The FT Commodity Summit

The mood at this year’s FT Commodities Global Summit was more upbeat than in recent years. The summit was again mostly focused on the extractive industries, oil, gas and metals—all markets that appear to have bottomed. Indeed this year’s theme was “The Start of a New Cycle”. Excess production capacity has now been absorbed and prices are on the up.

The “electrification” of the economy was the main subject of discussion for the energy and metal guys, particularly the anticipated growth in electric vehicles (EVs). Electrification is expected to be marginally bearish for oil prices, but then only sometime in the distant future, and wildly bullish for cobalt and copper prices. Speaker after speaker took the stage to warn that there simply won’t be enough of either to meet the planned expansion in EV production.

The mood turned remarkably flat, however, when it was time for the panel on agriculture. The panellists worried about razor-thin, or even negative, margins on their physical trade flows and sadly listed all the reasons : the democratisation of data; the speed of information; greater transparency in supply chains; the advent of algorithmic funds; heavier regulation; increased traceability and reduced tradability; over-production; and an over-hang of infrastructure.

Panellists explained that agricultural trade houses have been responding to the collapse in their margins by cutting costs, particularly by reducing headcount and implementing new technology to improve efficiency. They have also been trying to increase traded volumes so as to spread their overhead cost burden more thinly. Unfortunately, this fight for market share has resulted in increased competition and even thinner margins, a vicious circle that can only be solved by consolidation.

With margins so thin it doesn’t take much of a problem somewhere along the supply chain to push a transaction, or a company, into a loss. As long as it doesn’t over stretch management, increased volume can diminish the impact any particular problem can have on the company’s finances. So increased scale can reduce risks as well as costs. The panel predicted that we would see more partnerships, such as the recently announced one between Cargill and ADM in Egypt.

However, if the sector is to thrive—or even survive—it has to do more than reduce costs or spread risks. As the President of Cargill’s Agricultural Supply Chain Enterprise so aptly put it, “We all have to reinvent ourselves one way or another to ensure that we create value within the supply chain.”

Sitting in the conference hall listening to the speakers from the energy and metals sectors it became apparent that they at least are still making money from the physical movement of their particular commodities. Yes, they all complained about declining margins; but at least they still have margins to complain about. Agricultural trade houses don’t have that luxury.

Most agricultural commodity traders gave up trying to make money from FOBS to C&F a long time back. Instead they moved up and down stream into elevators, silos, barges, port terminals, and distribution and packing plants. They also went into trade finance and risk management. (At one stage they even tried their hands at running hedge funds.) However, competition is now just as tough at both origin (from farmers) and destination (from local traders).

But wait a minute. World population is growing, as too is our demand for meat. Someone will have to move all that food (and animal feed) from where it is grown to where it is eaten. They will have to store those crops from when they are harvested to when they are consumed. And they will have to process that food into a form that can be eaten: wheat into flour, soybeans into meal etc. Governments won’t do it. So it will be left to the agricultural trade houses.

That at least is the theory. Agricultural trade houses add value to the supply chain by transforming crops in space, time and form. But they won’t do that unless they are compensated for doing it. One way or another, if the world wants to eat, traders will have to be compensated for the value they add, the work that they do and the risks that they take.

If the world wants to eat, agricultural traders will not only have to survive, they will have to thrive. And if all other avenues for revenue are closed, margins on physical flows will have to become positive.

The US baseball player Yogi Berra once famously said, “In theory there is no difference between theory and practice. In practice there is.”

Just because the sector as a whole will thrive, it does not mean that all participants in that sector will survive. The companies that do will be the most efficient ones in terms of cutting costs and spreading risks. This means either scale or agility. We could see the bigger players getting bigger; the smaller ones getting more agile (in searching out opportunistic margins where they can find them), and the medium slower moving firms, well, getting out.

But all this could take time.  Remember, the UK economist J M Keynes once famously warned, “The market can remain irrational longer than you can remain solvent”.

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