Ten challenges for agricultural commodity merchants

We all depend on the big agricultural commodity merchants for much of the food that we eat and the clothes that we wear. Merchants move vast quantities of food and fibre from producers to consumers, from surplus areas to deficit areas. Without merchants, crops would rot in the fields, farmers would go out of business, and people would go hungry.

However we cannot take it for granted that commodity merchants will be able to meet the challenges that lie ahead. The sector is under pressure from all sides and its future is far from assured. With world population expected to reach 9.7 billion in 2050, that is a major issue that needs addressing.

Some of you may argue that these pressures are temporary; that commodity merchandising is a cyclical business; and that we are just in one of the down cycles. And you will be partly right. World food stocks are at an all time record, resulting in higher storage costs, compressed margins and reduced price volatility—all bad news for merchants.

However most of the sector’s current problems are not cyclical but structural. The ten most challenging issues for agricultural commodity merchants are (probably) as follows:

  1. Both the spread and the speed of information have increased dramatically, leading to better and more quickly informed clients, reduced price differentials and lower or negative trading margins.
  2. There has been a shift of market power along the supply chain, initially from farmer to trader, then to distributor and retailer, and now to the end consumer. Social media in particular has empowered consumers at the expense of producers and traders.
  3. This shift in power has focused attention on where food comes from, and what damage it may have caused both environmentally and socially on its way.
  4. This focus on social and environmental sustainability has increased costs (e.g. certification) for producers and traders.
  5. It has also led to a shift from tradability to traceability. Being less able to trade origins reduces merchants’ flexibility and profits. It can also increase costs if products have to be kept separate. Traceability is turning many commodities into ingredients.
  6. A greater focus by consumers on their own health can result in difficult to predict—and fast moving—trends. Sugar and fruit juice are examples, as is the pushback against GMO products in the US.
  7. Empowered consumers result in increased government intervention, whether in areas of health and safety, or in trade relations. Consumer trends can quickly change direction, and governments are rarely far behind. This increases merchants’ risks and pushes up their compliance burden.
  8. Increased consumer empowerment has been accompanied by the media’s increased hostility to agricultural merchants. This media hostility has reduced merchants’ political leverage, and made it harder for them to hire talent.
  9. At the same time, advances in Artificial Intelligence mean that computers are now better than humans at trading futures markets. As a result, agricultural commodity merchants are less able to leverage the insight that they glean from merchandising physical commodities into trading futures markets.
  10. Global climate change may increasingly make both crops and trade flows less predictable, increasing the risk when investing in infrastructure such as warehouses and port terminals.

Many of the trends listed above are “good things”. Empowered consumers, supported by fast-moving and attentive governments, are leading to changes for the better in terms of environmental and social sustainability, and health.

Agricultural commodity merchants should not try to resist or reverse these trends, but embrace them. The sector knows that if it is to survive it has to adapt and evolve. But how?

One thing that the sector can—and must—do is to improve its public image. Physical commodity merchants, rather than being seen for the good that they do, are perceived as evil speculators, accused of pushing food prices higher, creating shortages and hunger.

As a sector, we have to explain to the world what we do, to show the public that we are under the same pressures and constraints—and have the same challenges—as everyone else. And we must also explain that we are not perfect, that there is still progress to be made—and that we are trying to make that progress.

The first objective of our seminar in London in June therefore will be to discuss how we can adapt and evolve to survive: hence the choice of London’s Natural History Museum as the location for the meeting.

The second objective of our seminar in London will be to show the world that agricultural commodity merchants are human beings like everyone else. We have families; we live in communities; and we care deeply about our planet and the wellbeing of its inhabitants.

Charles Darwin once wrote, “In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed”.

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