Author: jonkingsman

In their excellent and must-read book, The World for Sale, Javier Blas and Jack Farchy have pulled together what the FT calls ‘rollicking yarns’ from the last fifty years of commodity trading. The authors have written the book like a spy thriller. James Bond (in the form of Vitol’s Ian Taylor) braves missile attacks to provide oil to fuel the Arab Spring. The evil genius Blofeld (in the form of Marc Rich) manipulates markets, breaks sanctions and trades with the enemy.

Ian Taylor and Marc Rich have sadly passed away, which makes me wonder to what extent the book reflects the current reality of commodity trading. When the world of trading is trying to increase diversity, what impact will the book have on a young person, particularly a young woman, thinking of a career in the business? Would it be like a young person joining the CIA or MI6 searching for heroic derring-do, only to discover that modern-day spying is more about computer-based data management?

The question, therefore, is: ‘If you read The World for Sale, would you be disappointed if you joined the world of commodities?’ My answer is: ‘It won’t be what you expect, but you won’t be disappointed.’

Commodity trading has always been about data – what we used to call ‘statistics’ or ‘supply and demand analysis’ – which commodity professionals use to predict future price behaviour. The weather is probably the most critical variable in agricultural commodities, but there are many others, politics and government intervention being high on the list.

Making sense of all this data –  bringing all the various elements together to form a compelling picture – is like doing a jigsaw puzzle on the deck of a yacht in a Force 8 gale. There will always be missing pieces, and you will have to make difficult decisions without full information.

You will spend a lot of time on that yacht if you join a financial institution as a ‘paper’ trader. Your work will be almost 100 per cent analysis, but you will quickly get used to being buffeted around by the gales that regularly sweep through the markets. Although I prefer physical commodity trading, you will have a challenging and rewarding career as a paper trader. You will also be adding value in terms of market liquidity and price discovery.

Physical commodity merchandising is about sustainable and efficient supply chain management. You can define it as ‘transforming commodities in space (geography), time (storage) and form (processing)’.

As you move your particular commodity along the supply chain, you will discover market inefficiencies and mispricing. These could, for example, make your corn worth more as ethanol than animal feed. You could find that it is cheaper to supply your Chinese wheat buyers from the US than Australia.

Most market inefficiencies occur when poor crops or government interference disrupt supply chains. The Trump trade wars with China meant that Brazilian soy suddenly increased in value compared to US soy. Russian export taxes on grain suddenly made other origins more competitive.

You may do all your analysis and discover that the market is not mispricing the various differentials but is mispricing the entire supply and demand for a commodity. When that happens, the flat (outright) price will move. This occurred during the super cycle of the 2000s when the world underestimated Chinese demand (for everything) while overestimating the world’s ability to supply it.

As you merchandise your physical commodity, you might, if you are lucky, earn a tiny margin at each stage of the supply chain. However, you will be more likely to make your living as a commodity trader by taking advantage of small market inefficiencies – mispricing – all along the supply chain. By doing so, you will not only make a profit; you will also make the market more efficient, ensuring that it sends the correct price signals to market participants. This is especially true for the flat price. Futures markets reflect the future: prices move in advance of a shortage or surplus, solving the problem before it happens.

As well as making your supply chain efficient, you will also have to make it economically, environmentally and socially sustainable. Your customers will demand nothing less, even if, unfortunately, they won’t pay you extra for it. Sustainability is now a ‘given’. In achieving this, you will find yourself working alongside – rather than in conflict with – NGOs, certification agencies and other not-for-profit foundations.

As I discovered when I wrote my book about coffee, you may also find that you are using your supply chain in reverse, helping NGOs to implement and effect change at the origin.

As well as managing the traceability of your supply chain, you will also have to manage the risks in it. You can hedge some of your price risks on the derivative markets, but most differentials are impossible to hedge. The skills you learn will enable you to trade those differentials successfully.

You will also have to manage counterparty risk – a client defaulting on you – and country risk – a government changing the rules on you. You may also have to deal with fraud, drug traffickers and other possible criminal activity.

A senior official from Olam recently told me that the health and safety of employees is the number one risk that his company faces – and that cybersecurity is number two.  You will have to deal with both.

You won’t be able to merchandise commodities if you don’t have suppliers and customers. The people you will deal with will probably be from different countries; you will have to become accustomed to dealing with people from other races, cultures and creeds. Many of these people will become your friends.

Meeting and interacting with clients was always the most enriching part of my life as a commodity trader. One week I could be wandering in the cane fields in Brazil, Thailand or India. The next, I could be walking the streets of Manhattan visiting hedge fund managers.

You will also have to work in a team. The movies depict James Bond as a lone wolf who saves the world single-handedly, but he would not work alone in real life. The best teams are diversified, with people of different skillsets, of different genders, and from other races and backgrounds. Commodity trading is a global business, and you will soon lose any prejudices that you may still be carrying around with you.

Finally, if you want an idea of what to expect from a career in commodity trading, you couldn’t do better than to watch this video interview of Dave Berhends, one of the world’s top coffee traders.

In their review of the World for Sale, The Times writes that commodity traders are the true Masters of the Universe. Fortunately, that is not true, but our business is still a great one to be involved in – especially if you are a woman.

Image by Peggy und Marco Lachmann-Anke from Pixabay

© Commodity Conversations ® 2021

 

To celebrate International Women’s Day, we post a blog that Shirin Moayyad, the founder of Sweet Bean Coffee, wrote in 2019 when she was first setting up her business. Next week, I will talk more with her about women in coffee. The following week, I will look at what we can all do to encourage more women into the world of commodity trading. Here is Shirin’s story:

I have now worked for nearly 30 years in coffee. I am at long last the founder and owner of my own coffee business. I have been in charge of a coffee farm in the remote Highlands of Papua New Guinea, where I also managed a roasting and exporting company. I travelled the world buying coffees for Peet’s. I guided National Geographic’s film crew through the coffee fields of Ethiopia and Colombia. I’ve had a long and varied coffee career, taking advantage of every opportunity to expand my knowledge, further my skills and experience as much as possible. And yet, it still comes as a surprise when I face gender discrimination.

Last week my partner and I dismantled a 33-year-old kitchen we’d purchased online to refurbish for my new roastery’s cupping lab. Armed with crowbars, hatchet, saws and a mountain of tools, we set to. Mid-morning, the homeowner invited us in for a coffee break and began asking about our plans: why we needed this kitchen, what we planned to do with it etc. Eyes widening with interest, he asked a whole series of questions. Where they concerned construction and refurbishment, my partner answered. Where it had to do with coffee, Didier directed the gentleman to me, saying, “Shirin is the coffee in this equation; she’s the one to answer that.” Kindly though he was, the gentleman only looked at me briefly, then immediately turned back to Didier, as if in subconscious denial that I, a woman, could be the business owner, the authority, or the one who knew the answers on coffee.

Don’t get me wrong. I am in awe of my partner’s abilities. I think it’s nothing short of miraculous, all the things he is capable of doing. I don’t know how to sand and spackle a wall. I don’t know how to wield a crowbar or saw through a granite counter. My mother did. But I don’t. She grew up in privation in WWII, Germany. Where you had to know how to do everything. My dad was the poet, the dreamer, the aesthetic; my mum was the doer, the powerhouse who made it all happen. She got shit done. She is, I realise, the person who most influenced who I am today.

Still, coming back to kitchen dismantling day. I found myself astounded by the gentleman’s assumption that it had to be Didier who knew coffee; he was the authority simply because he is a man. Maybe once upon a time in my career, this wouldn’t have struck me so much. But now, some 30 years on, it comes down as being just ludicrous.

It was 20 years ago in Singapore when I first found myself frustrated by the blatant discrimination of these assumptions. I was head of coffee, roaster and buyer for a 28-shop chain when I hired a mate of mine from Australia to come roast. He was a lovely bloke; a tall, amiable guy, very competent and a big help to me. But he was my employee, my hire, my direct report. And I lived the same frustration there, of facing implicit assumptions that he was boss, and I was just some little sidekick, an assistant perhaps. Inevitably, his authority was sought, his opinions solicited, the assumption made that he was The Man. It wasn’t his fault, mind, it just was that way. And I was young enough not to be too irritated. But now, some 30 years on….

There was that origin trip once when we were a group of coffee professionals on a bus, headed out to a farm visit. A chap sat next to me and proceeded to soliloquise on his extensive coffee experience, all the marvellous things he’d achieved at origin. I wasn’t sure when he found time to breathe, he was so enthralled with recounting his own achievements. I forgot what topic it was that prompted me to interject mildly how yes, I had also found XYZ issue on the 98-acre coffee farm that I managed in the remote mountains of Papua New Guinea. There was a moment of silence when my words broke through the waterfall of his monologue, and his face went blank. Dumbstruck. Silent. I watched the virtual cogwheels turning as he struggled to compute the information he had just heard. In the event, it was clearly too much for him to compute since, after that brief respite, he went right back to blathering on about his record of achievements. Sigh. It wasn’t yet 30 years then, but it was starting to irritate me.

My mum isn’t the only one to have inspired me over the years. There are others: women in coffee the world over who have been there in one form or another as I learned this path.

Erna Knutsen was one such wonder. I was travelling to California on a trade mission to represent Papua New Guinea – because, by then, I was managing a coffee roasting company there that had achieved considerable export success. My colleagues at home told me to contact Erna as she was the US importer of our finest estate coffee and would look after me. And indeed, she did. Erna invited me to her cupping table whilst evaluating a quality claim on a pricey auction lot Kenyan. Erna was the woman who coined the phrase speciality coffee, the grande dame of our industry who broke the glass ceiling and brazened her way to a place at the cupping table. She was awesome. And here, without knowing anything about me, she allowed me to cup alongside her. I trembled at the honour.

Later that afternoon, I experienced the true flamboyance of this trailblazing woman. She’d booked us a table at San Francisco’s Boulevard Restaurant…a place so fancy to my Papua New Guinean bush eyes, I couldn’t help but be impressed. And there she was, sporting a leopard skin pantsuit, through her cat-eye spectacles calling the handsome young server “darling” and drinking some mighty strong cocktails over lunch. Her self-confidence allowed her a flamboyance I could only dream of.

Today’s earthly embodiment of the virtue of grace though would have to be the inimitable Sunalini Menon, an extraordinary woman I consider to be both a mentor and one of the world’s greatest coffee cuppers. I first witnessed her quiet self-assurance and profound knowledge of coffee at work in Singapore when I moved there from Papua New Guinea. Two gentlemen were trying to sell me coffee from Yunnan, China, which was coming on as an origin. “As good as a Costa Rican hard bean,” they blustered loudly. Sunalini happened to be cupping with and coaching me that afternoon, but they clearly didn’t know her and assumed she was just another woman who could be hoodwinked and bullied.

As we started to cup their samples, Sunalini gently probed them with questions on the varieties they had planted. Was it a first or second-generation cross as the Catimor cup was clearly coming through? Perhaps the parenting might have been from XYZ stock as that taste was in the finish, didn’t they think? And where had the progenitor plant material come from as it tasted rather more along the lines of IMN than XYZ, didn’t they think?

With every softly spoken question, her deference combined with her indisputable empirical knowledge of what she was cupping put the gentlemen further on the back foot. I watched their posture literally move from forward-leaning, imposing, nearly bullying to quiet, defensive, and ultimately defeated. The lids came down over their eyes, their body language shut down, they were silenced. It was a prize-winning performance, the likes of which I have not since seen. Never once did Sunalini raise her voice or humiliate. Instead, with soft-spoken words underpinned by the undisputed certainty of her palate and her knowledge, she whipped them. Always immaculately clad in the bright and decorative costumes of her native India, Sunalini’s personal and professional elegance is an inspiring beacon to other women in coffee.

Let me end by drawing a parallel that might help the reader hear my point of view. I have a dear friend, Phyllis, an African American coffee professional. Some years ago, I reflected on the fact that while I could sympathise with her fight and certainly try to empathise with the discrimination an African American experiences, still I could never fully feel it. Why? Quite simply, because I’ve never lived it myself, I haven’t walked in those shoes. It hasn’t been my experience in life, and as much as I sympathise, I cannot live that experience the way Phyllis has.

By the same token, although I’m certain that while my many male colleagues and friends in coffee all sympathise, they cannot know in full what I feel because they’ve never lived it. They’ve never experienced this through this lens. Through the lens whereby, after some 30 years in the industry, a man would still turn his back on a woman and direct his questions at a fellow man with arguably nil experience in coffee.

If I look at the cumulative lessons I’ve learned from the women I admire, what it boils down to is this:

1. Know and love your subject matter because nobody can question that kind of integrity, and you will live with its certitude.
2. Believe in yourself and don’t listen to the noise of others. You know your worth; the monkey chatter of others should wash over you and not stick.
3. Don’t be afraid to have your style. From Erna to Sunalini and every other icon in the world of women in coffee, with the knowledge they have, style is an adornment, a cloak that embellishes their individuality and worth.

Note: these reflections are simply that and no more. And I dedicate them equally to the man I love, as to all my many coffee sisters. And most particularly to my mum, the woman who could do everything.

I also want to thank all my male colleagues for the huge support they give to women in coffee. The world is indeed changing, and there are several men out there – you know who you are – who I look up to every bit as much as I do to the likes of Erna or Sunalini.

 

I haven’t yet received my pre-ordered copy of The World for Sale by Javier Blass and Jack Farchy, but it has already spurred some headlines about corruption in the world of commodity trading. The story that attracted the most attention concerns a former Glencore mining executive who admitted to the book’s authors that in 2003 he flew around the world with bags of cash to be paid in bribes to government officials.

The authors rightly point out that, although unethical and immoral, it was both legal and even tax-deductible in 2003 for Swiss companies like Glencore to pay ‘commissions’. The Swiss government has thankfully rectified that sad state of affairs, and Glencore has banned using local agents, the intermediaries they used to facilitate corruption.

Glencore started life as Marc Rich & Co, led by a brilliant but flawed trader who specialised in dealing in countries where most people feared to tread. Daniel Ammann has written a (truly) excellent biography of Marc Rich – The King of Oil – in which he tackles the issue of corruption. He writes

“Most commodities come from countries that are not beacons of democracy and human rights. The “resource curse” and “the paradox of plenty” are the terms economists and political scientists use to describe the fact that countries that are rich in oil, gas or metals are usually plagued by poverty, corruption, and misgovernment. If commodity traders want to be successful, they are forced—much like journalists or intelligence agents who will take their information from any source—to sit down with people that they would rather not have as friends, and they apparently have to resort to practices that are either frowned upon or downright illegal in other parts of the world.”

Mr Ammann is right: corruption has more to do with governments than commodity trading. The onus is on governments to cure the disease.

Way back in 1977, the US instituted the Foreign Corrupt Practices Act (FCPA). It made it unlawful for a U.S. person or company to offer, pay, or promise to pay money or anything of value to any foreign official for the purpose of obtaining or retaining business.

More recently, China, previously one of the world’s most corrupt countries, has resorted to drastic action, instituting capital punishment for corrupt officials.  Other countries are taking less drastic measures, but they are moving, albeit too slowly, in the right direction.

Corruption in commodities typically thrives when governments get involved in, for example, awarding mineral rights, production or trade quotas or by setting prices.

It was omnipresent in the agricultural markets when I began my career in commodities. At that time, only the government had the right to import or export certain commodities in many countries. Buying and selling tenders were often rigged – and you were never sure how much money was being siphoned off or added on before it reached the farmers or the consumers.

Over the past 40 years, governments have exited the agricultural commodity trade; the business has been privatised. When business is in private hands, producers or buyers have little interested in receiving bribes; it is the price and the terms of the deal that interest them.

But what should you do if a government official asks for a bribe? In my book, The Sugar Casino, I told the true story of the first time someone asked me for one:

“After spending two years as a futures trader in Minneapolis, my company transferred me back to London with a brief to develop new markets in the Middle East and Africa. The company’s agent in one country (I won’t say which one) contacted me to say that they had surplus sugar that year and the government would like to export a couple of cargoes to earn much needed foreign exchange. The minister who was handling the sale was coming to London the following week. Could I meet him?

 “Despite being only 25 years old, I met the minister and took him to an expensive restaurant. We had an excellent meal, discussed the sugar market and tried to estimate the price for the particular grade of sugar the country was exporting. As we were leaving, he surprised me by suggesting that we dine again the following evening. I agreed even though I was unsure what we had left to talk about.

 “The next evening, the minister slipped me a shopping list of electronic items that he would like to take back with him from London. There were only four items on the list: a television, a radio, a stereo system and (bizarrely) an electric iron. He asked if I could help him obtain these items. I wasn’t quite sure if he asked me to go with him to the shops to choose the items or ask me to buy the items and give them to him for free. And if it was the latter, I was surprised at how little it took to bribe a minister.

 “The next day, I told my boss what had happened. I thought it was a bit of a joke. Still, my boss took it seriously, advising me to go back to the minister to politely explain that company policy meant that we couldn’t help with his request but that we would still like to buy his sugar and be very competitive on the price. I did as instructed and was not surprised to hear a week later that one of our competitors had bought the two cargos of sugar. I calculated they had probably made a profit of $240,000 on the deal. I compared that to the couple of hundred dollars it would have cost to buy the items on the minister’s shopping list.

 “I mentioned this to my boss, who told me angrily that I should never think about paying a bribe to anyone, no matter how much money was at stake. He called it “selling your soul to the devil” and argued that even if a television may not cost much, it was “the thin edge of the wedge. And from a business point of view”, he added, “It makes no sense.

 “First, it will give your client a hold over you. Second, if everyone does the same thing, you will end up competing against each other in the number of bribes that you pay.” He called it “competitive corruption” and said that paying a bribe would be ineffective if your competitor paid more.

In 2016, I interviewed the legendary sugar trader Robert Kuok for The Sugar Casino. He told me:

“One piece of advice: never hug the high and mighty; they electrocute you. Keep them at arm’s length. And always adhere to moral practices, and nothing can stop you. If someone asks you for a bribe, you should say that neither you nor your company could do that. But stay very polite. Don’t stand on your high horse and preach morality at that moment. Just turn them down nicely. If you get a chance later at a meal or something, you can pontificate a little, but not then – they are not in the mood to be listening to moral truth.

Sound advice, indeed.

© Commodity Conversations ® 2021

I recently caught up with Aitana Conca, previously Global Head of Middle Desk and Contract Management for Cargill’s Ocean Transportation Division in Geneva, and now Director -EMEA for Chinsay.

Good morning, Aitana. Could you please tell me a little about yourself?

I live in Switzerland, but I am originally from Spain, where I grew up and studied.

I started my commodities career when I joined Cargill Geneva in 2005 in the finance team of their Ocean Transportation division. I already had a deep understanding of finance. Still, I knew nothing about trading or shipping and learned everything from the bottom up, which has given me a solid knowledge of the industry’s complexities.

I felt that my career had hit a ‘pivot point’ and wanted to explore new avenues and offer the digital skills that were increasingly in demand. I needed to step out of my comfort zone and left Cargill to study for a Global Executive Master in Digital Business at Madrid’s ISDI business school.

I was excited to join Chinsay as I knew them from my time at Cargill – I was one of their first customers.

As a woman, did you find yourself in a ‘man’s world’ – and how did you deal with that?

Being a woman has never been an obstacle in my career, even in the male-dominated trading and shipping world. Having said that, I often felt the need for having to craft more solid arguments than my male peers.

Research has shown that diversified teams outperform non-diversified teams. Women bring a different perspective than men, and we definitely add value and insight. Many companies know this, and they embrace gender diversity. I’ve been lucky to work with companies that welcome women for the value that they bring.

Cargill is known for its training programmes. What was your experience with this, and have you had a chance to make use of it?

Cargill has excellent programmes for employee development. They don’t only teach you technical or professional skills. They teach you to be a better leader and how to navigate as a woman.

I am lucky that at Chinsay, I can continue to empower women and develop them into leadership roles. I find that very exciting.

Chinsay, like Cargill, is becoming more diverse and is interested in making women’s voices in the industry heard, and the company has a real passion for bettering client’s businesses. These are some of the factors that helped me decide to join their executive team.

What were the other drivers in your decision to join Chinsay?

Chinsay allows me to help people with innovation and digital transformation. It is a passion of mine. I have the opportunity to help drive real change and consider the future of technology and the market.

On the customer side, I can empathise with our clients and put myself in their shoes. I have been in their position; this helps me gain insights and establish a foundation of understanding. I can support our clients on their digital transformation journey.

From Chinsay’s side, I can help the company become an even more customer-centric company. That’s my objective!

Briefly, what does Chinsay do?

We enable clients to digitalise workflows in freight and commodity sectors. We focus on efficiency, compliance, controls and transparency. That is our core business, but we go beyond that. We are becoming increasingly about data: collecting, analysing and integrating our clients’ information into their systems.

We bring business clarity and efficiency to what has traditionally been a siloed, disconnected industry, and we reduce cost and risk.

Chinsay has several big names clients. Why do they need you?

We are fortunate to have a great relationship with clients, and our service and solution benefit greatly from input and advice. A good example is Cargill. They built the Covantis Blockchain platform in partnership with other grain-trading companies, and we work on the portion of the workflow that precedes the post-trade part.

We definitely believe in the principle of working together and integrating with best-of-breed technology; Covantis is a great example of the benefits of having one seamless flow of operations and data.

You joined Chinsay in December 2020. How are things going so far?

I am still learning, finding out how the company works and functions. I am looking at areas where the company can improve internally, particularly in shaping our product offering from the customer’s perspective.

My objective is to build a partnership with our customers. I look at it as ‘push versus pull’. Rather than ‘push’ our services to our customers, we want our customers to ‘pull’ Chinsay’s service into their systems.

First, you have to understand your customer’s needs and then work to fill those needs; don’t try to push your ready-made product or service onto the customer.

Is there anything you want to add?

I have three essential themes in my life:

The first is the empowerment of women: helping women thrive in male-dominated environments. I am a champion for gender diversity, whether at the local school or in the workplace.

The second is the importance of trust in both professional and private relationships. That could be between yourself and your children, or your company and clients. Without trust, you have nothing.

The third is to constantly learn and do better in both my personal and professional life. I see data and digital transformation as the agent for change for much of life, both now and in the future. It is the future, and I want to be an agent for that change.

Last question: how are you coping with lockdown?

On the professional side, we have been fortunate during lockdowns because our clients see us as a core part of remote working.

On the personal side, I miss the hugs!

© Commodity Conversations ® 2021

This is part of our series promoting women in agricultural commodities. Please get in touch if you have a story to tell on this theme.

History celebrates the battlefields whereon we meet our death, but scorns to speak of the ploughed fields whereby we thrive. It knows the names of the king’s bastards but cannot tell us the origin of wheat. This is the way of human folly.  –           Jean-Henri Fabre (1823 –1915) French naturalist and author

 Wheat, barley and rye can trace their origin back to Triticeae, a grass that grew wild in the Fertile Crescent. Wild einkorn and emmer are wheat’s earliest ancestors; they had seed heads that quickly broke apart in the wind, scattering the seeds and permitting self-sowing. Modern-day wheat is the opposite: the grains now stay on the stalks no matter how strong the wind.

Modern-day wheat did not benefit as much as corn from the Fritz Haber process of combining nitrogen with hydrogen to make ammonia. Until the middle of the 20^th century, applying nitrogen as fertiliser on wheat made it grow taller and thicker, but it fell over in the wind and rotted. Wheat needed to be genetically improved to take advantage of the technological progress in fertilisers.

One of the first leaps forward occurred in 1935 when a Japanese scientist named Gonjiro Inazuka crossed a semi-dwarf Japanese wheat species with two American varieties to produce an improved semi-dwarf variety Norin 10. Unlike previous types, which grew to 150 cm, Norin 10 only reached 60–110 cm.

In the late 1940s, Orville Vogel at Washington State University took another step forward when he imported Norin 10 into the US and crossed it with other varieties to yield high-yielding, semi-dwarf winter wheat.

However, the revolution in wheat—and it was a revolution—occurred in 1952. Norman Borlaug took some of these new Norin hybrid seeds to Mexico and grew thousands of unique varieties. He couldn’t sequence the wheat’s DNA to figure out which genes caused these traits because that technology didn’t exist then, but he carefully noted each variety’s characteristics. His work paid off, producing new kinds of dwarf wheat that were rust-resistant and didn’t blow over (lodge) in high winds.

By the 1960s, Borlaug was travelling the world to spread the news. His first stop was Pakistan where wheat yields were around 360kg an acre. Mexican farmers were by then getting more than three times that. His major success, however, was in India.

When India became independent in 1947, the country produced only 6.5 million tonnes of wheat each year, and yields were around 663 kg per hectare. It was not enough to feed the Indian population, and the country largely depended on food-aid imports from the US.

In 1963, India was on the brink of famine. The government invited Borlaug to India to test his new varieties. His yields were four or five times better, and India’s farmers quickly took up the new breeds. By 1974, India’s wheat production had tripled, and the country was self-sufficient in food. India has never faced a famine since.

In 1970 Norman Borlaug was awarded the Nobel Peace Prize for enabling what came to be called the ‘Green Revolution’. He earned it.

World wheat production has more than tripled in the last sixty years, from 234 million mt in 1960 to 772 million mt in 2020. At the same time, wheat acreage has only risen 10 per cent, from 202 million hectares to 222 million hectares. Without Norman Borlaug, the world population would not have increased over that same sixty-year period from 3.0 to 7.7 billion. And what’s more, crop failures and famines would still be regular occurrences.

But it is not just the varieties of wheat that have evolved over the centuries; so too has the way humanity has sown, harvested and ground it into flour.

Ancient Egyptians sowed wheat by casting seeds into the mud after the retreat of annual floodwaters along the Nile. They then drove their cattle over the area to trample the seeds into the ground. Hand scattering of seed is still used today in many parts of the world.

Early farmers harvested their wheat with sharpened stones fitted into a wood or bone handle, but the introduction of iron and steel led to the sickle, a tool that is still widely used. Sickles are light enough to be used by women and children and allow wheat to be cut at any height so that they can leave the straw standing or cut it separately.

The sickle was so crucial in human development that the USSR put it with the hammer on its flag. The hammer represented industry, the sickle, agriculture.

The scythe was an improvement over the sickle with a longer blade at right angles to a long wooden handle. You can harvest wheat faster with a scythe than with a sickle, and you can stand upright while you do it. However, a scythe cuts the straw close to the ground, leaving it attached to the wheat head. A scythe is heavier than the sickle. But the scythe has again entered into our collective psyches with death portrayed as the Grim Reaper harvesting souls.

The first mechanical reaper appeared in 1831: a two-wheeled, horse-drawn contraption pushed a series of moving, scissor-like blades against the grain to clip it close to the ground. A rotating paddlewheel swept the stalks against the cutting bales, so they fell on a platform as the machine moved forward.

Once farmers had harvested the wheat, they spread it on a plot of hard ground or threshing floor. They then drove cattle or horses over the grain so that their hooves separated the wheat from the chaff. Winnowing, or tossing the mixture into the air, then allowed the wind to blow away the lighter chaff and the heavier wheat to drop back. The threshing machine later used fans to separate the chaff from the grain, mechanically doing the process.

As its name suggests, the modern combine harvester performs all these basic jobs in one operation. Hiram Moore developed the first version in 1834 and, by 1860, combine harvesters had cutting widths of several meters. In 1885, Hugh Victor McKay, from Australia, developed the first commercial combine harvester, called the Sunshine Harvester. It reduced the number of working hours needed to harvest one acre of wheat from 46 hours to 30 minutes. Today a modern combine can harvest 1,000 bushels per hour. That’s more than 27 metric tonnes.

Once harvested, wheat needs to be milled into flour, separating the outer bran and germ from the inner, more digestible, endosperm. Although wheat has been grown for thousands of years, humans’ teeth from excavated villages dating back to 6,700 BC show no signs of wear, indicating that those early people already milled wheat. Archaeologists have found grinding stones at sites of ancient settlements in almost all parts of the world.

Over the centuries, mills have been powered by men, horses, oxen, water, or wind, all geared to turn one stone against another. The Romans were the first to use waterpower for milling flour, in about 100 BC, and it remained a significant source of mill power. In 1870, most of the approximately 22,000 flour mills in the US were still water driven.

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For more about wheat please click here

“No man qualifies as a statesman who is entirely ignorant of the problems of wheat.” Socrates

Socrates was right: The Roman Empire needed a steady supply of wheat to flourish. Grain made into bread was the most critical element in the Roman diet, and the city required between 150,000 and 250,000 tonnes per year to feed its population. Rome imported most of its grain supplies and distributed a ‘dole’ of subsidised or free grain, and later bread, to about 200,000 less well-off residents, about a fifth of its population.

The Romans initially imported wheat from Sicily and Sardinia but later centred production on Carthage’s ancient city, in present-day Tunisia. In the second century BCE, the Emperor settled 6,000 colonists near Carthage, giving them about 25 hectares to grow grain. Later, when Egypt became part of the Roman Empire, the country became its primary supply source.

The Romans shipped the grain by barge to Alexandria, where they inspected it for quality and loaded it on ships for Rome. They transported it into sacks, rather than carrying it loose in the holds; ships transported an average of 350 tonnes, although some had as much as 1,500 tonnes. The ships were sail driven, unlike the Roman warships propelled by oarsmen. Sailing times from Italy to Alexandria in Egypt might be as brief as 14 days, but returning to Rome would have taken as long as 70 days as the winds were adverse.

Centuries later, Britain depended on wheat imports from its empire to feed itself and encouraged wheat cultivation in Australia and Canada.

In 1846, the UK abolished the Corn Laws, a system of tariffs and other trade restrictions on imported food and grain introduced in 1815. (Remember, at that time the word ‘corn’ referred to all cereal grains, such as wheat and barley.) The government had introduced the laws to keep grain prices high and protect domestic farmers and (particularly) landowners.

The repeal of the Corn Laws was a decisive moment in British economic history. Their repeal lowered food prices, encouraged increased agricultural productivity, and freed up surplus labour to drive Britain’s industrialisation.

But the repeal didn’t just change England. As Dan Morgan wrote in Merchants of Grain,

“Parliament, with its stroke of repeal, …changed the world. Repeal of the protectionist system had opened England to the wheat of all the world, created incentives for the settlement of vast territories across the oceans, and established the conditions for modern international trade, with the new sea routes and modern trading empires.”

The pressure of cheap imports drove a steep decline in British domestic wheat production. At the same time, food became more affordable. Between 1840 and 1880, the cost of bread fell by half. By the end of the 19^th century, Britain was importing 5 million tonnes of wheat per year, about 20 per cent of which came from Britain’s colonies: Australia (150,000 mt), India (300,000 mt) and Canada (450,000 mt).

On the other side of the Atlantic, early setters were dependent on imported flour from Europe, most often England, until they could produce wheat independently. Though corn saved the early settlements, many settlers didn’t like it. They baked a bread called ‘thirds’ which they added to the imported wheat flour: one-third wheat flour, one-third rye, and one-third cornmeal.

By the 1740s, the US was exporting wheat to England from the northern fields of New York, New Jersey, and Pennsylvania. The US grew in importance as a wheat exporter after the American Revolution when the great migration into North America’s heartlands, along with the railroads, opened up new areas for farming.

Europe desperately needed this production, notably when their harvests failed in 1790 and 1807, and later, in 1860–1862. The Napoleonic wars (1803 to 1815) and World Wars I and II also led to spikes in wheat imports.

Wheat not only fed Europe during our numerous wars, but it also provoked conflicts. Writing in The Silk Roads: A New History of the World, the British historian Peter Frankopan argues that the Nazis invaded Russia for its wheat. Paul Joseph Goebbels, Hitler’s Minister of Propaganda, wrote that the Nazis opened the Russian front for ‘grain and bread’, to capture ‘the vast fields of the east (which) sway with golden wheat, enough to nourish our people and all of Europe’.

We will never know, but some argue if the Nazis had never made that dash for Russian wheat—if they had never invaded the Soviet Union—they could have won the Second World War. Is it possible that we all owe our freedom to wheat?

© Commodity Conversations ® 2021

To continue reading, please click on this link for the third part of this blog.

“In the sweat of thy face shalt thou eat bread, till thou return unto the ground.” Genesis 3:19

Unlike corn or soybeans, humans, not animals or cars, are the most important in terms of the world demand for wheat. On average, animals only eat about 18 per cent of the world’s total production of wheat. This number falls to less than 4 per cent in developing countries but as much as 35 per cent in developed countries. As a rule of thumb, wheat works as animal feed when it is 10 per cent cheaper than corn, or when wet weather reduces its protein content to under 10 per cent.

Even though wheat acreage has increased only modestly, wheat is now grown on more land area than any other food crop: 222 million hectares versus corn at 196 million hectares and rice at 163 million hectares. In 2020, the world’s farmers produced 772 million mt of wheat, making it the second most-produced cereal after corn at 1.1 million mt. Rice comes in at third place at 500 million mt.

Wheat is still the world’s biggest traded agricultural commodity by volume. In 2020 world exports were 194 million mt, just ahead of corn at 184 million mt and soybeans at 170 million mt; little of the world’s rice production trades internationally: 45 million mt in 2020.

If you were to ask your guests at your next dinner party to list the top wheat-producing countries in the world, I bet that they would all get it wrong. They may guess correctly that the EU tops the list at 136 million mt, but few would know that China now produces more wheat—134 million mt—than any other country in the world. China’s farmers now grow about the same quantity of wheat as Russia (85 million mt) and the US (50 million tonnes) combined. India is the world’s third-largest producer at an estimated 107 million mt.

Your party guests may have more success with exporters. Russia is now the world’s largest exporter at 39 million mt, followed by the US at 27 million tonnes and Canada and the EU, both at 26.5 million mt. Ukraine comes in fifth on the list at 17 million mt. (All figures are for 2020.)

I can guarantee that none of your dinner party guests could name the world’s top wheat importers! Although Egypt used to supply the Roman Empire with wheat from the Nile valley, it is now the world’s largest importer at 13 million mt. Unsurprisingly, when you consider their large population, Indonesia comes second at 11 million. China imported nine mln mt of wheat in 2020, while Turkey comes fourth at 8 million mt.

Wheat is an essential source of carbohydrates, but with a protein content of about 13 per cent, it is also the world’s leading source of vegetal protein in human food. However, it is just this protein content—the gluten—that is now causing controversy.

Gluten gives dough its elasticity, helping it rise and keep its shape while at the same time leaving the final product with a chewy texture. However, gluten can trigger adverse inflammatory reactions—a broad spectrum of gluten-related disorders, including celiac disease—in 1 or 2 per cent of the population. Also, between 6 and 10 per cent of people suffer from non-celiac gluten sensitivity. ‘Wheat Belly’ symptoms can include bloating, headaches, tiredness, and skin problems.

In his bestselling book Wheat Belly published in 2011, the American cardiologist William Davis claimed that modern wheat is addictive; he recommended that you exclude it entirely from your diet.  In promoting his book, he wrote:

‘The wheat of today is nothing like the wheat of 1960, 1950—that is, the wheat that our moms or grandmothers had—so it has been changed. This new crop has implications for human health that have never been anticipated. So, this is appropriate for nobody, no human, nobody in this audience, should be eating this modern creation of genetics research.’

He added: ‘I’d like to make the case that foods made with wheat make you fat…. I’d go as far as saying that overly enthusiastic wheat consumption is the main cause of the obesity and diabetes crisis in the United States.’

His views have been vigorously contested both by scientists and by the wheat industry. As an ex-sugar trader, I am personally delighted that he is blaming wheat rather than sugar for the obesity epidemic of the past forty years. I am, however, unqualified to give an opinion on the matter.

© Commodity Conversations ® 2021

Farming looks mighty easy when your plough is a pencil and you’re a thousand miles from the cornfield.  – Dwight Eisenhower

Corn is an awkward crop. Because of its shallow roots, it is susceptible to droughts, intolerant of nutrient-deficient soils, and prone to being uprooted by high winds. Corn reproduces sexually each year, randomly selecting half the genes from a given plant to propagate to the next generation. Corn breeding in prehistory led to larger plants and larger ears. Modern breeding began in the 19^th century and, in the past 75 years, both conventional cross-breeding and genetic modification have succeeded in making corn less awkward, increasing output and reducing the impact of droughts and pests.

Many of the corn varieties grown in the US and Canada today are hybrids; over 90 per cent are the result of genetic modification. Grown commercially since 1997, GM corn now accounts for about one-third of the corn grown in the world, most of which has been genetically modified to tolerate glyphosate, or to provide protection against natural pests. Glyphosate, sold as Roundup, is a relatively inexpensive herbicide that kills all plants except those with genetic tolerance, which pretty much means all of them.

Monsanto released glyphosate-resistant soybeans under the name Roundup Ready Soybeans in 1996 and within ten years 80 per cent 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. The USDA approved drought-tolerant GM corn in 2011 and it was first commercialized in 2013.

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, fertilizer, herbicides and pesticides. Chemical companies made their money selling these inputs. Now the cost is in the development of the seeds. The result has been a merging of chemical and seed businesses with large chemical companies buying up the seed businesses.

Although GM technology has revolutionised the industry, its effect on yields is sometimes overstated.  By one estimate, about 50 per cent of yield increases since the 1920s have been the result of breeding, including genetic modification, while the other 50 per cent has come from improved farming practices. Better farming techniques have been just as important as genetics.

The USDA first began to publish corn yield estimates in 1866. Yields of open-pollinated corn varieties in the US remained fairly stagnant, averaging about 1.6 tonnes per hectare, for 70 years until about 1936. There was no significant change in productivity during that entire time period, even though farmers’ seed-saving practices represented a form of plant breeding.

Agricultural yields began to lift off with the adoption of hybrid corn in the late 1930s, but the most significant improvement in the annual rate of yield gain began in the mid-1950s in response to continued improvement in crop genetics, increasing adoption of nitrogen fertilizer and chemical pesticides, as well as agricultural mechanization. Since 1955, corn grain yields in the U.S. have increased at a fairly constant 1.9 bushels per acre per year, sustained primarily by continued improvements in genetics and crop production technologies.

The increase in global corn production in the last forty years has been more than impressive. In 1979, farmers in the US harvested 201 million tonnes of corn; in 2019 they harvested 366 million tonnes. In that same forty-year period, world corn production has increased from 425 million tonnes to 1.122 billion tonnes. Total world trade has increased by 100 million tonnes, from 70 to 170 million tonnes. However, in the same period, corn acreage has increased only 13 per cent, from 29 to 33 million hectares.

In his book More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources―and What Happens Next the bestselling author Andrew McAfee writes:

‘Farms of less than one hundred acres grow 15 per cent less corn per acre than farms with more than a thousand acres. And bigger farms get better faster. Between 1982 and 2012 farms under one hundred acres grew their total factor productivity by 15 per cent, whereas farms over a thousand acres grew theirs by 51 per cent.’

And as for the environmental costs of large-scale farming, Andrew McAfee writes:

A comprehensive review published in Nature Sustainability in 2018 concluded: “The data does not suggest that environmental costs are generally larger for high yield farming systems. If anything, positive associations – in which high yield, land efficient systems also have lower costs in other dimensions – appear more common.”

In other words – and contrary to popular belief –  large farms are generally more environmentally-friendly than small farms.

But I am getting ahead of myself here. More on this in later posts.

© Commodity Conversations ® 2021

This is an extract from my next book: ‘Commodity Crops – and the merchants who trade them.’

Readers have posed some interesting questions following my blog last week on cocoa.

One asked me to explain why I said a minimum sales price becomes a ceiling on the market. The answer is that if the price can’t go up, it will go down. If traders and manufacturers know that they can buy at a specific price, they have little risk in being short below that price. If the price rises, they can cover their shorts at a predictable loss. Minimum prices skew the risk/reward ratio and encourage people to sell short.

On a broader level, one commented that, because Ghana and Ivory Coast account for 60 per cent of world cocoa, they have the market power to set cocoa prices. He suggested that cocoa producers should get together to form COPEC, cocoa’s equivalent of OPEC.

Unfortunately, cocoa is not the same as oil. Oil producers can reduce supply by turning off a tap; they can leave it in the ground. It doesn’t deteriorate. Cocoa producers can’t turn off a tree. The trees keep producing, cocoa builds up at the ports, rots in the warehouses, and loses some, or all, of its value. In the meantime, farmers are left unpaid – with all the dire consequences that entail.

Cocoa is a front-loading crop: grinders and chocolate manufacturers tend to hold large stocks that they can run down if producers hold off new sales. Cocoa buyers are more affluent and better financed than producers – and they probably have better infrastructure.

One reader argued that the market is almost as concentrated on the buy-side as it is on the sales side. I very much doubt that cocoa buyers work together in the same way that cocoa producers do. Still, I would guess the balance weighs in the buyer’s favour in terms of market power.

A couple of readers pointed out that as growers only receive around 5 per cent of a chocolate bar’s cost, increasing the cocoa cost by $400 per tonne would only increase the bar’s price by one or two per cent. They have a point. Besides, Cargill recently conducted a survey that showed consumers would be willing to pay more if they thought that the farmer would benefit. ‘Surely,’ asked one reader, ‘consumers would pay 2 per cent more for their chocolate if they thought that it helped the farmers?’

The answer is that it would, but, increasing the price that farmers receive would encourage them to produce more, adding further pressure on prices.

Expressing this problem differently, another reader said that producing and consuming countries should cooperate in setting a fair price for cocoa.

In the past, the United Nations has done that by setting up commodity organisations to ‘manage’ the markets; cocoa, coffee, or sugar were three such examples. These commodity organisations tried to use stock management to bring supply and demand into balance at a price that gave a decent return to growers and a reasonable price for consumers.

When world prices fell, the various commodity bodies set to work by either purchasing (in the case of cocoa) physical cocoa to hold off the market or asking (in the case of coffee and sugar) producers to build stocks and limit exports. When prices rose again, they released these stocks.

These noble efforts, sadly, failed. When prices fell, coffee producers continued to export; they desperately needed the money to feed themselves. In the case of cocoa, the ICCO ran out of funding. In the case of sugar, producers failed to build the stocks they were supposed to. (Brazil famously said that their inventories were in the cane in the fields.)

As a consequence, when prices rose, either the stocks weren’t there or were insufficient to stem the prices’ rise.

As we saw earlier, market participants will tend to sell short ahead of a stock release price level; if stocks aren’t there, then the price explodes as shorts run for cover. It means that not only do international price agreements not work, they also actually increase market volatility. They are like communism: a great idea in theory, but a disaster in practice.

It is true even if the producers are in rich, developed countries.

The EU used to fix minimum prices for many agricultural products, maintaining them through a mix of quotas, stock management and subsidised exports. Over the years, production costs dropped as farmers became more efficient. Still, the EU continued increasing their minimum prices in line with general inflation. In the end, sugar prices were so profitable that French farmers used to call sugar beet quotas’ white gold’. Butter mountains and wine lakes built up. So did subsidise exports – to the detriment of farmers in importing countries.

The EU has gradually wound down their market management schemes (sugar and milk were the last to go), along with, thank goodness, subsidised exports. The EU has replaced them with direct income support. Agriculture is still the largest item in the EU’s budget at 38 per cent, but down from 73 per cent in 1985.

Finally, one, rather astute, reader argued that the Ivory Coast should have thanked Hershey for taking delivery of the December futures market. By doing so, Hershey pushed the world cocoa price higher, taking some of the old crop cocoa (that had been weighing on prices) off the market. He may have a point.

Instead of manipulating the world price, what should Ghana and Ivory Coast do to help their impoverished growers? I posed that question this week to the head of one of the leading NGOs in the sector. I will publish his replies shortly.

© Commodity Conversations ® 2021

Cocoa farmers in Ivory Coast went on strike last week in protest against the low prices they are currently being offered for their crop. They have also threatened to block port warehouses where more than 100,000 tonnes of cocoa have backed up due to a lack of demand. A farmers’ representative told Bloomberg that farmers are only being paid 800 CFA francs per kilo against the state-guaranteed minimum price of 1,000 CFA francs, roughly $1.85/kg.

Covid19 is partly to blame for the lack of demand. The FT (subscription required) reports that the virus has disrupted ‘sales of chocolate at airports, hotels, restaurants and speciality boutiques’. As a result, world cocoa demand fell 2-3 per cent last year, prompting processors and chocolate manufacturers to delay shipments on quantities that they have already bought, and hold off on new purchases. This drop in demand has hit the Ivory Coast particularly hard. Together with Ghana, the country produces 60 per cent of the world’s cocoa.

Ghana and Ivory Coast work together more closely than in the past, setting similar ex-farm prices and reducing smuggling across their borders. In 2019, they looked at ways to increase farmers’ incomes and discussed setting a minimum export price. They eventually rejected the idea and instead introduced a ‘Living Income Differential’ (LID), a $400 per tonne premium that buyers had to pay over the world price, starting with the 2020/21 season.

The $400 per tonne LID was not just a premium over the futures; it was also in addition to the country differentials.

Country differentials (premia and discounts relative to the futures) fluctuate widely; they often depend on the cocoa that the market expects to be delivered against the futures. Processors prefer new crop cocoa to old crop, and the futures can be depressed, for example, if old crop is expected to be delivered.  For the 19/20 season, exporters probably paid an average premium of about £75 for Ivory Coast and £125 for Ghana, as these purchases were made starting in September/October 2018.

The larger cocoa processors – particularly the ones with factories in Ivory Coast – have paid LID on their 2020/21 purchases, but they have had difficulty passing it on to their buyers. Unlike Fairtrade or the Rainforest Alliance, LID doesn’t come with a certificate that can be handed on to the chocolate manufacturers. Without a certificate, manufacturers can’t put a label on their retail packaging, nor ask their customers to pay more.

Rather than pay LID, Hershey was reported last month to have taken delivery from the December futures contract: a mixture of the old crop cocoa from West African, Ecuador and Sulawesi.

In response, Ivory Coast and Ghana launched an unprecedented media campaign against Hershey. They also threatened to suspend the company’s sustainability programmes in the two countries. It is not clear what arrangement Hershey made with Ivory Coast and Ghana, but it has been reported that Hershey has agreed to pay the Living Income Differential. Still, as Hershey does not buy directly from the Ivory Coast, it is unclear how that works.

It is also unclear how Ghana and the Ivory Coast expected LID to work in the first place.

By asking their customers to pay $400 per tonne more for Ghanaian or Ivory Coast than for other cocoa, chocolate manufacturers had a strong incentive to buy alternative origins. Ghana and Ivory Coast have tried to stop this by putting media – and local – pressure on the big chocolate companies. Still, the big companies account for less than half of the world’s chocolate production and an even smaller percentage of beans.

The cocoa market is looking at a surplus this year of up to 300,000 tonnes. Because of LID, this surplus is now primarily made up of cocoa from Ivory Coast and Ghana. At this time of the year, the Ivory Coast would have customarily sold all of this crop, most of their mid-crop and a significant chunk of the following main crop. Instead, they still have an estimated 500,000 tonnes to sell from the 2020/21 season and a similar quantity from the 2021/22 crop. They have not sold anything yet for 2022/23.

Cocoa is what is known as a ‘front-loading’ commodity. The harvest runs from October through March, with shipments concentrated during this period; processors then store the cocoa and use it throughout the year. With storage costs at around £12 per month, it is not surprising that buyers have been delaying purchases, aggravating the build-up at the origin. Time is on the side of the buyers; they can afford to wait.

The inevitable has happened: both Ghana and Ivory Coast have reduced prices to tempt buyers. Country differentials have fallen to a discount of £150 – 200 per tonne. Unfortunately, they have little success even at those prices; buyers have either already bought elsewhere or are waiting for prices to fall even further.

But isn’t this just bad luck on the part of Ghana and Ivory Coast? Wouldn’t LID have worked if the balance sheet had been in deficit rather than surplus? Unfortunately, the answer to both questions is ‘no’.

If there had been a deficit, the outright cocoa price would indeed have risen. Unfortunately, neither Ghana nor Ivory Coast would have been able to sell if they had continued to ask for a premium of $400 per tonne over the market. The world price could have gone to the moon, but they would still have asked for $400 per tonne more. To move their crop, the country differentials would have been reduced – probably to levels similar to where they are today. As with all farmers, it is the outright price that matters, not the differentials.

So, what is to be done? With hindsight, the obvious answer would have been to go with the two countries’ original idea and set a minimum price, not a differential. Even then, with a market in surplus, the world price would have fallen below the minimum price; Ivory Coast and Ghana still wouldn’t have sold. The minimum price would have become a maximum price with the market only buying it when it was needed.

It is sad to say, but cocoa economics are the same as everyone’s else’s economics: the only cure for low prices is low prices.

© Commodity Conversations ® 2021