as grains across seas and oceans.

Volatility

The degree of variation in trading prices for agricultural commodities over a period of time.

Voyage charter

A contract under which a shipowner agrees to carry an agreed cargo between stated ports or port ranges in return for freight, subject to the charter party terms. The owner retains possession and navigation of the vessel, while cost allocation, laytime, demurrage and performance obligations follow the agreed charter party.

Voyage estimate

A calculation prepared before fixing, or updated during execution, that estimates the commercial result of a voyage from freight revenue, commissions, voyage duration, bunker consumption and prices, port and canal costs, waiting assumptions and other voyage costs. It is commonly used to calculate expected TCE and compare alternative employment. The result changes when assumptions or actual performance change.

W

Warehouse Receipt

A document that provides proof of ownership for commodities such as grains stored in a warehouse.

WASDE

World Agricultural Supply and Demand Estimates (WASDE). A monthly USDA report forecasting global commodity supply and demand.

WCCON, WIFPON, WIPON, WIBON

A shipping phrase referring to the whereabouts of the vessel, meaning "Whether Customs Cleared Or Not. Whether In Berth Or Not. Whether In Free Pratique or not. Whether In Port Or Not".

Weight Note

A document stating the weight of agricultural goods shipped, crucial for pricing and customs.

Wet Bulk

Liquid agricultural commodities, such as vegetable oils, transported in large quantities by tankers.

Wharfage

A fee charged for the use of a wharf in loading or unloading agricultural cargo.

Working capital

Cash or credit tied up between paying for the commodity, freight and related costs, and receiving the proceeds from the sale.

X

Y

Yield Curve

A graph showing interest rates over different time horizons. Relevant in financing agricultural operations.

Z

Zero-sum Game

A situation in trading where one party's gain in agricultural markets equals another's loss.

Zone Pricing

A term sometime used for setting different prices for agricultural commodities based on geographical location.