A conversation with Dan Basse: Part One

Dan Basse is founder and CEO of AgResources

Growing up in Wisconsin, Dan Basse raised hogs on his father’s farm to put himself through Wisconsin State University. He had originally planned to be a veterinarian, but after a few years running the hog operation, he began to realise that some years he made money and he could enjoy the university life, while other years he didn’t make much money, even though his costs hadn’t changed. He told me that he was doing the same things in terms of costs, but it was all about marketing the hogs.

He began to get interested in markets to try and understand what drives prices. He took some economic courses, fell in love with the subject and switched his major from veterinarian studies to economics.

Dan how many hogs did you have when you were a student?

I had between 120 and 150 each year,” he told me. “Running the operation gave me some ideas about the business of farming. It was a good way to get a young lad into the world of agriculture. I knew that I didn’t want to be a hog farmer long term, so maybe it also encouraged me to work harder in college!

And does the farm still exist?

We still have the family farm but we now employ a farm manager to run it for us. My mother is still alive at 83, but my father passed away in 2013. The farm is located near the city of Milwaukie and we are involved in an urban restoration project there, building a few apartment buildings on some of the land. But we are still farming; we don’t have livestock anymore, but we grow vegetables and apples.

About ten years ago my wife told me to get a hobby, so I bought a dairy farm in Ohio where I raise high-end Guernsey cattle. It is an unusual cattle breed for the US, but the breed has been in my family going back three generations. We show them in fairs and have had some national champions, so it has been quite successful. I enjoy it. It is a good way for me to get away from my consulting business and enjoy the rural life.

Are the cattle grass-fed?

Yes. They are largely grass-fed, but we still have to use about 10-15 percent of a grain mixture so that the cows get enough vitamins, along with the balanced diet, that they need for milk production. We have about 270 head of cattle, so it is a relatively small business.

I have some clients with farms as large as 40,000 head. The average in the US is probably around 900 head, so my operation is small. The trend in the dairy sector has been from small to large operations, a mix of corporate and family-owned. The big problem we have in the US at the moment is finding help; the labour market is so tight. That is a constraining factor on the dairy sector, even for us with our three employees.

You founded AgResource in 1987 at the age of 30. Was it a success from the start?

Yes! Within the first couple of weeks I had 600 clients through a new entity called DTN, Dataline Transmission Network. At that time farmers didn’t have access to price quotes, and I was one of the first on the DTN service to provide research. The owners of DTN told me that no one would ever pay me the $50 per month that I was charging for my research, but they were wrong. Businesses need good research. Today we have over 1,200 clients in 87 countries.

In your opinion, what makes a good analyst?

First, you need the ability to take large amounts of data and to put it into a format that is sensible and consistent. Second, you need the ability to get on with people. You have to have contacts within the industry to bounce ideas back and forth. Having the data is one thing, but you also have to have ground level input from real people: market participants, farmers, traders, governments etc. So a good analyst has not only to understand data, but also to understand people and what drives them. Third, you need the ability to write and to communicate your research in a readable, interesting manner. It’s a rare combination of skills.

Economics is our preferred subject of study when we look for an analyst —normally a Masters Degree or a PhD. A farm background helps.

Dan, you are among the leading analysts in the grain sector. What do you think first made your reputation as an analyst?

There are two occasions that come to mind. The first was the Carter grain embargo when we quickly understood that the US government would be buying up a lot of the surplus grain stocks.

The second was the biofuel build outs and the way that the mandates in the US, EU and elsewhere would lead to a sharp increase in demand. You could smell, taste and put your fingers in it in terms of projecting future grain demand. It was therefore relatively easy to see the bull markets that enveloped the grain markets from 2007 to 2014.

It then became equally as easy to see that agricultural markets would begin to struggle as the biofuel industry matured. We lost that demand driver while at the same time productivity and yields continued to improve.

The current situation is less clear. Trade wars are not as clear as biofuel mandates. The future in terms of politics is far more difficult to predict.”

Do you think the Chinese ethanol program could be the next driver for global grain demand?

We think it will drive some demand, but it is not clear how quickly the program can be implemented. It should lead to 37 to 45 million tonnes of addition annual corn demand. That will ultimately deplete Chinese stocks by 2021, and led to increased imports after that date. But unfortunately when you look at corn yields and technologically, the industry is advancing faster than we thought it would. Yields are increasing faster than demand. But that Chinese ethanol demand will of course be helpful to the world corn market.

In the 1960s and 1970s we were all worried about having enough food to feed the world. And that repeated itself in the early 2000s with the growth of biofuels and the food versus fuel debate.

If you do some long term modelling of population growth and farm yields, we could start to run out of agricultural farmlands around 2050. Until then, I don’t see really what, apart from a weather problem, could alter the situation. I can’t see where the next demand driver will come from. Until we find one, any rallies in price are supply-based, weather etc. I can’t see demand catching up with supply until we get to 2025 or beyond.

Could biodiesel come to the rescue of the US soybean producers?

We have seen record demand recently for biodiesel. It is mandated, so that demand trend will persist. At some point it may become mature in the same way that ethanol demand matured. We believe that world energy demand will peak somewhere between 2029 and 2031. As we start to use more electric vehicles biofuel demand will slow, but for the moment it keeps gliding upwards.

The US has anti-dumping cases against a number of biodiesel producers, so we have been trying to keep supply out of the domestic market.”

Have GM crops aggravated these surpluses? Looking back, could you argue that the world didn’t, or doesn’t, need GM crops to feed itself?

I think we need GM crops to feed the world, particularly as population continues to grow. The problem that has occurred is that farmers always overreach when they see profitability; they have bought in more land than we needed. It is not just GM that has enhanced yields—it is also farm technology, GPS, drones etc, as well as better fertiliser, pesticides and herbicides.

Looking back to the 1800s, it has always been demand shifts, whether war, biofuels or the growth of Asia that have jump started our grain demand. Our current trade wars are disruptive in terms of flows of grain rather than overall grain demand. So it is a question of shifting the chairs around the table, rather than putting more food on the table.

© Commodity Conversations ®

What does the customer want?

This blog is based on comments made to a workshop organized by Azucarera in Madrid in May 2019

Over history, market power—or pricing power—has shifted along the agricultural supply chain, first from farmers to merchants, then from merchants to processed food companies and now, ultimately, to the consumer.

The shift in power from farmer to trader began as food became more plentiful. The discovery of the Americas and the opening up of vast new agricultural areas, accompanied by efficiencies in ocean freight, along with refrigeration, dramatically increased food supply. This reduced the market power of farmers, particularly among the great land owning families in Europe.

In the UK, the repeal of the Corn Laws in 1846 was a pivotal event in the history of food production. It removed tariffs on imported grains, lowered food prices, encouraged farm efficiencies and led to the surplus food and labour that powered the industrial revolution. And since then, despite rising population, increasing agricultural yields, as well as gradual area expansion, have reinforced this trend.

As farmers and landowners lost market power, traders gained it. The pricing power moved to the people and the companies that could finance, store, transport and process these vast quantities of food.

But over the past few decades the tectonic plates have moved again. It has been the turn of merchants to lose their market power to the food companies. It is difficult to pinpoint when that process began. Perhaps it was with the gradual introduction of processed foods and the concentration of commodity purchasing power into the hands of a reducing number of large processed food producers.

More recently, the democratization of information, particularly the rise of social media, has dramatically shifted market power from the food companies to the consumer. Social media can both build and destroy a brand, even a company. The consumer may be a lonely individual in front of his or her computer screen, but he or she has found strength in numbers on Facebook, Twitter, Instagram and the like.

But if it is the consumer that now has the market power, what does the consumer want?

The answer, of course, depends on the consumer. Broadly speaking, a consumer wants to be able to choose between a variety of convenient, cheap, safe and healthy products which haven’t damaged the environment, or infringed on human rights in their journey along the supply chain. But let’s break down that sentence a little.

Convenience—There was a time when many of us grew at least some of our own food, stored it throughout the year, and then spent long hours in the kitchen preparing it. Now, we have neither the time or the inclination—nor even the space—to invest in our food. Instead, we pick up something for dinner on the way home from work.

VarietyAccording to the author Michael Pollan, there are 45,000 different food items in an average US supermarket. Go to any French supermarket and you will see huge variety of yoghurts. Go to the UK and you will see a huge variety of soft drinks.

Of course, most of those different food items are made out of the same things. More than 25 percent of the 45,000 items in a US supermarket contain maize. And, according to the FAO, more than 40 percent of all human calories come from just three crops: rice, wheat and maize. So maybe, even if the consumer wants choice, what he really gets is only the perception of choice.

Safety—In the Western World we largely take it for granted that the food we eat won’t kill us. In the developing world, food safety is still a big issue, particularly in China.

Health – The consumer is shifting from tradition- or culture-based consumption to science-based consumption. Consumers no longer eat what their parents ate, or told them to eat; they eat what science and the media tells them to eat. Unfortunately, for all the reasons we know, food and nutrition science is difficult. There are often as many studies showing that a particular food is bad for you as there are showing that it is good for you.

As a result, consumers have to form their own beliefs, and they do that within their own new—and ever shifting—tribes, tribes that are usually formed on social media. These beliefs can be extremely strong; in that sense, food has become “the new religion.”

Food now defines you. Are you vegetarian, vegan, or flexitarian? Are you gluten- or lactose-intolerant? Do you mind eating GM foods, or eating animals that have eaten GM feeds? Will you only buy organic produce—or will you go for the cheaper options? Are you sugar-free? And if you are, does that include the “natural” sugars in fruit and fruit juices? (As if the sugar in sugar beet is somehow not “natural”, but that is another story.)

Sustainability—The Boston Consulting Group recently did a survey in the fashion sector that found that 75 percent of consumers said that sustainability was “extremely or very important” in their purchasing decisions. However, on closer questioning, only 7 percent said that sustainability influenced their purchase decisions. More important factors included low prices, high quality, convenience and “trends”.

BSG came to the conclusion that sustainability is a prerequisite rather than a driver of purchasing decisions. Consumers expect and demand now that everything they buy is “sustainable.” It is not an add-on, a nice-to-have thing. It is a prerequisite. But because it is a prerequisite, consumers are not willing to pay more for it. And as you all know, sustainable production has to be certified, tracked, and separated. This pushes up costs and reduces margins all along the supply chain. But at least in this, you—we—now have no choice. We have to be sustainable.

Human rights—Consumers want to know that farmers and suppliers have received a fair return for their labours, but they also want—and expect—the cheapest price possible. There is an obvious contradiction here. In many cases, perhaps in most cases, price wins.

Price—The first priority for most consumers in developing countries is to feed their families with the small amount of income that they have. Food is a major part of the family budget. In Nigeria, for example, consumers spend 64 percent of their income on food. Compare that to the UK where we spend 8.2 percent of our income on food. In the US the figure is 6.4 percent. Nearly all of us in the developed world could all pay a little more for our food without it impacting our standard of living.

However, we are all products of our evolution. We may go to the supermarket to buy an organic, certified product, but we end up buying the two-for-one special offer supermarket-own brand. After all, we have a family to feed, and the wellbeing of our family comes before the health of the planet, or the safety and wellbeing of the workers who produced it.

But there is hope in our own selfishness. Our first responsibility may be the health and wellbeing of our families—the survival of our genes. However, we know that we have to provide farmers with a living if we want them to provide us with food. We also know that our genes won’t survive for long if we don’t look after the planet. As such, sales of SOFT (Sustainable, Organic and Fair Trade) foods are increasing.

Maybe we consumers do know what we want, and maybe we are indeed sending the right signals back down the supply chain.

© Commodity Conversations ®

Secrets and conspiracies

OK, I had to do it. I couldn’t write a book* about commodity trading without (finally) reading The Secret Club that Runs the World—Inside the Fraternity of Commodities Traders by Kate Kelly, formally a journalist with the Wall Street Journal. The book was published in June 2014, so you may ask why it took me so long to get around to reading it. The answer is that the title put me off. It reeks of a conspiracy theory; it suggests that the commodity traders work together to secretly “run the world.”

But it wasn’t just the title that put me off; it was also the advertising blurb. The publishing company writes, “… if the individual participants in the great commodities boom of the 2000s went unnoticed, their impact did not. Over several years the size of the market exploded, and so did prices for raw materials—raising serious questions about whether the big traders were intentionally jacking up the cost of gasoline, food, and other essentials bought by ordinary people around the world. What was really driving all those price spikes?”

All sensational stuff! The advertising blurb adds that the author “takes us inside this secretive inner circle that controls so many things we all depend on”.

Imagine my surprise, therefore, when I finally read the book and found that it wasn’t the conspiracy-accusing, and industry-demolishing, book that the title suggested. In fact, it was more like a cross between Gala and Vanity Fair magazines.

I recommend that you read the book if you are, for example, interested to know that the fiancée of one hedge fund manager went to Paris three times to have her wedding dress fitted, but eventually chose a dress that was off the peg. Or that the same hedge fund manager decided not to drive his Bugatti in the South of France for fear that gravel from the driveway would chip the car’s paintwork.

It is a nice book, fun and easy to read, and as entertaining as celebrity gossip always is. But I am afraid you won’t learn much about commodity trading from it. Nor will you learn anything about the secret club of commodity traders that rules the world.

So why the misleading title and advertising blurb? Probably because the publishing house knows how to sell books—and they know that everyone likes a conspiracy theory. They know that people like to believe that secret clubs—or groups of powerful, often sinister, people—control our lives, and indeed really do rule the world.

The only problem is that they don’t, and it was therefore impossible for Kate Kelly to write a book that lived up to its title.

The political scientist Michael Barkun has argued that people like conspiracy theories for three reasons. He writes,

“First, conspiracy theories claim to explain what institutional analysis cannot. They appear to make sense out of a world that is otherwise confusing. Second, they do so in an appealingly simple way, by dividing the world sharply between the forces of light, and the forces of darkness. They trace all evil back to a single source, the conspirators and their agents. Third, conspiracy theories are often presented as special, secret knowledge unknown or unappreciated by others. For conspiracy theorists, the masses are a brainwashed herd, while the conspiracy theorists in the know can congratulate themselves on penetrating the plotters’ deceptions.”

There is certainly no shortage of conspiracy theories in our commodity markets. As Dan Morgan wrote in Merchants of Grain, it explains why trading “companies…stay in the shadows most of the time. Perhaps it was the ancient nightmare of the middleman-merchant that made them all so secretive—the old fear that in moments of scarcity or famine, the people would blame them for all their misfortunes, march upon their granaries, drag them into the town square and confiscate their stocks.”

Unfortunately, there can often be an anti-Semitic element in this, particularly as many traders and financiers are Jewish. Daniel Ammann touched on this issue in his book, The King of Oil. He wrote,

“For centuries Jews in Europe had suffered from discrimination. They were unable to become farmers, as they were forbidden from owning land. As they were excluded from the craft guilds, they were unable to become craftsmen. The Catholic Lateran Council of 1215 stated that Jews were not allowed to carry out the most important economic activities of the time. They were however permitted to perform one function that was proscribed for medieval Christians: making loans with interest. Thus the Jews became moneylenders and traders in the absence of other options.

“It is one of the ironies of history that the persecution and expulsion of the Jews is what made such an efficient trading community possible. King Edward I of England expelled the Jews in 1290, and the French monarchs Philip IV and Charles VI chased them from fourteenth-century France….Sephardic Jews were forced to leave Spain in 1492. By the onset of the modern era, the Jewish Diaspora was greater than that of any other people. The scattered Jews had a trading tradition that was second to none and sufficient confidence to enable trade over large distances and periods of time.”

But I will lead the last word to Yuval Noah Harari, author of Sapiens—A brief History of Mankind. He writes,

“As a historian, I’m sceptical about conspiracy theories because the world is far too complicated to be managed by a few billionaires drinking scotch behind some closed doors.”

© CommodityConversations®

* I hope to publish Out of the Shadows: The New Merchants of Grain later this year




Wheat weirdness

As part of my background research for my new book*, I stumbled on the novels of Frank Norris. Born in Chicago in 1870, Mr Norris travelled widely as a journalist; as a news correspondent in South Africa (1895–96) and as a war correspondent in Cuba during the Spanish–American War in 1898. As a writer, he had planned, in his own words, “to write three novels around the one subject of Wheat. First, a story of California (the producer); second, a story of Chicago (the distributor); third a story of Europe (the consumer) and in each to keep to the idea of this huge Niagara of wheat rolling from West to East.”

The Octopus, the first volume in the trilogy, was published in the spring of 1901. It centred on the early wheat farmers in California and their battle with the railroads. The second, The Pit, was published posthumously after Norris died in 1902, at the age of 32,  from a ruptured appendix. He left The Epic of the Wheat trilogy unfinished.

I wouldn’t recommend either The Octopus or The Pit to anyone other than hardened wheat fans. Both are overly long—Kindle estimates that The Octopus is over a ten-hour read—and verbose. They are a difficult for a modern reader:—and I include myself in this—anyone with an attention span more in tune with Twitter than early 20th century American literature. Another difficulty is Norris’s writing style: pretentious—and sometimes plain weird. He describes the wheat as follows:

“There it lay, a vast, silent ocean, shimmering a pallid green under the moon and under the stars; a mighty force, the strength of nations, the life of the world…wheat! Indifferent, gigantic, restless, it moved in its appointed grooves. Men, Lilliputians, gnats in the sunshine, buzzed impatiently in their tiny battles, were born, lived through their little day, died and were forgotten; while the wheat, wrapped in Nirvanic calm, grew steadily under the night, alone with the stars and with God.”

His description of the Chicago Board of Trade wheat pit is just as pretentious,

“There it went, day after day. Endlessly, ceaselessly the Pit, enormous, thundering, sucked in and spewed out, sending the swirl of its mighty central eddy far out through the city’s channels…All through the Northwest, all through the central world of the Wheat the set and whirl of that innermost Pit made itself felt…Because of an unexpected caprice in the swirling of the inner current, some far-distant channel suddenly dried, and the pinch of famine made itself felt among the vine dressers of Northern Italy, the coal miners of West Prussia. Or another channel filled, and the starved moujik of the steppes, and the hunger-shrunken coolie of the Ganges’ watershed fed suddenly fat and made thank offerings before ikon and idol.”

As for weird, his description of the spring planting takes some beating:

“One could not take a dozen steps upon the ranches without the brusque sensation that underfoot the land was alive, roused at last from its sleep, palpitating with the desire of reproduction. Deep down there in the recesses of the soil, the great heart throbbed once more, filling with passion, vibrating with desire, offering itself to the caresses of the plough, insistent, eager, virtuous. Dimly one felt the deep-seated trouble of the earth, the uneasy agitation of its members, the hidden tumult of its womb, demanding to be made fruitful, to reproduce, to disengage the eternal germ of Life that stirred and struggled in its loins.

“It was the long stroking caress, vigorous male, powerful, for which the Earth seemed panting. The heroic embrace of a multitude of iron hands, gripping deep into the brown warm flesh of the land that quivered responsive and passionate under this rude advance, as robust as to be almost an assault, so violent as to be veritably brutal.”

Weird, although it did reflect the then common belief in a Mother Earth, or Mother Nature, as the (female) force that fed and nourished us. Mr Norris continues with a (less pornographic) description of ploughing on one of the ranches:

“The ploughs, thirty five in number, each drawn by a team of ten (horses), stretched in an interminable line, nearly a quarter of a mile in length. They were arranged, as it were, en echalon—not one directly behind the other, but each succeeding plough in its own width farther in the field than the one in front of it. Each of these ploughs held five shears, so that when the entire company was in motion, one hundred and twenty five furrows were made at the same instant.”

Today, the ranch would probably still use 300 horses for ploughing, but all in one tractor.

There is a scene in The Octopus where a group of Californian ranchers are discussing how to combat the railroads that are squeezing them on freight rates. One rancher suggests sending their wheat in the other direction, to China. He explains,

“At present all our California wheat goes to Liverpool, and from that port is distributed all over the world. But a change is coming; I am sure of it. Our century is about done. The great word of the nineteenth century has been Production. The great word of the twentieth century… will be Markets. As a market for our wheat…Europe is played out. Population in Europe is not increasing fast enough to keep up with the rapidity of our production. The result is over-production. We supply more than Europe can eat, and down go prices….The remedy is not in curtailing our wheat areas but in this: WE MUST HAVE NEW MARKETS, GREATER MARKETS. For years we have been sending our wheat from East to West. We must march with the course of Empire, not against it. We must look to China!

“Send your wheat to China! Do away with the middleman, break up the Chicago wheat pits and elevator houses and mixing houses. When in feeding China you have decreased shipments to Europe, the effect is instantaneous. Prices go up in Europe…We have the key; we hold the wheat…Asia and Europe must look to America to be fed.”

The result, Mr Norris wrote, would be:

“The farmer suddenly emancipated, the world’s food no longer at the mercy of the speculator, thousands and thousands of men set free of the grip of Trust and ring and monopoly acting for themselves, selling their own wheat, organizing into one gigantic trust themselves, sending their agents to all entry points of China.”

So Frank Norris’s books aren’t totally weird. Over 100 years ago he was already predicting both the rise of China and the disintermediation that would occur in the grain trade!

*Out of the Shadows: The New Merchants of Grain, will be (hopefully) published later this year

© Commodity Conversations®

A conversation with Kristen Eshak Weldon

Part Two: The future of food

“Joining Dreyfus is a tremendous opportunity for me in terms of innovation and disruption,” Kristen told me, “and my initial focus is on the future of food.”

“So where do you start?” I asked her. “You arrive at LDC, you are given a long business title and then what?”

“The first thing I had to do was to understand what makes LDC successful as a company. I initially spent very little time in London and instead tried to go to the places where LDC has a major presence. I visited the industrial assets and wanted to understand the industrial processes, but more importantly I wanted to meet the people and understand the culture of the company.

“During this initiation period I realized that people were often working on the same challenges in different regions, but without necessarily sharing their experiences. It is essential that we leverage best practices across regions, so my first task was to try and link the dots.

“The second thing I had to do was to define our investment thesis. The future of food topic is so vast, there are so many things we can be doing. Upstream is logical in terms of looking at helping farmers to be more efficient and more effective, but it is a really crowded space, and more the domain of the seed and technology companies. The downstream part has more opportunities and is adjacent to what we already do, but we have to decide what is relevant to us, and where we can be impactful.

“Could you tell me a little about your company’s investment in MOTIF?”

“I joined LDC when the due diligence was nearly done. This investment is really exciting, cutting edge and I would place it on the far right hand side of our range of opportunities as it relates to adjacency. MOTIF leverages biotechnology to create innovative ingredients that replicate animal proteins in terms of texture or taste. The company is based in Boston and was the second start-up to launch from Ginkgo Bioworks. Investing in MOTIF was a way for us to help us understand more about the future of food.”

“The other agricultural commodity traders have already been serial acquirers in the sector, moving into specialty areas. What will you do differently?” I asked.

“Our intention is not to provide all of the F&B companies with a blanket solution for all their specialty ingredients, but we will do it in specific areas and regions. And we will do it differently. We are looking to work in partnership with other companies in the form of joint ventures, or by bringing in external co-investment capital on the innovation side. This will allow us to move quickly.”

“Don’t you think LDC is starting the process a little late in the game compared to your competitors?”


“Maybe, but one thing that gets drummed into your brain at business school is that there is no such thing as a first mover advantage. That and “fail fast.” I would have liked to have had some lessons learned from previous acquisitions, but we are certainly not too late. The timing is still right, and we can add value in the areas and regions that are less trafficked.”

“In the late 90s Continental Grain decided that the risks in commodity trading weren’t worth the rewards, and they sold their commodity trading operations to Cargill. They then became a major investor in the faster growing parts of the food chain, almost as a venture capital fund. Is that something that LDC might consider doing, selling off their bulk handling operations?”

“Absolutely not. The trading part of our business is the DNA of our company. That won’t go away. When we look at new areas we have to ask what we bring to the table and how, are they adjacent to what we know and do best. We can bring industrial scale to a business, as well as our risk management skills. Our geographical footprint helps massively. We already operate in countries where a start-up may not be able to go by themselves—countries where we already understand the regulatory landscape, the political issues etc.”

“What about brands?” I asked. “LDC has a crushing plant in China, and if I understand correctly your plan is to take beans all the way from Argentina through to branded bottled oil in China. That’s a new venture for you: a branded consumer product.”

“Branded consumer products are not new to LDC per se. Over the years, we have created a number of branded consumer products, including edible oil brands “Vibhor” in India and “Vila Velha” in Brazil, or “Zephyr” coffee in the US, together with rice and sugar brands. Today, we plan to go downstream in a more structured approach where we leverage our matrix structure and take experts from our platforms that know these products, and then use our regional resources that understand local consumer demands.”

“And that leads me on to my most important question: what does the consumer want? Is it sustainability, health, human rights, a fair income for farmers, or what?”

“You are asking the wrong question. Different consumers want different things. That’s what makes this job so interesting, and provides so many opportunities.

“First, it depends on where you are in the world. If you look at Europe and the US, then health is probably the number one issue, followed by environmental sustainability and human rights. Farmer welfare probably comes last but that does not mean that it is not important. In China and other Asian countries, consumers are looking closely at quality and safety, for example. In the poorer parts of the world, the first question usually is, “How can I meet the daily needs of my family?”

“Second, regardless of where they are, different people have different priorities. They may be vegetarian, vegan, flexitarian, or whatever. There are opportunities in providing different consumers with different solutions.

“As a company, our downstream approach has to be crafted differently for each region and for each market segment. At the same time we have to keep a focus on the macro picture of feeding the world safely and sustainably. We have to be aware of what our global goals are. We have to look at the entire value chain and where it is impactful.

“Everyday when you leave the office you should ask yourself, “Am I doing the right thing? Is what I am doing beneficial, and do I feel good about it?”

“That is what is really important about what I am doing at LDC, especially on the innovation side. We want to know that we are delivering a food product in a safe and environmentally sustainable way, that we know exactly where it comes from, and that the labour that produced it is being paid market wages.

“I want to be someone that does positive things, and I want to work with aligned parties that share our values, whether it is the companies that we invest in, or fellow investors in these companies.”

“Thank you Kristen for your time.”

© Commodity Conversations ®

A conversation with Kristen Eshak Weldon

Part One: Women in Commodities

Kristen Eshak Weldon is the recently appointed Head of Food Innovation and Downstream Strategy at Louis Dreyfus Company, a title that her father thinks might be a contender for the longest business title in the world.

She was born in New York City and raised in Houston Texas, before going to the Georgetown University in Washington DC. There she was one of about four women and about 200 men in her year to obtain a degree in Finance and International Business. Kristen told me that she had intended to study marketing, but quickly switched to finance because she liked the “concreteness” of mathematics. She added that with a finance degree “your work was done at the end of the day, versus a liberal arts degree where you always had more reading to do.”

“So you’re a mathematician?” I asked her.

“I like facts and being able to resolve problems,” she replied. “In liberal arts you can always ask another question without reaching a conclusion.

“I graduated at the height of the dotcom boom so many of my classmates joined start-ups. I joined JP Morgan where I went into the markets training programme. Everyone else I knew from Georgetown went into investment banking, rather than trading. I was attracted to the lifestyle of trading, being on your toes, making quick decisions, but not necessarily carrying risk overnight.

“I started in Fixed Income, and hated it. It was really boring. I spent my time modelling trades, but in the 18 months that I was there I only did one trade! One of the group’s VPs at the time was moving to commodities, and he took me with him. I started off as a salesperson in the metals group, one of two analysts. It was fantastic. I loved the fact that it was real and tangible.

“I particularly liked commodity balance sheets, understanding the supply and demand, bringing it all together. I also like the precision of a model, when it all comes together. I worked with corporate clients, particularly in base metals.

“I have two younger brothers; they are twins. By this point they had come to New York as well. They are both in the music industry, so we would laugh that we were all touching platinum in some sort of way! I was trading it, and they were trying to make platinum records. They are immensely successful.”

“So you are all high achievers in your family,” I commented.

“Yes, I think my parents are very happy, although they did have their doubts about my brothers when they were younger! We all were raised as one unit, almost like triplets. I was only 16 months older than they were, and I was never treated any differently at home in terms of what I could achieve, or what my parents wanted me to do.

“I remember when I was about nine or ten. I went one Saturday to my Dad’s office where he was C.E.O. of a hospital in Houston. He had a little mini refrigerator in his office, and I was excited about which soft drink I would choose from it. I sat in his assistant’s chair and I told him that I wanted that chair when I grew up. He got really cross. “You should want my chair,” he told me, “Not my assistant’s seat.”

In 2003 JP Morgan asked me to move to London to cover North American and European consumer and producer clients in both base metals and energy. When I was 14 I had come to London to stay with a friend, and I fell in love with it.

“I arrived in London the weekend of the LME Summer Party: July 4th when the US markets are closed. I was a 25-year-old American woman and I thought, “Oh My God, what have I got myself into?” I stuck it out for as long as I could, but it was tough.

I remember my first LME Dinner, a sea of men in dinner jackets! The drinking went on all night and I got home at 5am, only to turn right around for a breakfast meeting at 7am. I wouldn’t have gone to the Playboy Club, but I was happy to go to the parties. I felt they were necessary to network.

I did my best to fit into this male atmosphere. I think a lot of that speaks to my childhood and my degree. Having two brothers so close in age, our house was full of boys. I was also used to the comments—you know how abusive siblings can be to each other! Then at university I had a lot of male friends. So the banking and trading environments weren’t that alien to me. It was just that the LME was the extreme end of that. The verbal comments eventually got to me. Things like that should not be happening in the 2000s.

Having previously talked to Blackstone about a job in NY, I called my contact and said, “Listen I have made a mistake. I would really like to work with you, but I would like that to be in London.” And he said, “yes”. So I left JP Morgan in June 2004 and joined Blackstone in July. It was a completely different atmosphere from the LME desk at JP Morgan. It was a younger industry.

“I stayed at Blackstone for thirteen and a half years. I built a commodity hedge fund platform. It was great fun. I had a hugely supportive boss. He encouraged me to speak up more in meetings and not to be afraid to ask a question or express a point.

“I remember that I was disappointed not to have been promoted during the 2008 review season. I asked my boss why that was. He replied, “Because you never asked.” So the next year I asked. I was pregnant with my first child, but I made sure I kept my personal life personal so that I would just be assessed on the merits of my performance. I was promoted to Managing Director in 2009 and made a partner in 2013. I was young and I was the first female partner in London!

I knew that Kristen would hate this question, but I asked her any way. “How did you manage your work life balance?”

“When I was pregnant with my second child my husband left his trading position at JP Morgan. We took the view that my career at that point was looking positive. His career was going in a different direction, with trading mostly going electronic. His real passion in life is design and architecture, and we had just bought a new house—a major renovation project. We agreed that he would invest his time into the house project, and I would continue to work. We moved into the house three years after that.

“My husband is around much more for our children than I am right now. I think that it is really difficult if both parents are going full speed. In any case, society is changing. Dads now take much more of a role in family life. (Paywall) Not seeing their kids can be tough for the Dads as well. Child raising is an equal task to be shared.

“In 2017 the commodity hedge fund business was slowing; funds were closing and the environment was becoming more challenging. I thought it would be a good opportunity to step back, clear my head and at the same time spend more time with my family. My boys were growing and as they say, “small kids small problems, big kids bigger problems”. I felt it was the right time to spend a bit more time at home.

“I applied and was accepted for a Sloan Masters in leadership and strategy at the London Business School. The course was amazing. It was a great year for me even if I didn’t spend more time at home!”

“And after that you joined Louis Dreyfus?”

“Yes. I had known Ian McIntosh for some time and he called me around May 2018. We discussed his ideas for LDC, and I shared with him a lot of what I had learned in my Masters course, in terms of innovation and disruption, while keeping the culture of a company. Basically, how you disrupt from within. In October, after he became CEO, he asked me to join. I jumped at the opportunity.

“You have had a fabulous career so far—and a great opportunity in your new position. Can women have it all?” I asked. “A family and a career?”

“Women (and men) can have it all,” Kristen replied. “In my experience, it has been challenging to have it all at the same time.”

© Commodity Conversations ®

Rip-on / Rip-off

One Friday night in July 2016, 32-year old Jack Marrian was woken from his bed in his suburban Nairobi home, handcuffed and taken to the city’s central police station. It was the beginning of an almost three-year nightmare that saw him spending three weeks in a crowded Kenyan jail, deprived of his passport for two years, charged with drug smuggling, and faced with the prospect of spending 30 years of his life in jail.

The previous evening Kenyan Customs officers—in the full spotlight of local media—had opened one of four shipping containers that had just arrived in the port of Mombasa. They found that two of the 50k bags of white sugar in one of the containers had been replaced with 100kg of cocaine, with an estimated value of US$6 million.

The sugar was part of a total consignment of 22 containers that was being shipped from Brazil to Kenya, with transhipment in Valencia in Spain. Mshale Commodities (Uganda) Ltd, the East African arm of British sugar-trading company EDF Man, was the importer of the sugar, and the company’s name was on the documents. Jack is a director of the company.

Jack told me by telephone from Nairobi that it is unheard of for a consignment of shipping containers to be split up so that some containers arrive ahead of schedule. He explained that the four containers that arrived early couldn’t be cleared through the port when the shipping documents were for a 22-container consignment. “A shipping line would normally never split consignments like that as they would be liable for the punitive port storage of the early arriving containers in the discharge port until the balance arrived,” he told me.

“I first heard of the issue from the TV news on the Friday evening,” he said. “The media said that four containers had arrived that day, which did not make sense to me as my shipment was 22 containers, and showing an ETA ten days later.

Unknown to Jack at the time, the US Drugs Enforcement Agency, the DEA, had been tracking the drugs from the moment the smugglers had placed them in the container while it was waiting to be loaded at the port of Santos in Brazil. The DEA had warned their counterparts in Spain that the drugs were on their way, and suggested that they wait to see who came to pick them up. Somehow the warning leaked out, and no one turned up to collect them. Before the Spanish police could get a mandate to open the container, it was whisked off on the next boat to Mombasa. The DEA then informed the Kenyan authorities that the cocaine was on its way.

The container with the drugs, MEDU3333950, was fast tracked out of Valencia directly to Mombasa. The other containers that were split up in the process were reconsolidated in Salalah port, to arrive in Mombasa with the others.

Smuggling drugs in legitimate containers is known as Gancho Ciego or “Rip-on/Rip-off.” The method is widely used by drug gangs around the world, but most particularly out of Brazil. The UNODC describes Rip-on/Rip-off as “a concealment methodology whereby a legitimate shipment, usually containerized, is exploited to smuggle contraband (particularly cocaine) from the country of origin or the transhipment port to the country of destination. In “rip-off” cases, neither the shipper nor the consignee is aware that their shipment is being used to smuggle illicit cargo. For this method to be successful there will always be local conspiracy both in the country of origin or the transhipment port as well as in the destination country.”

The European Monitoring Centre for Drugs and Drug Addiction adds, “The drugs are usually loaded in the dock area, so the ‘rip-on’ team must be able to get the drugs into the container terminal and to locate the container, which must be in an accessible position. In most cases the security seal needs to be replaced with a duplicate to avoid obvious signs of tampering.

“At the port of arrival, the drugs need to be retrieved, which can be achieved in a variety of ways. The drugs can be removed from the container by corrupt port workers or by external teams who gain access to the terminal. After the ‘rip-off’ is complete, the container is either left open or resealed with another false /duplicate seal. The success of the rip-off depends on knowing the location of the container within what is often a very large container terminal with tens of thousands of containers. However, just knowing the container number is usually not enough. It must also be accessible, which again usually requires a corrupt port or company worker to manipulate the position of the container.”

In Jack’s case the smugglers cut the locking bars of the container so as to gain access to it and insert the drugs without disturbing the original seal. A spare MSC seal was found amongst the drugs by the Kenyan authorities.

When the Kenyan police arrested Jack they showed him a photograph that had been taken at passport control in Nairobi airport of three Caucasian men; they asked him if he knew them. He did not, but they were subsequently identified as suspected members of the ‘Ndanghreta crime syndicate. They had arrived at Nairobi airport a few days before the four containers arrived in Mombasa. No one is sure, but the plan was probably for the smugglers to bribe their way into the port, recover the drugs, and rescue an operation that had gone wrong. Unfortunately for them—and for Jack—the Kenyan police got to the drugs before they did.

After Jack was arrested, the DEA wrote a letter to the Kenyan prosecutors explaining what had happened, writing, “The DEA would like to stress that there was no indication the cocaine was to be received in Kenya.” They added, “The company owning the consignment had no knowledge that the cocaine was secreted inside their shipment of sugar.”

Unfortunately, the Kenya authorities continually denied ever receiving such a letter, and the case against Jack and his co-defendant Roy Mwanthi, a Kenyan clearing agent at the port, dragged on. It was only in March 2019 that the case was finally dismissed.

“I don’t want this to happen to anybody in our business ever again,” Jack told me.

“But how can anyone stop it?” I asked him.

“In my case,” he told me, “the vertical bar on the shipping container concerned had been cut through, so that the bar could be turned, and the container opened, without disturbing the seal. (See photo below.) The smugglers than put the drugs inside, closed the container and re-welded the bar, without breaking the seal.

“I think it should be standard practice for containers to be double-sealed between the two doors,” he continued. “The first seal would be a cable that goes between the two central bars, and act as a physical deterrent that needs to be banged off before the container can be opened. The second would be a multiple-layer security-sticker that goes across the two doors with a bar code readable by any standard smart phone. The sticker will allow anyone to check quickly and easily at any point whether that seal has been broken.”

“But how can we implement that change?” I asked him. “How can we make that happen?”

“Traders can implement their own policies for sealing containers,” he replied, “but there needs to be an industry standard. It shouldn’t be something that individual importers need to ask for as an add-on, or as a special favour.”

Listening to Jack, however, I wondered about the effectiveness of any sort of sealing method. Along with the drugs in the container, Kenyan Customs found a counterfeit seal that would have been used to reseal the container in Valencia once the drugs had been removed.

“Surely the solution lies in the hands of the shipping and trading companies,” I asked him. “It must come rather from the port authorities increasing security at the ports.”

“The challenge,” Jack admitted, “is that you are up against a large-scale well-funded organisation, especially from Brazil.”

At the same time as Jack was struggling with the courts in Kenya, Mr Ammaiappan Vasudevan, the 51-year-old partner of Amro Sugars—a sugar importer in Sri Lanka—spent ten months in a Colombo prison pending trial on charges of also smuggling cocaine from Brazil.

On 4th May 2016, 184 sugar containers belonging to Sucden were loaded onto MSC Julie in Santos, Brazil. The Sri Lankan company Amro Sugars bought 54 of the containers while they were afloat, while other Sri Lankan importers bought the 130 remaining. The consignment went via Sines, Portugal where the containers were trans-shipped onto MSC Luciana for Sri Lanka. The cargo cleared customs in Colombo on 9th June, but the containers sat unopened for four days in a privately owned yard until they were inspected by the Sri Lankan Narcotics Raid Unit (NRU).

The NRU had received a tip-off giving them a precise container number. The country’s President, along with attendant press, was present to witness the NRU opening the container. Inside, the NRU found 80 kg of cocaine, marked with a tiger stamp, in three black travel bags, along with duplicate seals.

Mr Vasudevan was present at the time the container was opened and he was arrested on the spot, along with the two wharf clerks who had cleared the sugar consignment through Customs. In addition, Amro Sugars’ bank accounts were frozen, leaving the company barely able to operate.

Even though the NRU privately acknowledged that Mr Vasudevan had purchased the sugars afloat—and therefore could not have known about the drugs—he still languished in jail while the investigation continued. At the time it was the biggest ever drug seizure in Sri Lanka, and drug smuggling is an unbailable offence in Sri Lanka.

One month after the seizure, Amro Sugars’ employees found 274 kg of cocaine in a further two containers and immediately informed the NRU. Because they did so, no one was arrested and the company was ruled an unwitting recipient. However, there was no review of Mr Vasudevan’s case, and Amro Sugars’ bank accounts remained frozen.

This second, separately purchased, consignment had left Santos aboard MSC Letizia, the same ship that carried Jack Marrian’s sugar. All the containers had been loaded on the same date. When the ship arrived in Valencia, the Amros sugar containers were trans-shipped onto MSC Maria Saveria for Colombo, and Jack’s sugar was transhipped to Kenya.

By some estimates, almost half a tonne of cocaine may have been aboard the MSC Letizia when it crossed the Atlantic in June 2016. The drugs were believed to have been destined to the Italian crime syndicate ‘Ndanghreta, which controls up to 60 percent of the cocaine traffic between South America and Europe, and operates in ports all along the Iberian Peninsula, as well as in Italy. According to Nicola Gratteri and Antonio Nicaso, authors of the 2015 book on the crime group Oro Bianco (White Gold), the Rip on / Rip Off technique was developed in the Calabrian city of Gioia Tauro. More than 3.6 million containers pass through the port each year, making it tough to supervise each shipment.

The Italian police first worked out that containers were being broken into when they realised that certain container numbers did not match their seal numbers on arrival. ‘Ndanghreta responded by producing counterfeited seals with matching numbers.

The UN Office of Drugs and Crime states that less than 2 percent of the more than 500 million containers that are shipped yearly are inspected. Drug gangs often target sugar containers because sugar does not show up on scanning equipment. As such, the containers have to be searched by hand – a huge task. This makes the Rip On / Rip Off method relatively cheap. Even if a container is seized, there is only a relatively small quantity of cocaine in each container, reducing the cost to the gang.

I spoke to Sivarajah Jegathieswaran, Mr Vasudevan’s nephew (and partner in Amro Sugars), by telephone from Colombo.

“We were unlucky,” he told me. “We took only 54 of the 184 containers on that first shipment, but one of those 54 contained the drugs. The containers were allocated randomly between the three buyers, and we were unlucky to get the one with the drugs in them. The NRU told us that they knew that we were innocent and that we were not involved in the smuggling, but they still kept my uncle in jail. We don’t understand why. Maybe it was political; maybe they were afraid to release him and then have the media criticise his release. They preferred to keep him in prison.”

He told me that they even refused to release his uncle when a few months later three further containers arrived in Colombo with cocaine in them destined for another importer. The importers again informed the NRU, and no action was taken against them.

I asked Sivarajah what needed to be done to stop this happening again. “It has already been done,” he replied. “We have stopped importing sugar—and indeed other commodities—from Brazil and South America. It is not worth the risk. In any case we make so little money out of the imports. It is not just our company. None of the importing companies in Sri Lanka will now buy Brazilian sugar. We have all stopped importing. Sri Lanka now buys their sugar from Europe, Ukraine and India.

“When my uncle went to prison we asked the Brazilian embassy for help, but they said they could do nothing. Now that everyone in Sri Lanka has stopped buying Brazilian sugar the Embassy has come back to us. But they are not protecting us. There is nothing they can do.”

I asked Sivarajah if he was still bitter about the experience.

“My uncle left the company after his release from prison,” he told me. “He left it to my father and me. He had had enough.

“Some of the containers from the MSC Letizia ended up in Myanmar,” he continued, “but no action was taken there against the importers. So why did the authorities in Kenya and Sri Lanka act the way they did?”

Jack Marrian is the nephew of the Earl of Cawdor, whose family seat is Cawdor Castle in the Scottish Highlands. His case received considerable coverage in the UK media, and I wondered to what extent his aristocratic background might have explained the Kenyan authorities’ reluctance to drop the case, even in light of the DEA evidence.

I asked Jack if he felt that he had been singled out, and made a scapegoat. He replied that he didn’t think so, although he did “believe that it was politically expedient for the Kenyan authorities to publically accuse and prosecute me.”

“In a way I was fortunate to have had all that support from the media,” he continued. “I think it helped.”

“Has the experience put you off trading?” I asked him.

“It has made me very cautious about trading anything out of Brazil,” he replied. “Brazil is extremely high risk. People need to understand the sheer volume of drugs that get smuggled around the world in shipping containers. We traders need to understand the risks. And we need to take the issue seriously.”

© Commodity Conversations ®

Chris Mahoney – CEO Glencore Agriculture

Part Two

Could you tell us a little about the Viterra acquisition, and how it happened?

It was a complicated transaction and at that time I had little experience in major M&A. Canada and therefore Viterra became a focus for us because the Canadian Wheat Boards monopoly rights were about to be rescinded by the government. We were also already a big trader of wheat, barley and canola and these were key exports from Canada so it was complimentary. We began by looking at the business as a whole, and we identified the businesses that we didn’t want. We presold the fertiliser production and distribution to Agrium and CF Industries. We presold a smaller piece of the fertilizer business and some of the grain handling assets to Richardson. If the transaction hadn’t gone through those sales would have been unwound.

We presold those businesses in part to help with financing the acquisition but also because we either didn’t want them or because we wanted to involve Canadian companies in the transaction. There wasn’t an anti-trust issue, as we didn’t already have a business in Canada, but we had to get approval as a foreign company taking over a strategic Canadian company. Pre-selling parts of the business to Canadian companies helped us enormously in getting Canadian government approval. 

We also sold off quite a number of businesses post the acquisition, like the pasta, malt business and the petroleum distribution business; we ended up keeping only about 50% of the company. The enterprise value of the total acquisition was $7.3 billion. At the time it was the biggest acquisition in our space—and still is.

The deal was finalised in Toronto. The Viterra people were in a building and I was in a restaurant with the rest of the deal team just over the road. At one stage there was a long silence and we thought we had lost it to ADM. There was a bit of toing and froing during which I was on the phone with Ivan Glasenberg, Agrium and Richardson deciding whether we should pay more, and how much more. That was one of the beauties of working for Glencore and particularly with Ivan whom I reported to directly. For such a large company there was almost no bureaucracy. You could make big decisions incredibly quickly and easily. It was a huge advantage.

Glencore is somewhat more structured now than it used to be, but to some extent it has to be given the growth of the business post the merger with Xstrata. It is still the same people though. And the company is people. It is only as good as the people that run it.

Why did you keep the Viterra name?

In Canada Viterra had a long history and a well-respected name, appreciated by the farming community, so we had no reason to change it. In Australia, Viterra itself had only bought the business three or four years earlier. Glencore already had a sizable trading business in Australia, headquartered in Melbourne. The Viterra business was headquartered in Adelaide and it was a separate non-trading business providing handling services to third parties as well as to Glencore, so it made some sense to keep the two separate.

Glencore Ltd has transformed itself from a trading company into a mining and trading company. Is Glencore Ag planning any similar transformation, or did the Viterra acquisition already do that?

I think we have largely already done that. Something like 80 percent of our earnings now comes from non-trading. But the asset businesses of Glencore Ag are quite different from the mining businesses of Glencore PLC. Even where we have a dense set of assets such as in Canada—65 country elevators and 5 port facilities—we are buying from the farmer and selling to customers around the world; nothing is entirely back-to-back. So these are asset-based businesses with strong elements of trading running through them. As I said this type of business now constitutes 80 percent of Cargill Ag’s earnings. 

You mean Glencore Ags?

(Laughs) Yes, sorry. You know I still sometimes answer the phone “Cargill!”

Trading has become more difficult for reasons that are well known to everyone. This will not change. The transformation to an asset based company, both in Glencore as a whole and Glencore Ag bought Glencore PLC to where it is today with an annual EBITDA of $14-15 billion. This would obviously be quite impossible as a trading company. Already in the early 2000s we could see that pure trading was going to become increasingly challenging.

Other trading houses are moving both ways along the supply chain. Cargill has moved into proteins; ADM and LDC into ingredients. Is Glencore Ag planning to do something similar?

No. I think that is very difficult to do. If you are Cargill and you started to do that forty or fifty years ago, as they did, then that was the right move. They can continue in that same direction. It is a natural progression. For us to transform ourselves now from an upstream procurement, handling, oilseed-crushing company into a company that captures the full value chain—that includes refining, bottling, milling, branding, ingredients, feed—is very difficult.

I say that for a simple reason: we originate about 80 mln tonnes per year and it is much easier to capture those big flows upstream as you are dealing with fewer origins. For example, Russia exports 40 million tonnes of wheat each year through five or six port facilities. Argentina supplies almost 50 percent of the world’s soybean meal through just a few export corridors. You can capture big flows in relatively few countries moving through big facilities. The business is much more fragmented on the consumption end. Egypt, the world’s biggest buyer of wheat, imports ten or eleven million tonnes and there are multiple importers and in turn numerous millers. 

One of the mantras that you hear in our business is that you have to capture the full value chain. We can’t possibly do that now. It would cost billions to build downstream businesses of a tonnage that was even remotely relevant to the tonnage that we secure upstream. That is not viable from where we are today. Instead we have to look at improving the core business by deploying capital in the right places.

What do your Canadian shareholders add to your business—and do you think that at some stage Glencore Ag will spin off as a private company?

Glencore Ag is already a separate company owned 50 percent by Glencore and 50 percent by our two Canadian shareholders. They add financial muscle. They are in for the long term. They bring certain insights and observations as an outsider in terms of analytics, finance and a global investment perspective that is valuable. 

Are you still looking at mergers and acquisitions?

I still very much believe that the industry requires consolidation through mergers or acquisitions. Moving downstream is not tackling the problem. What I believe we need to do is stick to our core business, focus on developing the broadest geographic footprint to spread the crop and event risk, increase our economies of scale, and take a disciplined approach to organic expansion. The industry is still under pinned by good demand growth and seaborne trade will grow at a faster rate than consumption itself. Technology does not threaten our handling and processing business as it cannot replace the assets themselves. 

Where is there over-capacity?

In the north of Brazil…in the US Pacific North West…..in the US Gulf….in the Ukraine…on the east coast of Australia. There was only limited overcapacity in Canada on the west coast but with recent investments in the port of Vancouver there will now be more overcapacity for a number of years. 

Not only is there over capacity, but also the existing installed capacity has become a lot more efficient, largely because transport has become more efficient. Trains and trucks are getting bigger, and operators have expanded their terminal input capacity. For example, the railroad in Canada and barge system along the Amazon are increasingly more efficient. Efficiency gains are of course effectively capacity gains.

What is preventing M&A activity in the sector?

A number of things. You would think that pressured margins would encourage acquisitions. The industry has had a difficult two or three years during which potential acquirers have had their own earning issues and were obviously less bold. Things were potentially cheaper but the buyers were more careful. On the other hand, sellers are reluctant because they think the industry is going to get better. It hasn’t yet. Anti-trust and foreign control regulation is also a potential hurdle to some combinations.

Half of Brazil’s cane is used to make ethanol. Do you believe biofuels have a future?

People blow hot and cold on biofuels. Politicians were positive on biofuels 12 years or so ago, and they set up structures to support them: either mandating their use or providing tax advantages, or both. This propelled ethanol production in the US and Brazil, and biodiesel production in Europe.

In 2007/8 and again in 2012, we had periods of high crop prices and people became rightly very concerned about the competition between food and fuel. When you look at the amount of food that gets processed into fuel it clear why this is an issue. We should be very concerned about using food to produce fuel when people don’t have enough food. The other issue is when you look at the carbon footprint of biofuels and consider fertilizer, water and diesel use, you can question whether they are really that good for the environment. That issue hasn’t been completely resolved. This turned the politicians off and the political support was pulled.

However, I think there has been something of a rethink. Food prices have come down and we have surpluses again. When that happens, biofuels can help support prices for farmers. Over 40 percent of US corn production is used for ethanol, and over 50 percent of EU rapeseed is used to produce biodiesel. If you took away that demand, prices would collapse along with farm incomes. 

How involved are you in biofuels?

We have three biodiesel plants in the EU. Margins were low for 3-4 years with static demand and production overcapacity. In the past few years no new capacity has been added, and some capacity has been taken out. Demand has increased a little. Meanwhile, the drought last summer put some plants out of action as they couldn’t get their barges up the rivers. At the same time, the EU blocked SME imports from Argentina and, in some circumstances, PME from Asia. Margins have improved considerably and the business has been good for the past year. 

Biofuels are a good example of optionality in Ag assets. There is an embedded optionality in Ag assets.

So assets are your biggest asset, so to speak!

An asset base is essential today but in addition to their asset portfolios what distinguishes companies is their people, their culture, the way management and employees interact and treat each other—the respect they show for each other. What kind of a company do you want to make it? In the end any company can hire bright people, but it is the steps it takes to build a motivated, hard-working, entrepreneurial, fast acting team that is important for success. People spend the greatest part of their lives at work; they do not do it only for the money. The Glencore culture is a strength I believe, certainly helped in the early days by private ownership. It is something that must be nurtured to ensure that despite growth it is not lost. 

Thank you Chris for your time!

© Commodity Conversations ®

Chris Mahoney – CEO Glencore Agriculture

Chris Mahoney

Part One

Good morning Chris, and thank you for taking the time to talk with us. First question: You rowed in the Oxford & Cambridge Boat Race from 1979 to 1981 and are a four-time winner at Henley Royal Regatta. You won the silver medal in the eight at the 1980 Moscow Olympics. What lessons did your rowing career teach you that have been useful to you as a commodity trader?

Sport for me is a microcosm of life, especially business life. As in everything, the more you put into it, the more you get out; the harder you work the better you become. So the things that you need to do to succeed in sport are the same things you need to do to succeed in business: effort, focus, discipline, and dedication. The beauty of sport is there is little politics, if you are fast nobody can deny it. There is no quick fix, it takes years of effort and hard work to do well in sport; the same in business!

When the Canadian Globe and Mail interviewed you in 2016, the journalist wrote that you looked like you “could empty a grain silo in about 10 minutes with a shovel.” How do you keep so fit, and how does it help you bear the pressure of the job?

I probably exercise five times a week, including cycling at the weekends. When I cycle I go at it hard. And in the gym I don’t sit on the rowing machine for 45 minutes. I do interval training, for example five times 1,000 metres. That is not only better for you but is also less boring! Also, I time and record everything, and I wear a heartbeat monitor.

Ivan Glasenberg, the CEO of Glencore, was a champion race-walker for both South Africa and Israel, and runs one hour every morning with a group of senior managers. Is physical fitness actively encouraged at Glencore?

I believe Ivan runs or swims every morning, there is an office swimming group I know because I have tried and failed to keep up with them when I have been in Baar. We used to run together when we were travelling. I think it is part of the culture, although not for everyone. When you are exercising hard you are not thinking about anything. In fact, if I am not suffering I find it less relaxing!

Marc Rich once famously told his wife when they got married that he could spare the family 30 minutes on a Saturday and 45 minutes on a Sunday. How do you manage your work / life balance?

That is absolutely not the case with me. There was one big transaction, the Viterra transaction, which was an exception. It was an intense six or seven month period during which I spent many weekends in Canada. That period aside, I believe I have always been able to balance my family and my work. I virtually never travel on the weekend—I make a point of that. My family is very important to me.

When you were at Cargill you “invented” the model of modern sugar trading, levering large physical positions against futures positions and then making big profits on the futures. That was very innovative, although the model has pretty much run itself to death now. You could have ended up running Cargill. Why did you leave?

I don’t know that I could have ended up running Cargill. I started in sugar which was relatively independent, and a little apart from corporate Cargill. Working in the sugar division of Cargill at that time was a little bit like running your own company. There was no real interference from above, but at the same time the financing and the corporate support were there. It was ideal.

Cargill likes to rotate their senior managers, and in the mid-nineties I was transferred to the grain division in a regional management role. There are a lot of people in Cargill who know something about grain and, good company though Cargill is, there were too many opinions at that time for my liking. Perhaps unreasonably I found it restrictive and missed the trading and so I left, probably more my fault than Cargill’s.    

Didn’t you at one stage trade coffee?

Yes, you’re right, but for only a short period. Every morning we had to taste different grades of coffee, and one day my colleagues played a trick on me, and slipped in two cups of tea. I couldn’t tell the difference!  Let’s say I was not the best coffee taster in the world!

When you first left Cargill you worked for a short while at Phibro?

Yes, in Westport Connecticut with Andy Hall, who incidentally also rowed for Oxford against Cambridge, but a few years before me. I made the easy choice—which probably wasn’t the right choice—to go back to what I knew: to go back to the sugar business in a pure trading role.

When I joined them, Phibro was part of Salomon Smith Barney, but a few months later they were bought by Travellers Group, and then three months after that they merged with Citibank. These were two big bank mergers and commodities didn’t fit their plans. Andy told me I could stay on, but that I would have to keep the business small, and focused entirely on futures and derivatives. I already believed that a pure derivatives trading business was never going to work in sugar. It had to have a physical base with origination, sales and a distribution book. Guessing whether the market was going to go up or down was never going to work, or at least it was never going to work for me.

So you joined Glencore in Rotterdam. You had moved from Geneva to Westport, and after only a few months moved back to Europe. What did your wife think of that?

She was not very happy. My wife is American—she had been excited about going back to the US, and that was one of the reasons why I accepted the position with Phibro. I remember promising her that this would be our base and this was going to be our life. We bought a nice house in Connecticut, one of those old colonial houses. Our daughter was born there.

But eight months later we talked it over, and both realised that the opportunity with Glencore was just too good to turn down. She was very supportive. We agreed to give it a go for a couple of years, and that if it didn’t work out we would come back to Connecticut. That was 21 years ago. We moved to The Hague. She found it tough for a few years, but stuck with it. The Dutch are easy to get on with, and it is a lovely place to live—great for kids. We love it.

I joined Glencore in 1998 as number two with geographical responsibilities for South America, the FSU and Africa, and became head of Agriculture in 2002.

In 2011 your cotton-trading department lost $300 million, wiping out your total profits of that year. Would you like to briefly explain what happened, and what you learned from it?

We had a large long position in non-US physical cotton hedged in the US futures market. It was a basis, or premium, position—not an outright position—so we believed our risks were somewhat limited. The physical market was tight at that time—both in the US and globally. Our position expressed the view that world cotton was undervalued compared to US cotton.

One company decided to take delivery of the US cotton futures. They had specifically sold US cotton to their customers and wanted US cotton to cover their sales. The problem was that they wanted to take delivery of more US cotton than was physically available for delivery. Rather than swap US cotton for other cheaper origins, which was the economic thing to do in my view, they maintained their long position in US futures and the market went sky high. Non US origins also went up in price, but to nothing like the same extent. A huge differential opened up between US cotton and non-US cotton.

You were head of Glencore Ag at that time, so the problem ended up on your plate?

I was responsible for setting up the cotton desk so it more than landed on my plate. It was my plate. It was clearly my responsibility. We had hired a team from outside, because we didn’t have a cotton business. Clearly with hindsight we should have looked to have developed a cotton team from within, supplemented with outside expertise. Glencore in Switzerland was not happy of course but Ivan supported me in a way that I never forgot. 

How important is corporate culture, and if it is important does it make it hard for mergers to work in the trading business?

Corporate culture is critical and that is one reason why it is challenging to acquire trading businesses. Acquiring assets—a logistics business and supply chain management—is easier. There is also the issue that unless you are willing to double the risk—double the size of the VAR—then one plus one doesn’t necessarily equal two. We also do not feel we need to buy trading expertise as we already have it.

© Commodity Conversations ®

Women in Commodities

The programme for the FT Commodities Summit in Lausanne this year included a breakfast panel on Women in Commodities. Just holding the panel proved rather controversial; some conference attendees argued that the FT should have made more of an effort to include women on all the panels, and not have a separate one for them.

The summit organizers told me that they had tried hard to do just that, but were sadly unable to find industry leaders who were female. Instead, panel after panel at the conference consisted of old white men in blue suits, white shirts and the, apparently obligatory, Hermes tie. (I mean no disrespect; I am white and just as old, and was for the occasion dressed in exactly the same way!) The failure to find more women wasn’t the FT’s fault; it is just that the top echelons of the industry are currently almost 100 percent male.

Another criticism that I heard voiced at the event was that the women’s panel was 100 percent female. Indeed one of the panel participants told me afterwards that she had been surprised that, when she had looked out over the audience, she had seen that it was almost entirely male. She said that it had taken her a while to realize that that was because many of the women at the event were at that moment on the stage!

She also expressed her disappointment that the panel was entirely female. “It is no good just us women talking together,” she told me afterwards. “What we need is for a change of attitude among the men in the industry…for men to realize their unconscious biases, and accept the contribution that women can make to the sector.”

The panel, sponsored by the metals-trading Gerald Group, got off to an awkward start. In opening remarks, the company’s (female) COO and Board Member made a brave effort to convince the audience that Gerard actively sought out and promoted women. No sooner had she sat down than the FT journalist reminded her that Gerard had been criticised last year for holding their annual Metals Week party at the Playboy Club, complete with Playmates in low-cut, black satin leotards and fluffy tails. All the COO could do to justify that decision was to tell the journalist that it hadn’t bothered her and, in any case, it was “a convenient location.”

This type of thing highlights the sector’s (sometimes justified) sexist and macho image. Quite simply, there are few women currently in commodities because few women wanted to be in commodities. The sector’s image often puts women off from wanting to join in the first place. Much therefore needs to be done first to improve behaviour, and then second, to get the message across that commodity trading is no longer the macho sexist world that it once was. I hope this website is doing just a little bit to help in that cause.

There was some debate on the panel as to whether companies should positively discriminate in favour of women; some thought they should, others not. There are good arguments on both sides, but surely it is in the interest of every company to have more women on board. As every recruiter knows, hiring the right person is not just, or even necessarily, a question of academic qualifications and experience. When you recruit someone you are looking for the best person to fit in with, or lead, a team. And if your team is predominately male, then the best person may well be female.

There was also some discussion over eliminating unconscious bias among recruiters. A panellist from the mining sector explained how her company trains managers to be aware of their unconscious biases regarding gender, race and religion.

However, one panellist made the moot point that unconscious biases exist not just in our sector, but also across the board. She gave the example of journalists who always ask senior female executives about their children, and how they manage their work life balance. They never pose that question to a senior male executive. (Funnily enough, I had asked Chris Mahoney from Glencore that very question the previous day! I will be posting his interview next week!)

The panellist from the mining sector did make another key point: the mining industry is changing. She highlighted that one of her company’s mines in South Australia is now managed from Perth, making it easier to attract women. In any case, she added, the mining sector is replacing muscles with machines, making it easier for women to be competitive within the sector.

But it is not just mining that is changing. Trading is also changing with more money now earned from supply chain management, logistics, and innovation than from outright trading. This change will, I believe, inevitably lead to more women seeking to join the sector.

But even when more women are attracted to sector, women need to do more to help themselves to advance within an extremely competitive environment. One panellist told me afterwards that women tend to believe that all they need to do to advance in their careers is to work hard and do a good job. After all, their hard work at school was rewarded by good grades in the final exams. Unfortunately, this is not enough in the world of business. As Patricia Manso pointed out recently, hard networking and self-promotion are essential in any career.

So in conclusion, the commodity trading industry is changing and in so doing so will naturally attract more women. Even so, the sector must continue to improve both its behaviour and its image. It also has to mentor male managers to recognise their unconscious biases. And once they are in the sector, women need to do more to get their contribution noticed.

Unfortunately, it may take a generation for there to be an equal number of men and women on the stage at a future FT Commodities Summit. I may not be around to see it, but it will happen.