Cargill loses $100 mln in U.S. winter energy trade -SparkSpread

NEW YORK Thu Feb 20, 2014 5:15pm EST

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NEW YORK Feb 20 (Reuters) - Global commodities trader Cargill Inc lost at least $100 million after a weeks-long bout of frigid weather in the United States sharply lifted power and natural gas prices, an industry publication reported on Thursday.

Cargill lost most of the money in the PJM power market, the Pennsylvania-based electric power grid operator, online industry publication reported on Thursday. Arctic weather in January forced power prices to a high of $1,500 per megawatt hour (MWh), some 30 times the average.

SparkSpread did not cite any sources on the losses.

The commodity trading and agriculture conglomerate has emerged as one of those with some of the largest losses after an unusual streak of frigid weather plagued much of the United States, driving record heating demand.

David Toole, the firm's physical trading manager for North America in Cargill's Thermal Energy Supply Chain (TESC) unit, which trades power, natural gas and coal, left the company on Wednesday and will be replaced by Mike Newman, gas trading manager in Calgary, who will relocate to Houston, the report said.

A spokeswoman for Cargill declined to comment on the financial performance of the company's energy trading business.

She confirmed that Newman has been appointed as physical trading manager for North America in Cargill's TESC unit.

A loss of $100 million would be significant for Minneapolis-based Cargill, which last month reported net earnings of $556 million for the quarter ended Nov. 30.

It was unclear exactly how Cargill lost money on the trades but some in the business speculate that they were carrying "short" positions in the PJM market, meaning they expected prices to fall.

For example, a company would lose out if it sold power at $50 per megawatt hour (MWh) in December for January delivery and held that position into the actual spot month.

Since the first of the year, next-day PJM power prices averaged $100 or more per MWh on 13 days, including four days above $400 per MWh. That is well above the five-year average price of $55 in January and $44 in February.

Funds and trading houses who posted large losses in natural gas and power since the Arctic chill set in simply may not have accounted for a "tail risk" or the likelihood of a rare or one-off event like the coldest winter in 30-years, veteran fund managers said.

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Comments (1)
Miner49er wrote:
Cargill drank the kool-aid of unlimited, cheap, clean natural gas for power generation. Others will do the same, and suffer the same fate. They never learn–they think they’re smarter than markets.

The long-run marginal cost of thermal coal is less than $2.00, and gas is above $5.00. Power generators need to buy for less than $3.50. Where’s the trade there, guys? Moral: Don’t bet the farm on politically-driven forecasts.

Also, numerous big value-added gas users can afford to pay $10.00-$15.00 for gas, and still hold significant competitive advantage over foreign competitors. It makes a lot more sense to ship gas overseas as value-added products, like fertilizer, than as LNG, or burning in in power plants.

Feb 21, 2014 11:34am EST  --  Report as abuse
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