Of dinosaurs and conferences

In a Linkedin post this week Hartwig Fuchs, the ex-CEO of Nordzucker (one of the world’s biggest sugar producers), warned that time is running out for the world’s big agricultural trading companies, or as he called them, “the dinosaurs of the international ag trade”. He wrote, “Unless they redefine their business, and focus on true function that benefits their customers, they might have to go”.

He argued that producers no longer need trade houses to intermediate between them and their final buyers, to book fobbing capacity and freight, or to make the destination sales. He wrote,

“So, looking at those companies today, question is: who really needs them? Where do they generate genuine added value for their customers – and for themselves? Who really likes them and wants them around? What´s their purpose?”

Although none of these arguments are new, it is worrying to see them expressed by so significant a personality in the commodity trade. (Mr Fuchs was also at one time Chairman of Toepfer.)

We have already written extensively on the issues that the trading houses are facing, and discussed various alternative business models. As a reminder, take a look at these two interviews: one with Abercore, a trader that has become an advisor, and another with Solaris, a trader that has found a successful niche in the Black Sea grain trade.

It is interesting that Mr Fuchs refers to the trade houses as “dinosaurs”.

“Evolution or Extinction” was to be the theme of the Commodity Conversations ® event that we had been organising at the Natural History Museum in June. Unfortunately we had to cancel the event due to a lack of interest from both sponsors and attendees. This lack of interest was perhaps a sign that the sector is really in difficulty.

Or perhaps it was that the evening cocktail party was due to be held in the museum’s Earth Hall under the watchful eyes of the most intact fossil skeleton ever found. At three metres tall and almost six metres long, the Stegosaurus was perhaps too big a presence for the cocktail party attendees!

I have recently begun to (re) read Merchants of Grain, written by Dan Morgan and published in 1979, almost forty years ago. The book describes the five trading companies that dominated the world’s grain trade: André, Bunge, Cargill, Continental Grain, and Louis Dreyfus.

Mr Morgan wrote that the trade houses

“had made themselves indispensible because of their control of the distribution systems, the processing plants, the technology, the capital and the communications with buyers and sellers…The companies run their own intelligence services all over the planet—private news agencies that never print a word.”

He added,

“The grain merchant houses are private, centralized oligopolies that do not publish financial statements. There are no public stockholders, which greatly limits the obligation to disclose information. Ownership of the companies is vested in the hands of seven of the world’s richest and most uncommunicative families, and the same families also have operating control of the companies.”

However, that was already beginning to change by the time the book hit the shelves. Cargill had already begun to publish a monthly newsletter, starting an “opening-up” that continued for the next forty years—and still continues today. The big trading companies, even the privately held ones, have long realized that they have a responsibility to account to the public, to disclose and explain what they do, and how they do it.

Two of the five companies cited in Merchants of Grain no longer exist, and a third is a candidate for takeover. However, Even so, I am not sure that the agricultural trading sector has been subject to more change than other sectors.

A recent study showed that the lifespan of large, successful companies has never been shorter. In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years. It’s forecast to shrink to 14 years by 2026. If this trend continues, about 50 percent of the S&P 500 will be replaced over the next 10 years.

Commodity trading companies have significantly changed their business models in the past forty years and this evolution will continue. Those that do not evolve will become extinct, but this process is not restricted to agricultural commodity trading.

Finally, I do not agree with Mr Fuchs’ argument that agricultural trading companies add no value. When prices and price volatility are low it is relatively easy for buyers and sellers to connect directly. Wait until prices turn or there is a major harvest failure somewhere. It will be then that the skills and value of the trading houses (big and small) will once again be appreciated.

But it is still a shame that we had to cancel the conference planned for June. It would have been an interesting discussion.

One Reply to “Of dinosaurs and conferences”

  1. Interesting discussion. I spent my career in the Canadian Ag trade and watched the evolution. The demise of the Canadian Wheat Board was inevitable because a government entity acting as a monopoly merchant could no longer provide any value to Canadian Farmers or customers. The problem was they had no other assets, and had to use the terminal assets of the grain companies. After the wheat board was dissolved, it led to a boom large private grain company investments in terminal infrastructure. So there is still value in having “franchises” that have assets involved in the pipeline value chain, provided they can make them pay. In Canada, virtually all of the cash generation is dependent on having export terminals on the East and West coast, and the cash outflow is associated with operating the inland terminals that can generate the volume to feed them.

Leave a Reply