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FCStone Group, Inc. is an integrated commodity risk management company providing risk management consulting and transaction execution services to commercial commodity intermediaries, end-users and producers. The company assists primarily middle market customers in optimizing their profit margins and mitigating their exposure to commodity price risk. In addition to FCStone’s risk management consulting services, it also operates one of the leading independent clearing and execution platforms for exchange-traded futures and options contracts. The company serves more than 7,500 customers and in fiscal 2006, executed more than 47.8 million derivative contracts in the exchange-traded and OTC markets. The company also assists its customers with the financing, transportation and merchandising of their physical commodity requirements and inventories.

The company operates through a number of wholly-owned and majority-owned subsidiaries with offices and facilities in twelve states, China, Brazil, Canada and Ireland. The company’s principal business activities consist of four operating segments: commodity and risk management services, clearing and execution services, grain merchandising, and financial services.

FCStone organizes its marketing efforts into customer industry segments. Currently, the company serves customers in the following areas:

  • Commercial Grain
  • Energy
  • Introducing Brokers
  • Latin America/Brazil
  • China
  • Renewable Fuels

Trends and Forces

Growth Strategy

Despite having the majority of revenue come from the United States, FCStone is quickly establishing a more international presence. On the production side, the company is especially active in Brazil, where it covers a significant number of grain producers. While the region is known for its grain production, FCStone is also making strides in the sugar, ethanol, coffee and foreign exchange markets.

On the other side of the spectrum, China is one of the largest and growing consumers of commodities, and FCStone is active in this country as well. Management noted that it operates in China, helping to hedge risks in grain, metals, energy, cotton and foreign exchange markets. The continual growth of the Chinese population and the opening of markets for more active trade should continue to drive demand for goods. In fact, China trade figures released this week point to increasing trade statistics, which should provide a fertile ground for new FCSX business.

The company’s growth strategy makes use of both organic growth as well as acquisitions. Over the past year, FCStone has acquired Downes O’Neil, The Jernigan Group, and Globecott. Each company operates in a different niche of the risk management universe and gives FCStone better expertise in that particular field.

In addition, the expanded customer base allows FCStone to cross sell additional services that the customers may not have had access to in their previous relationship. Management was clear that it will continue to pursue additional acquisitions when it finds target companies that are immediately accretive. This gives the company an opportunity to branch out into new avenues of serving customers.

Carbon Initiative

One such avenue is a new carbon initiative which is under development. The idea is that an exchange will be launched which allows companies to trade carbon or emission credits on a standardized market. The initiative should create more awareness and incentive for all companies to operate in a responsible manner with regard to pollution as the market increases incentives for all parties to reduce emissions in order to capture the economic value of such strategic decisions.

Interest Rate spreads

Interest rates have had an effect on the net interest income the company earns. At this point the total number in terms of earnings has grown, but that is more a function of higher customer balances than the overall interest rate environment. The trend at this time is for clients to hold higher balances with the company as margin requirements are increased due to the volatility in the markets.

At the same time, lower interest spreads mean that each dollar held for customers is less profitable than the same dollar would have been a year ago. In order to keep interest income steady, the company will have to attract a growing level of balances from customers, which it appears to be doing successfully.


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