Agricultural commodity traders are asking themselves key questions about the future of their businesses. Here are ten that we heard recently (with tentative, perhaps controversial, answers).
1/ How can we improve profitability in the supply chain?
At present the only way is to cut costs. This can be done by reducing headcount and by introducing new technologies and processes. Increasing traded volumes and the general scale of operations can also help. However, when everyone fights for increased market share competition gets tougher and margins suffer.
2/ Why is consolidation in the sector happening so slowly?
The main players are looking to increase scale to reduce their costs and diversify their risks. However once you get to a certain size you run into issues with the competition authorities. Consolidation is happening in the middle tiers. COFCO bought both Nidera and Noble Agri, but those two acquisitions show how tough it can be to integrate a business once you have bought it. Most M&A deals destroy rather than create value—and not just in the agtrade.
3/ Where is the value in the agricultural supply chain?
In recent years the value has seeped out of the agricultural supply chain as market power has shifted from producer to trader to consumer. This has resulted in lower food prices at the expense of farm incomes and traders’ margins. If people want to eat, that pendulum will have to swing back, at least partially.
4/ Is a sustainable supply chain a less profitable one?
No. To be sustainable a supply chain has to be profitable. If it isn’t profitable then it isn’t sustainable. Traders will have to be paid for what they do or they will stop doing it.
5/ Does increased traceability mean less tradability?
Maybe. Traders need optionality to be able to respond to price signals (for example changing freight rates) in order to supply their customers at the cheapest price. If one origin can’t be swapped for another then the supply chain becomes less flexible and more costly. However technological progress should soon mean that all commodities are traceable back to where they were produced. Traceability and tradability will then become co-dependent.
6/ Is efficiency the key to a sustainable supply chain?
Yes, along with improved traceability. Increased efficiency should result in reduced crop loss and and fewer GHG emissions. A more efficient supply chain should also raise farm incomes and help local communities reduce environmental degradation caused by agricultural expansion.
7/ Is there still a role for speculation in agricultural supply?
Speculators absorb price risk. Risk has a cost. By transferring price risk to speculators the other actors in the supply chain (producers, consumers and traders) can lower their costs. This raises farm incomes and lowers food prices. Speculators also ensure that price signals are transmitted quickly, leading to faster supply responses.
8/ How will technology impact the agtrade?
In many ways, but most significantly, blockchain and a wider use of electronic shipping documents should make the whole supply chain more efficient and lower costs.
9/ Does the agricultural commodity trade have a future?
Absolutely. The world’s demand for calories continues to increase and the only way to meet that demand in an efficient and environmentally sustainable way is through trade. Someone will have to move these huge crops around the world—and to be paid to do so. The future for the sector as a whole is bright.
10/ Which companies will win and which will lose?
The winners will be those that embrace change, responding quickly to process innovation and technology. As Charles Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.