Learning to navigate

A conversation with Brian Zachman, President of Global Risk Management Bunge Limited (NYSE: BG)

The views and opinions expressed in this interview are those of Brian Zachman and do not necessarily reflect the official policy or position of Bunge Ltd.

Good morning Brian. My first question is, how did you start in the business?

I am from St. Michael, a small town in Minnesota, just northwest of the Twin Cities. My family was in the dairy farming business, but it was never really my hope to have a career in the family business. My choice of university, Minnesota-Duluth, even came with an added bonus: it was too far from the farm for my dad to call at 3pm and ask for a hand milking the cows at 5 pm!

I was interested in markets and studied Economics and Math in college before applying to Cargill, but for a position in their financial markets department. Cargill likely saw the farming background and instead offered me a merchant trainee job in West Fargo, North Dakota.

What happened to the family farm? Is it still going?

My parents sold the milking cows and the young stock in the early 1990s, when Mom and Dad reached retirement age and when no obvious succession plan emerged for the farm—all of my five siblings also chose professions other than farming. Dad still lives on the farm, although suburban development and the resulting increase in land values means less and less of the land is directed to agricultural uses. It’s a tale as old as time, a pattern likely to continue throughout rural America.

Before joining Bunge you worked briefly for a hedge fund. What was it like?

I really enjoyed the experience. The ‘reason for being’ is very clear in a fund: it’s about delivering results, and that clarity has a way of creating the right kind of focus. Also, maybe contrary to popular perceptions, my experience is that hedge funds are very disciplined organizations. There’s a real recognition that outcomes are uncertain and that one doesn’t know anything with certainty, so a big part of the business revolves around managing risk.

My primary frustration in the managed money space was being limited to the Exchange-traded instruments and not being able to take positions in the underlying physical commodities (the basis) or in any other part of the value chain. The analytical process is the same in both settings—oftentimes at the fund we had very solid opinions about value migration in parts of the chain but with no way to express our opinion in those markets.

Are you optimistic or pessimistic about the future?

I am optimistic. Bunge is a global player with a global asset base. We physically originate 70 million tonnes of grains and oilseeds each year and have an end-to-end presence in the supply chain; that’s an inherently strong structural position, which is not easy to replicate.

From the standpoint of price risk management, our network also provides us with a lot of proprietary information that helps us optimize our value chains. In a way, our asset base is a call option on volatility in the supply chain.

What advice would you give to a young person starting a career in commodities trading?

My first piece of advice would be to remain intellectually curious. It seems to me that some of the most successful people in the business always ask the next question, not in the interest of information overload, but in the interest of drawing connections between cause and effect in the markets: What’s driving this? Why is this happening? Does it have any knock-on effects? What does it mean?

Second, be humble. If you don’t already possess humility, the market will eventually provide it to you—but it’s almost always more expensive that way!

Accept that you give something of yourself when you put on a position; it exposes your vulnerability to failure. In reality, markets can reward you even when your underlying logic was flawed, and a bet can go badly even when your underlying logic was sound.

Some of the best advice I received went something like “be less concerned about defending your logic and ‘being right,’ because you don’t have all the facts; be more concerned about the outcome and managing your capital.” When it’s framed that way you realize a bad bet isn’t an indictment on your intelligence.

Third, “never say never.” You can say that there’s a low probability of something happening, but you shouldn’t say it will “never” happen. We’ve all seen too many things happen that we thought would never happen. The options markets have this pretty well figured out.

Fourth, find what works for you and develop your own style. At the same time, though, seek the counsel of people that you trust, who can ground you in moments of emotion and the extremes, and who can help you put things in perspective.

Finally, appreciate the place that commodities have in the world…we are in a relevant business with great purpose!

Thank you Brian for your time!

© Commodity Conversations ®

This is a brief extract of a conversation from my upcoming book to be published in November.

Playing for Barcelona

A conversation with Ivo Sarjanovic

Could you please tell me a little about career?

I joined Cargill in July 1989, and after working in Buenos Aires and Sao Paulo, I was transferred to Geneva in 1993 as a wheat trader. In late 1994 Cargill asked me to join the soybean desk. I started as a junior trader and worked my way up to become head of the desk, a position I kept from 2001 to 2011.

I was in charge of Cargill’s worldwide activities in soybeans, including the coordination of crushing activities. It was a role that combined international trading with the strategic side of the business, so it was super interesting. I loved it!

So you were head of the bean desk through the whole of the super cycle?

I first visited China in 1997 at a time when they were buying almost no beans at all. Twenty years later they are importing 85 to 90 million tonnes each year, which is roughly 60 percent of the world total.

This created tremendous opportunities for the desk. I was lucky to be there at that time—and to have had the right experience and the right team to be able to enjoy it. For me it was like playing football for Barcelona in La Liga.

What was Cargill’s share of the world soybean trade at that time?

We had maybe 15 percent. The business was extremely competitive, but not only among the big trading houses. Chinese companies soon started to buy soybeans directly from the origins and trade them to destination.

In 2011 you moved within Cargill from beans to sugar. What prompted that move?

I had been in soybeans for almost 20 years, and I wanted a change. I also wanted to have a position that was more managerial, more asset-based and less trading-orientated. Becoming head of Cargill’s Sugar Division was a perfect opportunity for me. I jumped at the chance.

What are the main differences between the sugar and the soybean markets?

The biggest difference is the delivery mechanism. Sugar trading revolves around the delivery process against the futures market, especially the optionality that you have between the different origins.

What was a surprise was that physical margins were even worse in sugar than they were in beans. Traders are even more willing to discount physical prices to put on a short sales book to end destination.

After a few years of running Cargill’s Sugar Division you merged it into Alvean, a joint venture with Copersucar.

Alvean was probably the best idea I have ever had professionally, combining what at that time were the two biggest traders in a market that was desperate for consolidation. Cargill had the global trading expertise while Copersucar had the origination infrastructure in Brazil. The combination was very strong.

Moving on to your current position, you now act as an advisor to trading companies on risk management.

Risk management is a journey. We can only try for continual incremental improvements. Also, I don’t think there is a definitive way to manage risk; different companies have different methods.

Thirty years ago we managed risk in terms of the size of the position measured in tonnes. We then moved on to looking at the risk in monetary terms, the value. We then began to incorporate tools that were developed by the financial industry such as ‘Daily Value at Risk or DVAR”, “Drawdowns” and ‘Stress’. We combine all these tools into what we call a ‘Dashboard’ and then we try to find a balance, a way to combine each of the various legs such as flat price, spreads, premiums and freight positions within limits.

It was challenging at the beginning, but most people now realise that you can’t trade if you don’t use those tools. Without them you may overtrade relative to your equity and run the risk of ‘blowing up’.

In addition to my advisory work I give courses on agricultural commodities at the Masters level at the University of Geneva, as well as at the Universities of Buenos Aires and Rosario in Argentina. I love teaching young people about our business, and sharing my enthusiasm for the business with them.

Thank you Ivo for your time and input!

© Commodity Conversations ®

This is a short extract of a conversation that will be published in full in my new book due out in November.

A faster and bigger world

A conversation with Riccardo and Emanuele Ravano, respectively President and CEO of IFCHOR

IFCHOR is an international shipbroking company based in Lausanne, Switzerland with a network of 12 offices in Asia-Pacific, Europe, Middle East and the USA. I asked Riccardo, the founder of the company, how it had all begun.

I come from a ship owning family. I started in the shipping business in 1964 at the age of 20, in Genoa, Italy. In the 1970s, politics in Italy began to get really bad, even dangerous. Many of my clients began to move abroad, and in 1976 I decided to follow them. I looked originally at Monaco and then at Geneva. I had a friend who told me that there was a one-room office for rent in his building in Lausanne. I took it.

I started on my own at first with a secretary—who by the way is still with the company 42 years later! Over the years we expanded from one room to two floors…but we remained in the same building!

And Manu, when did you join?

Ours is a family business, so I joined when I was born! I officially started working in 2002, just before the freight super-cycle, which lasted about five years between 2003 and 2008.

How big is the company today?

Today we are about 180 people around the world. I would say we do between 3,000 and 4,000 transactions a year throughout our various offices and segments. We have never calculated the amount of tonnes that equates to, but perhaps we should. It could be good marketing!

Do the big trade houses each have a shipping department?

All of them do. Over the years they have developed bigger and bigger departments. Forty years ago they might have had one guy chartering vessels on a voyage basis, but now they all have separate departments with P&Ls that can reach tens of millions of dollars.

Manu, that’s one big change in the past 40 years. Are there others?

The most important change in the past 40 years has been the development of the market in Forward Freight Agreements, FFAs. These now trade every day in thousands of lots, allowing operators to hedge their freight needs. The FFA market has traditionally been an OTC (Over The Counter) market, where counterparties enter into direct agreements with each other. It is still an OTC market, but since the crash of 2008 all FFAs are cleared either in London or Singapore.

FFAs are closely linked to the physical shipping business. It is the physical shipping market that determines the FFA prices, not the other way around.

Any other changes?

Shipping transports 90 percent of the goods in the world. At the same time, the sector burns only 7 percent of global oil consumption. Shipping globally contributes only 3 percent of the GHG emissions in the world.

Recently, the IMO took a major step to implement—as of January 2020—new regulations to ensure a targeted 20 to 30 percent reduction in GHG emissions, to be achieved principally through the use of low sulphur fuel.

Could LNG be used as an alternative low emission fuel?

There is a currently lot of discussion around LNG fuelled ships, but for the moment the technology is pricey and it is difficult to justify economically. Some charterers may be willing to pay more to charter LNG fuelled ships for environmental reasons, but trading margins are currently so thin that it is unlikely that trading companies could do so and remain competitive. There is also a question of LNG supply at the ports. It is not easy to organize globally. There is a risk of having LNG fuelled ships being stranded.

So how could the industry reduce emissions further?

I think it will be a contribution of many things. There might be some sails that work. There might be some solar power as well. There might be some electric contribution to the engine. It will be an evolution that will take another 10 to15 years before we reach a point of having the right mixture of technology.

What’s the average lifespan of a ship?

That is another thing that has changed significantly over the past 40 years. When my father started in the business, the average lifespan of a cargo vessel was 25-30 years. Today, it is more like 15 years, especially when you look at all the new regulations coming.

Remember though, that some ships are well maintained and safe for carrying grain, even at 25 years old. Others are less well maintained and are a problem at 12 years old. We know which ships are well maintained, and which ones aren’t.

Where is innovation likely to come from in the future in the industry?

Shipping is facing the same challenges as those faced by commodities. Technology has made communication fast and seamless in both chartering and trading. This has led to thinner margins. As a result, traders are seeking economies of scale and shipping is evolving with bigger and bigger ships. Port infrastructure is also adapting to accommodate these bigger ships.

I wouldn’t say it’s a challenge. It’s a reality. We have to adapt to a world that is faster and bigger.

Thank you Riccardo and Emanuele for your time and input.

© Commodity Conversations ®

This is a short extract of the conversation that will be published this autumn in my new book on the grain business.

Agriculture is our backbone

A conversation with Karel W. Valken, Global Head Trade & Commodity Finance (“TCF”) Agri for Rabobank

Good morning Karel, could you tell me a little bit about Rabobank and it’s involvement in agriculture?

Rabobank is cooperative bank that emerged from small agricultural cooperative banks founded by Dutch farmers. We have Members but no shareholders.

Agriculture is our backbone. We understand the seasonality and the complexity of farming. As a cooperative it can be a challenge to raise enough capital, and for that reason we tend to be conservative. But the advantage of not being listed is that we can take a longer-term view of the business; we can be more patient. We are perhaps more focused than other banks on contributing to the wellbeing of society.

I saw from your website that your mission statement is “Growing a better world together.”

I recently did a presentation to the bank’s executive board where I looked at the mission statements of the ABCD+ group. They all had similar statements. We are aligned.

Growing” stands for sustainable, healthy growth, development and progress. “A Better World” goes beyond our clients, employees, and members and includes our communities and our associations. “Together” is important because, as a cooperative bank, we believe in the power of coalitions. Our strength lies in connecting people and knowledge. It is much more than an empty slogan!

This mission is part of our Banking for Food (“B4F”) strategy. It entails the meaningful role we want to play in food transition, and how we can help feed the 9 billion people that will be on this planet in 2050, while respecting planetary boundaries.

In terms of sustainable financing, which commodity presents the greatest challenges?

If you look at my area of responsibility, most challenges are in cocoa and coffee, simply because of their level of complexity and the need to improve the livelihood for smallholders. We spend a lot of time on those two commodities, even though they are much smaller in terms of volume than grains and oilseeds.

Our challenge is to stop deforestation and prevent climate change, while at the same time feed the world: how can those two objectives coexist? We have to embed sustainability in the business and our daily thinking. Our “sustainable toolkit” includes services & financing from Rabo Foundation/Rural Fund but also the Fund we established with United Nations called “Agri3” to combat deforestation and enhance livelihood of smallholder farmers.

Do you think a time will come when Rabobank will only finance commodities that are certified as sustainable?

This year we were the sustainability coordinator of a $2.5 billion Revolving Credit Facility with green features. Customers are getting discounts on the interest rates they pay as long as they meet certain sustainability criteria. I would not be surprised going forward if companies that are not green, or less green, they will still get financing, but they will have to pay a premium.

It is different for palm oil. The consumer pressure is different. We do not finance companies that are not RSPO members. We may sometimes make an exception if a company is not RSPO certified as long as it is committed to become RSPO certified, and has put the correct milestones in place. We can help them on that journey.

Could you describe a typical TCF finance?

TCF has traditionally meant, “transactional financing,” where we would finance, say, a Ukrainian wheat exporter to purchase wheat from farmers and to export it. We can finance the wheat from the moment it is in an upcountry silo though until the importer’s Letter of Credit is opened and cashed.

We make an important distinction for the ABCD+ group—the seven companies covered by your book. The ABCD+s each have individual credit ratings within the bank, which allows for unsecured financing. We provide them with anything up to $1.5 billion in working capital that they can use throughout the globe for different purposes. We do not finance them on a transactional basis. That is why the distinction between ABCD+ companies and non-ABCD+ companies is so important.

How do you see your business evolving in the future?

There are two strategic drivers for our agri-clients: sustainability and innovation.

We divide innovation into two categories: food and feed innovation and digital innovation. The first is to meet changing consumer demands. For example, Dreyfus recently invested in a company producing fake blood from beet for vegetarian burgers. We help our clients with this type of innovation through our franchise. We have a platform called FoodBytes, headquartered in California, which looks at the innovation needed to meet changing consumer demands. We help our clients with start-ups and their incubation to take them to the next step.

On the technical/digital innovation side, we have embedded in our teams a number of people who are looking at, say, Blockchain or robotics. If you look at Dreyfus again, they recently signed a joint partnership with a big e-commerce platform in China, which they will use to sell their brand of soybean oil.

Traditional TCF is changing. The amount of due diligence that we now have to do is such that smaller merchants will have increasing difficulty in obtaining financing. We do not have the mandate to do business with companies with a capital below $25 million, simply because the income we can create from this kind of client is too small—and the risk is too big.

The world’s population is growing and international trade will have to play an increasing role in keeping people fed. International traders will continue to have a role despite disintermediation and the democratisation of information. Their role will be in logistics and risk management, and having a large global footprint will allow them to maintain optionality in the chain.

Thank you Karel for taking the time to share your experience with us!

© Commodity Conversations ®

This is a short extract of an interview to be published in my upcoming book.

Trading with a purpose

A conversation with Greg Morris

Good morning Greg. Could you please tell me about your current role within ADM?

Good morning Jonathan. Earlier this year, I was asked to bring together our Origination and Oilseeds business units into what we call today, Ag Services and Oilseeds, which I now lead. This new combined business unit constitutes a significant portion of the employees, the revenues and the profitability of the corporation. Fortunately, it is also made up of some of the best talent in the company and the industry, so I am fortunate to work with a great team every day.

What tonnage of commodities does ADM trade each year?

 We process about 60 million tons of ag commodities each year. We don’t disclose the tonnage that we trade, but it would certainly be bigger than that.

Some people would say that ADM is an industrial rather than a trading company. Would you agree?

Many companies that operate in this space feel that their job is to trade. Our philosophy at ADM is different. We trade with a purpose. We don’t trade just to trade; I think that is yesterday’s model.

We trade to support higher utilization rates in our assets. We trade to help provide products for our customers. So no, I wouldn’t say that ADM is necessarily a trading company. We trade as a critical function of managing our portion of the supply chain to serve our global customer base.

 Are you affected by the current overcapacity in agricultural production and logistics?

 We’ve certainly had some challenges with oversupply of some of raw materials, such as grains and oilseeds, and this has led to margin compression. However, it goes back to having the right philosophy.

Recent trade policies and decisions have resulted in regional dislocations, as has the terrible weather in some of the growing areas in the U.S. Some parts of the U.S. have been badly hit by flooding; others have been relatively okay. Our global footprint has allowed us to keep supplying our customers – when we can’t get something out of the U.S., we can often get it out of Europe or South America, and vice versa. That’s really the critical role for our industry – companies with global reach like ADM are the ones that can move agricultural and food products from areas of supply to areas of demand. So it’s been a dynamic situation, but overall, I think we have fared pretty well in a challenging environment.

 Are there any ways that the sector could better meet the challenges it faces?

Looking forward, I believe that partnerships will become more interesting for the industry as a whole.

At ADM we’ve done some partnerships, as have others in the industry, in order to reduce the risk of an investment, or to participate in a new region of the world. For example, we’ve recently entered into two separate joint ventures with Cargill: one, called SoyVen, which owns and operates a soy crush facility in Egypt, and another, called GrainBridge, that is developing a single digital platform for farmers to consolidate information on production economics and grain marketing activities. We’re also a founding member of an industry initiative to standardize and digitize global agricultural shipping transactions.

 What advice would you give to a young person starting a career in commodities?

 In a trading role, and in the current environment, the best advice I could give would be to keep your head on a swivel. You have to pay constant attention, whether to global economics, geopolitics, the weather, currencies, or the latest consumer trend. As a commodity trader, you can’t read a newspaper or watch the news without naturally connecting it back to your business, because it all matters.

From a career growth perspective it’s important to think beyond whatever your current role is. I would advise any young person in this business to stretch themselves and find other ways to contribute to the corporation and develop good business management and leadership skills. Trading can be a great foundation, but don’t limit your professional options.

 Is there anything that you’d like to add?

I think for me it’s important to recognize that ADM has undertaken a lot of change in the recent past but there is one thing has remained constant: we are proud of the role that we play in the world.

Our purpose statement says “We unlock the power of nature to enrich the quality of life.” We believe that is a noble cause. But at the same time we are evolving. We are transforming our portfolio of businesses, our capabilities and the way we interact with our customers across all of our businesses. We are more process focused and disciplined and our growth strategy includes a very robust agenda.

ADM is a much different company than the company I joined 24 years ago. We’re a stronger company and I’m proud to have been part of the evolution.

© Commodity Conversations ®

This is an excerpt of a full-length interview with Greg that I will publish in my book later this year.

Feeding the world in 2050

Jason Clay, the head of agriculture at WWF US in Washington, once famously calculated that the world’s farmers will need to produce as much food in the next forty years as they produced in the past 8,000 years. Can they do it?

The UN’s FAO believes that they can. At a world summit back in 2009 the Organisation predicted that in order to feed the world in 2050 global agricultural production would have to be 60 percent higher than it was in 2005. Although that sounds a lot, it would be a smaller increase than the agriculture sector achieved over the previous past half century.

Where will that 60% extra production come from?

The FAO expected that, in aggregate, more than 85 percent of the increase in production would come from improved yields. They projected global cereals yields would increase from 3.3 tonnes/ha in 2005 to 4.30 tonnes/ha in 2050. World average yields for other major crops were expected to follow similar patterns.

The rest would have to come from bringing more land under agricultural production. The FAO estimated that the world has a total of around 7.2 billion ha of land suitable for rain fed food production. After discounting for areas already in production, under forest cover or put to other uses – as well as land that is only marginally suitable – the world has some 1.4 billion ha of prime land that could be brought into cultivation.

Much of this, however, would have to come at the expense of pastures, and would require considerable investment. In addition, some of that spare land is not readily accessible due to lack of infrastructure and its distance from markets, making production uneconomical.

The FAO estimated that land under crops would increase by some 70 million ha by 2050. However it warned that much of the spare land is concentrated in a small number of countries, for example in Brazil. Some countries may find it difficult to increase the amount of land under food crops.

All this means that, at the global level, the FAO was optimistic that agricultural production could be increased enough to satisfy the 60 percent increase in demand projected to 2050 for both food and non-food uses.

Where are we ten years later? the World Resources Institute, a non-profit organization, still believes the challenge can be met, but only if certain  “gaps” can be overcome. In a recent report entitled “Creating a Sustainable Food Future” the WRI identified three gaps. The first is the food gap, the difference between the amount of food produced in 2010 and the amount necessary to meet likely demand in 2050. They estimated this gap to be 7,400 trillion calories, or 56 percent more crop calories than were produced in 2010. (Their numbers are pretty much aligned with those of the FAO.)

The second, the land gap, is the difference between global agricultural land area in 2010 and the area required in 2050 even if crop and pasture yields continue to grow at past rates. They estimated this gap to be 593 million hectares, an area nearly twice the size of India. The third, the Green House Gas (GHG) mitigation gap, is the difference between the annual GHG emissions likely from agriculture and land-use change in 2050 compared to emissions that have been targeted under the Paris Agreement to limit global warming to below an increase of 1.5°C.

The foundation argued that closing these three gaps would be harder than often recognized. The report’s lead author said, “If we tried to produce all the food needed in 2050 with today’s production systems, the world would have to convert most of its remaining forests, and agricultural alone would produce almost twice the emissions in 2050 allowable from all humans sources.”

The Intergovernmental Panel on Climate Change (IPCC)—a global group of scientists convened by the United Nations to study climate change—is also worried about agriculture’s GHG emissions. In a report published last month, the panel warned that cutting emissions from major polluters like factories and power plants won’t be enough to keep global warming below the two degrees Celsius agreed under the Paris Climate Agreement. They concluded that land use and food systems have to change, too.

The report found that food production (including post-harvest activities like transportation) accounts for between 21 and 37 percent of greenhouse gas emissions caused by humans. The scientists emphasized the need to manage land better and recommended diversifying cropland, reducing food waste and transitioning to vegetarian or vegan diets. The report found that methane emissions are rising again after a no-growth period between 1999 and 2006. Methane is a particularly potent greenhouse gas, and cows and global rice production are largely to blame.

They also warned that climate change will exacerbate food insecurity even in the best-case scenario. In fact, they say that climate change is already affecting agricultural production.

Many of the solutions outlined in the IPCC report—farming techniques that prioritize soil health, reforestation—take time. It can take years to rebuild soil that’s healthy enough to withstand a flash flood or a dust storm; a tree can’t start capturing carbon until it’s several years old. The IPCC warn that the time to act is now.

A failure to do so would lead to increased degradation of land because of intensive farming, while a rise in deforestation would accelerate climate change that would in turn make land less fertile and productive, the IPCC added.

We all agree that the way forward for agriculture, and for a sustainable food future, is through producing more food per hectare, per kilogram of fertilizer, pesticides, and herbicides, and per litre of water.

Are our farmers up to the challenge? You bet!

© Commodity Conversations ®


Grown commercially since 1997, GM (genetically modified) corn now accounts for about one third of the corn grown in the world, most of which has been genetically modified to tolerate glyphosate, sold as Roundup, a relatively inexpensive herbicide that kills all plants except those with genetic tolerance.

Monsanto released glyphosate resistant soybeans under the name Roundup Ready Soybeans in 1996 and within ten years 80 percent of all soybeans grown in the US were Roundup Ready. Roundup Ready corn received FDA approval in 1997 and it was commercially released in 1998. It used much the same technology as in soybeans, but also had built-in insect protection in the form of a Bt protein, a naturally occurring bacterium that lives in the soil and is toxic to insects.

Scientists also modified corn genes to make the crop more drought tolerance. Drought tolerant GM corn was approved by the USDA in 2011, and commercialized in 2013.

As Christine Du Bois writes in her book, “The Story of Soy,” some 80 percent of all soybeans in the world are genetically modified to be resistant to Roundup. In the Americas, that figure rises to 95-100 percent. In terms of acreage, GM soy accounts for around half of all GM crops in the world.

GM soy largely came about as a result of the introduction of Roundup in the 1970s, with Monsanto trying to find a gene that was resistant to the herbicide. They eventually one in bacteria in a Roundup factory’s waste pond, and engineered it into soy plants. The introduction of Roundup Ready soybeans allowed farmers to increase yields by planting rows closer together. Without it, farmers had to plant rows far enough apart to allow weed control by mechanical tillage.

The Monsanto Company was no stranger to controversy; it once manufactured the insecticide DDT, as well as the defoliant Agent Orange that was widely used in the Vietnam War. Bayer, a German multinational pharmaceutical and life sciences company bought Monsanto in 2018 for $66 billion. Since then Bayer has been entangled in litigation over claims that Roundup causes cancer, something that the company obviously denies.

Over the past twenty years, GM technology has revolutionised farming and transformed the seed and agricultural input business. Previously, much of a farm’s cost of production was in purchasing chemicals: fertilizers, herbicides and pesticides; chemical companies made their money selling these inputs. Now the cost is in seed development . The result has been a merging of the chemical and seed businesses: over recent years, the large chemical companies have bought up the seed companies.

Although GM technology has revolutionised the industry, its effect on yields is sometimes questioned. By one estimate, about 50 percent of yield increases since the 1920s have been the result of breeding, including genetic modification, while the other half have come from improved farming practices: better farming techniques have been just as important as genetics. However, that is hardly surprising when you consider that the primary objective of genetically modifying crops has not been to increase yield potential. The increases in yield that have come with genetically modified corn have come in the form of yield protection and stability, not actual increases in yield potential.

In Seeds of Science: Why We Got It So Wrong on GMOs, Mark Lynas, an early anti-GMO activist, admits that the scientific evidence for the safety of GMOs is robust. He writes, “I cannot deny the scientific consensus on GMOs while insisting on the strict adherence to the one on climate change, and still call myself a scientific writer.”

Meanwhile, Amanda Little, in her book “The Fate of Food: What We’ll Eat in a Bigger, Hotter, Smarter World, quotes Tamar Haspel, a journalist for the Washington Post, as saying, “The argument against GMOs has never really been about the GMOs themselves. It is about a corporate-dominated, industrialised food system for which GMOs serve as a kind of proxy.”

She argues that the public may be more accepting of the new gene editing technology, CRISPR (pronounced CRISPER). Gene editing involves the deletion, insertion, or modification of the genome at a specific site in a DNA sequence. She writes,

“CRISPR may not win minds and hearts overnight, and we still have much to study and learn about it. But here’s hoping that transparency, community involvement, and applications in the public interest will bring gene editing sceptics to the table — disbelief at least temporarily suspended — to give it a chance.”

However, as The New Food Economy argues, these new techniques are already creating a debate about what “genetic modification” really entails. Most people use the term to refer to inserting foreign DNA from one organism into another. This process, known as transgenic mutation, cannot happen on its own in nature.

CRISPR doesn’t require the insertion of foreign genetic material. The technology allows scientists to precisely edit in, or edit out, targeted traits. In this sense, CRISPR is an acceleration of traditional methods of plant and animal breeding, and not an unnatural mutation that could not occur outside of a laboratory. The United States Department of Agriculture (USDA) seems to agree, and has decided not to regulate gene-edited crops in the same way as GMOs.

Of all the new developments and new technologies in agriculture, CRISPR seems to be the one with the most potential to increase yields, something that is essential if we are to stop deforestation and biodiversity loss. But to do that, it will first have to be accepted by consumers. Fingers crossed that it is!

© Commodity Conversations ®

The History of Agriculture

My book on the grain merchants has reverted to the title I first thought of, “Alphabet Soup—The Seven Companies at the Centre of Your Food Supply.” I am still aiming for publication in early-November.

There is a saying in the book business that “the wastepaper basket is a writer’s best friend.” In putting together the first draft of my book, I deleted large chunks of what I had previously written. I have fished out some of the least bad bits, and I will share them with you over the coming weeks. This is the first:

As Richard Manning wrote in “Against the Grain: How Agriculture has Hijacked Humanity,” of the roughly 300,000 years that mankind has wandered this earth, we have spent 290,000 of those as hunter-gatherers. Agriculture is a relatively new game for us and, as you have realised when visiting your local supermarket, we still have hunter-gatherer genes.

And even during the last 10,000 years, farming has changed little. Fields were regularly left fallow, and animal manure was the sole fertiliser. It was only in the early 1800s that scientists began to understand that inorganic minerals such as nitrogen, potassium, lime, and phosphoric acid could replenish depleted soils, leading to the production of mineral fertilizers.

The search for fertiliser led merchants and scientists to the dry seabird islands off the South American and South African coasts, where immense deposits of bird droppings, rich in nitrogen and phosphorus, had accumulated over centuries. Guano mining became a profitable business. Between 1840 and 1880, guano nitrogen made a vast difference to European agriculture, but the best deposits were soon exhausted. Rich mineral nitrate deposits were found in Chile, and nitrate mines gradually took the place of guano in the late 19th century.

However, as Michael Pollen writes in The Omnivore’s Dilemma, the great turning point in the modern history of agriculture can be dated to the day in 1947 when a huge munitions plant at Muscle Shoals, Alabama, switched over from making explosives to making chemical fertilizer. He explains that at the end of World War II, the US government found itself with a surplus of ammonium nitrate, the principal ingredient in making explosives. Ammonium nitrate is an excellent source of nitrogen for plants, and the chemical fertilizer industry (along with that of pesticides, which are based on the poison gases which were also developed for war) was the product of the government’s effort to convert its war machine to peacetime purposes.

Even though the earth’s atmosphere is about 80 percent nitrogen, nitrogen atoms have to be split and joined to hydrogen atoms (“fixed”) before they can be used for fertilizer or bombs. A German Jewish chemist named Fritz Haber worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on earth had to be fixed by soil bacteria or by electrical lightning, which breaks down nitrogen bonds in the atmosphere.

In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that “there is no way to grow crops and human bodies without nitrogen.” Without Haber’s invention, the amount of life on earth would have been limited by the small amount of nitrogen that bacteria and lightning alone could release. Mr Smil argues that as a result, the Haber-Bosch process for fixing nitrogen (Bosch commercialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 percent of the people on the earth today would not be alive if not for the invention. Without synthetic fertilizer, billions of people would never have been born.

Although Fritz Haber won the Nobel Prize in 1918 for “improving the standards of agriculture and the well-being of mankind,” he has since largely been airbrushed out of history. During World War I he helped the German war effort by making bombs from synthetic nitrate. Worse, he also developed poison gases including Zyklon B, the gas used in the Nazi concentration camps.

Michael Pollen argues that once mankind had acquired the power to fix nitrogen, the basis of soil fertility shifted from a total reliance on the energy of the sun to a new reliance on fossil fuel. The Haber-Bosch process works by combining nitrogen and hydrogen gases under immense heat and pressure, the energy supplied by electricity. The hydrogen is supplied by oil, coal or, most commonly today, natural gas.

Growing crops, which from a biological perspective had always been a process of converting sunlight into food, has become a process of converting fossil fuels into food. More than half of the world’s supply of usable nitrogen is now man-made—and more than half of all the synthetic nitrogen made today is applied to corn alone.

© Commodity Conversations ®

A conversation with J-F Lambert

Good morning J-F. Could you briefly describe who you are and what you do?

I am a former banker with a banker’s DNA. I spent most of my career in international banking and trade finance, with stints in Greece and Asia. I was originally with Crédit Commercial de France -CCF, and then with HSBC, when they took over CCF. I moved to London where I built the structured trade finance activities, and then the global commodity finance activities for the group.

I’m now a consultant on trade and commodity finance and strategy for banks, companies and funds. I also teach commodity market dynamics at Sciences Po in Paris, and regularly lecture at the London Business School.

How are the different trade houses adapting to the changes in their business environment?

Although everybody is investing in logistics, Glencore is differentiating itself through a strategy of size. They believe that through size they can reduce costs, and perhaps even become a price-setter rather than a price-taker.

When you talk to ADM or Cargill, they tell you that they don’t trade commodities, but that they are an integrated supply chain from farm to fork. Their profits are not coming from trading; their profits are coming from sophisticated supply chain management. They also endeavor to generate commercial margins by producing and selling adding-value products downstream.

Cargill has been doing this for many years now, shifting focus to animal and fish proteins. This certainly makes sense when population is increasing and the middle-class is growing. The world needs more protein, and Cargill’s investment into the verticality of the protein supply chain is paying off handsomely.

ADM is a different animal. Let’s not forget that the original “A” amongst the ABCDs was André, not Archer Daniels Midland. ADM is by and large an agri-industrial company, not a trading house. It has developed into trading, but the bulk of their money is spent and earned on the industrial part of the business.

Dreyfus will also tell you that they are no longer a trading house, and that they are now supply chain managers. However, Dreyfus is probably one of the last true large trading houses left in the market. That is quite a challenge in a market where the odds of making money through trading get slimmer.

Bunge is somewhere in between Cargill and Dreyfus. There is more trading at Bunge than there is at Cargill, but Bunge is keen to complement their upstream capabilities with downstream access, in search for commercial margins. Their aim is to lower their reliance on trading and become more of an agri-industrial company.

What about COFCO, or rather their trading company COFCO International Ltd? You once said that their role was to feed the dragon.

COFCO International is a game changer in the world of agricultural commodity trading.

I believe their true mission is to optimize sourcing at origin and ensure a smooth and efficient supply for the Chinese market. Their grip on China as a destination is already strong and will only get stronger. This is a major issue for the ABCDs, as price discovery in China will get more difficult to read.

I believe the rivalry between the U.S and China is a new normal. If that view is correct, COFCO International’s role becomes even more important. It has to restructure the sourcing and origination of China’s food imports in order to lower the country’s dependency on the U.S. To fulfill it efficiently, I would expect further acquisitions/alliances down the road.

Do you believe that traceability is an integral part of a trade house model?

Traceability is not a luxury, it is “a must have.” Part of the process of industrialization is to efficiently support that traceability requirement. For now, consumers in developed countries are the most demanding, but with emerging urban middle classes around the world, requirements for traceability will only rise and spread.

There seems to be a growing trend for banks to link finance to sustainability and human rights objectives.

I see a future—not too far away—where at least the large banks will eventually only finance sustainable production. This is the trend. If you look at the coal business, not a single international bank will finance a new project in coal fired power generation. I think that banks will have to exit non-sustainable agribusinesses. Not doing it would merely be unacceptable to the society at large, and the reputational risk incurred would be too high.

 Will any of the big trading companies exit their bulk commodity trading operations to concentrate on higher value parts of the supply chain?

Trading companies will not “quit” trading. It is their core expertise and their culture. However, trading as a stand-alone is no longer generating profits in line with the risks undertaken. All large trading companies therefore are endeavoring to complement – or rather, enhance – their trading capabilities by capturing what they have identified as the higher value parts of the supply chains. This is easier said than done.

First, you need to identify the right supply chain and the right portion of it: upstream or downstream. Second, investing in supply chains is costly and companies need the financial strength to do so.

Not every player can afford the risks and costs involved. This leaves them with two alleys: partnerships and mergers amongst equals.

Do you think that trade houses should be publicly quoted?

A listed company has to have a growth story to tell, year after year to investors. This does not fit well with the cyclical nature of the commodity business. But I will go one step further. As I already said, commodity traders are currently struggling to make money, and I think that they will continue to struggle in the years to come. So I doubt we will see any commodity traders listing in the next 10 or 15 years.

Would you recommend a young person now to join one of the big grain trading companies?

There is no better school for someone to learn about markets and discover how the world works. Commodities are about history, demography, geography, economy, finance and geopolitics! It is a fantastic training for young people, even if they intend to move on to other activities.

Thank you J-F for your time.

© Commodity Conversations ®

This is a brief extract of a conversation that will be included in my upcoming book on the grain trade, to be published before the end of 2019.

More Questions for GJ

What are the biggest challenges currently facing the grain merchandising industry?”

In the 2000 to 2010 boom the industry built up too much capacity, too many silos. Farmers around the world have also built storage capacity. Their need for merchants of grain to store commodities, and to take them off their hands at harvest time has become less. That is a significant change that challenges intermediaries such as ourselves. We need to add value to the farmers in a different way than we have done in the past.

Another challenge that we face is government intervention; the current trade conflict is an example. Tariffs and import and export bans make it harder and more costly to move food around the world. They lead to inefficiencies and extra costs.

Ian McIntosh, the CEO of Dreyfus, recently said, “One tweet and everything changes.” Traders need volatility, but they like volatility that is at least partially predictable.

If you trade you need price volatility. If the price doesn’t move, you can’t make money. You might not lose either, but not losing isn’t enough to stay in business. By definition traders require volatility.

However, unpredictable political volatility increases risks and costs. It becomes a casino, and then it becomes gambling rather than trading. There have been a lot of market impacting tweets. That has made trading difficult in the past year.

But one thing I would say is that our global scale has helped us to find solutions. Recently, trade tariffs have made it more expensive to supply US beans to our buyers in China, but because of our global scale we have been able to supply Brazilian beans instead. We couldn’t do that without global scale. If you were a small regional player in the US you would have been caught in that.

Can grain merchants still add value, or can the market now do without intermediaries?”

There are a lot of myths around the grain trade, that traders just make money hand over fist, that they are making huge amounts of money on the backs of farmers and consumers. It is not true. In reality, margins are very thin in the agriculture sector.

On the plus side, pressure on margins means that we are constantly looking to make the systems more efficient, to cut back costs, and to make sure that our agricultural products are moved in the most cost effective and efficient way.

So yes, there is a need for intermediaries as long as they can continually reinvent themselves to add value. We have to differentiate ourselves from our competitors and to add value on both ends of the spectrum, at origin and at destination. If you cannot add value, then there is no reason for you to be in business.

Is traceability compatible with tradability?

I don’t think traceability necessarily kills tradability, but it clearly restricts it. You end up with an IP (Identity Preserved) product. It is a value added product that is not really exchangeable. A commodity is a commodity because it is exchangeable. An IP product requires segregation; it is not a standard product.

Our objective within Cargill is for all products to become sustainable. Once that happens the distinction between traceability and tradability no longer exists.

How has Cargill changed since you joined?

At its core, the company has not changed. We are still a values-driven company where ethics and compliance is at the top of who we are. That has not changed over 150 years and I don’t think it will ever change. It is a family requisite. The Cargill family cares about the company, about passing on to the next generation, and that will only happen if we take care of the company in an appropriate manner.

Cargill has however changed from a portfolio perspective. When I joined in 1987 we were still predominately a trading company. The trading part of Cargill is still a critical part of the company. We still have an active trading business. We trade actively around our assets. We are a major supply chain manager. But we have also diversified our portfolio into the value-added products. We have invested heavily into animal feed, into the meat businesses, into starches and sweeteners, fermentation. That has diversified the revenue streams, but it has also allowed us to capture margins in the downstream supply chain just as the margins in trading were under pressure.

Chris Mahoney, the CEO of Glencore Agriculture, told me that something like 15 percent of his company’s revenue comes from trading and merchandising.

It is difficult to put an exact number on it, and trading is an art not a science; it varies from year to year. We still have a huge amount invested in people and talent to trade and position in the market place, and I would guess that it is larger than our competitors today. Nevertheless, the trading side of Cargill relative to the rest of Cargill is now less than it used to be. That is simply because our portfolio on the value-added side has grown significantly.

What makes Cargill different from other merchandising companies – what is your USP?

I am not going to talk about our competitors, so I will answer that question in terms of what I think we are good at.

Number one is our exceptional talent—our people. Number two is that we are truly global as a company; we have good assets in all the key geographies, whether at origin or destination. Number three is the way that the different businesses within Cargill work together. Number four I believe we can differentiate ourselves by the importance we place on our relationships with customers and suppliers. We work with our end users and our suppliers to adapt to their changing needs.

Would you recommend young people to become traders, to join Cargill?

You are asking someone with a fascination for markets and trading, so yes I would recommend anyone to become a trader. Trading will never disappear. We manage risks, and those risks will never disappear. There is risk all along the agriculture supply chain and that risk has to be managed. To manage risk you have to understand the marketplace.

To take that one step further, you go beyond simply risk management into trading opportunities, where you see something that the market is mispricing, and you seek to profit from that. That is how markets work. It is a fascinating business. You have global forces at play.

There is now greater need to understand mathematics and mathematical models than in the past. Data science is becoming increasingly more important. I joined Cargill before the Internet existed. And I studied law, not mathematics. But I guess I must have some ability at maths, otherwise I wouldn’t be where I am today.

So you need to be strong in mathematics now to be a good trader, and that is not for everyone.

You also need to be able to manage stress. Your job should not be at the cost of your health. It is a tough environment. A lot of people come and go. It is performance driven culture, if you don’t perform consistently you will be replaced. You are always at the cutting edge. Performance is quick to come and go.

Cargill is often viewed as a training programme for the industry. How do you feel about that—and how do you manage it?

 I have mixed feelings about that. In one sense it bothers me. Through our training we are obviously feeding our competitors with talent. But at the same time I am proud that we recruit and train people so well. That tells you a lot about this company and the way we invest in our people. I think that is a good thing.

But frankly there is no choice at the end of the day. We are a pyramidal structure. People are promoted on merit, and there will be people that fall out of that system. Our objective is to maintain our strongest talent. We don’t always succeed. But not everyone can make it to the top, so there will always be people that seek other opportunities. I think that is ok. It is the way the system works; it is inevitable.

What would like to read about in a book about the grain trade?

The grain trade plays a vital role in the agriculture sector and I think that story needs to be told. The industry has a stigma that is hard to lose but the key is transparency. We have to show we are doing good, but we also have to admit to our challenges and vulnerabilities. I am proud of the way that Cargill has evolved. We tell our story in good faith. We have very strong values, and we are in the business for the long run.

To feed a growing population we have to make sure that our farmers receive a fair payment for their crops and that they thrive. But at the same time we need to care for the planet. We don’t want any further deforestation. There are paradoxes that we need to manage. We are in the middle of this and want to play a role. There are a lot of conflicting issues to be managed. We cannot ignore one away in favour of another. They need to be handled and met at the same time.

Thank you GJ for your time!

The full interview will be published in my upcoming book, “Out of the Shadows: The New Merchants of Grain.”

 © Commodity Conversations ®