Lessons learnt

A friend of mine recently asked me what I had learned from writing The New Merchants of Grain. A quote from Winston Churchill came to mind. He said,

“Writing a book is an adventure to begin with, it is a toy and an amusement, then it becomes a mistress, and then it becomes a master, and then a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster, and fling him out to the public.”

I had already had that experience with my earlier books, but what did I learn from writing this book in particular? I have come up with five ‘lessons-learnt’.

The first is the importance of leadership. CEOs and senior managers often get a bad press, but they play an essential role in setting both the culture and the strategy of a company. Management consultants may talk about ‘bottom-up’ organisations, but in my experience everything comes from the top. Of course not all CEOs are equal, and a company has to have the right one, but after writing this book I will never again say that a CEO is overpaid!

The second is that companies are just people. Again the media likes to present big companies as faceless organisations, but they aren’t. Enterprises are just a bunch of real people trying to do the best they can for their company, their families and for the world in general. Of course there will always be people who prioritise their own self-interest above the general good, but they tend not to last long in a team-based structure. And all companies are team-based structures.

Third, writing this book really drove home to me the cyclical nature of our business, not just in terms of agricultural production but also in terms of investment in infrastructure. Booms lead to busts. We all know that, but we still often fall into the trap of believing that ‘this time will be different’. It rarely is, and it can take years to work off the investment overhang.

Fourth, writing this book drove home to me the way in which up-cycles—and their accompanying profits—attract new players, increasing competition just as the cycle turns and times get tougher.

It is often said that in a slow growth industry you have to be in the top three companies to earn a decent return. As I wrote in my book, seven companies account for 50 percent of the world trade in grain and oilseeds. That may be four too many. But also as I wrote in my book, consolidation is currently blocked, leaving participants to eek out economies of scale in regional and sectoral joint ventures. This situation may last a while.

Lastly, I learned that different markets behave in different ways. Sugar may be similar to grain, but it is not the same.

When I started in the business 40 years ago commodities used to trade in silos. If you began your career as a cocoa trader you stayed a cocoa trader—and it took a lifetime to really learn the business. Meanwhile, what happened in the cocoa market rarely affected what happened, say, in coffee or orange juice.

This situation changed over the intervening years with the ‘financialisation’ of the commodity markets. The growth in computer power, accompanied by the growing popularity of commodities as investment tools, led to the market rather than the commodity being the dominant factor. A hedge fund manager could trade numerous commodity markets without any real understanding of each underlying commodity.

This has now been largely discredited, and commodity hedge funds have pretty much disappeared. We are seeing a return to commodity ‘silos’ where traders become experts in their own commodities, rather than in commodity markets as a whole.

I would venture that we are in the process of transitioning back to markets that are once again based on underlying fundamentals, viewed of course through the filter of human emotions. That would be a big positive for our industry. I hope I am right!

© Commodity Conversations ®

Out of the Shadows – The New Merchants of Grain is now available on Amazon

Sugar’s New Normal

Last week my daughter and I were honoured to co-chair the 28th ISO Seminar in London. It was a great event as always, well organized and well attended.

The ‘War on Sugar’ was omnipresent at the event, centre stage in both the conference and coffee rooms.

Some attendees were optimistic that they would eventually win the war—that sugar demand would pick up again once folks realized that cutting sugar consumption was no silver bullet in the battle against obesity.

One presenter explained that the objective of most governments and NGOs was to reduce sugar’s share in daily calorie intake to 5 percent, as recommended by WHO guidelines. However, replacing one calorie by another will not solve the obesity problem.

Other presenters gave examples of chocolate and food manufacturers who are reducing sugar content in their products but replacing it partly with fat, the net result being lower sugar content but the same number of calories.

However, for the moment at least the sugar industry is losing the war. It is having to come to terms with slowing demand growth or, in some instances, an actual decline in outright demand. This is a completely new paradigm, and it is taking some time for the new reality to sink in. It has a number of implications.

Agricultural sugar yields, particularly in beet, have historically been increasing at around 1.5 percent per year, enabling the sector to meet rising demand with little need for new areas. However, zero demand growth coupled with rising yields means that farmers will have to reduce their sugar acreage.

Also, when sugar demand was growing at 3 million tonnes per year, any surplus production one year could be relatively quickly absorbed in the following years. Now, if one country over-produces—as recently happened in India—other countries have to reduce production if they don’t want the surpluses to hang around, weighing on the market.

The sugar sector is similar to grains in the sense that it has over-invested in capacity, both in refining and milling. In the past that wouldn’t have mattered too much because demand would have eventually caught up. This is no longer the case.

If demand is stagnant, the only solution is consolidation and rationalization. This is already happening, particularly in Europe and Brazil where factories are being closed.

It is not all bad news. First, demand is still growing strongly in some regions, particularly in Africa, but also to a lesser extent in Asia. This presents local opportunities. Second, rationalization and consolidation can lower costs if smaller less efficient units are closed. Third, slow growth sectors are less attractive to potential new entrants, reducing the threat of excessive capacity investment.

The sugar sector is also lucky in that sugar cane and beet are extremely versatile products. It doesn’t have to produce only sugar and can diversify into ethanol, bioplastics, energy generation, fibres etc. Unsurprisingly, diversification was a hot topic at the seminar.

Meanwhile, many food manufacturers are taking advantage of the anti-sugar hype to reduce the size of their products, particularly drinks and chocolate bars. But they are not reducing the prices of these products—another example of companies becoming more profitable in a zero or negative growth market. In addition, many sugar producers are starting to produce higher-value and innovative reduced-sugar sweeteners.

If you look around you can see plenty of zero growth, or low growth industries that are highly profitable. There is no reason why sugar shouldn’t be one of them.

However, as more than one presenter pointed out, it is the consumers that now have the power;  you have to follow the trends and produce what they want. But what they want is not always what they say they want. Consumers may say they want a healthy sustainable product, but what they buy is actually a convenient low-cost tasty one. In order of importance, taste comes first, price second and convenience third. Health is fourth and poor old sustainability fifth.

Having said that, modern day consumers take for granted that their foods are sustainable and healthy—and they rent their outrage on social media when they are not. Unfortunately, consumers are not willing to pay for sustainability. This means that the extra costs involved are passed down the value chain to the farmers, making them worse off. It is a problem that I have often touched on in my blogs, but so far no one has found any solution to it.

On a brighter note, one piece of research presented at the seminar found that consumers prefer the cake to their presents on their birthday. Baking a cake is apparently seen as an act of love, more so than just buying a present. I will remember that for my grandchildren!

© Commodity Conversations ®

Trading is a people business

A conversation with Ito van Lanschot

Ito van Lanschot is a business developer, strategist, investor, leader, risk and commodity expert. He is founder and managing director of TRADESPARENT BV, (formerly named Commodity Services & Solutions) which is today a leader in commodity data and solutions.

Previously Ito was CEO of BayWa Agri Supply and Trade, President and COO of Reliant Energy Europe and CEO of Nidera where he was directly responsible for the international trading and processing business and operations for the grain and oilseeds complex, freight, energy business and the development and implementation of its global risk group.

You left Nidera 4 years before COFCO acquired a 51 percent stake. While you were CEO, had you already started to look for an equity partner for Nidera?

Indeed, as the company had grown tremendously, and financing became an issue—how do we finance future expansion? Markets were volatile and prices were rising; high prices mean that you need more trade finance. Banks were willing to lend, but they increasingly looked at Nidera’s solvency ratio. Equity was important, and we needed more equity. We started to look around for equity partners to take a 10 to 15 percent in the company

Why did the families decide to sell the whole company rather than the initial 10 or 15 percent?

I left Nidera in 2010 so I was not involved in the transaction. I can only speak from what I have heard second-hand. While our initial intention had been to find an equity partner, the families also wanted a strategic partner to help grow the business. They found that strategic partner in COFCO.

COFCO was interested in acquiring the origination assets that Nidera had in Argentina and Brazil. Nidera was interested in COFCO as a strategic partner. The 51 / 49 percent deal that they eventually agreed was in line with that logic. The idea was that Nidera’s managers would continue to run Nidera with an assist from COFCO.

Nidera posted its first loss in five years in 2015 after a rogue trader incurred losses of around $200 million in the biofuels market. How did that happen, and why didn’t risk management controls catch it earlier?

I was the last CEO of Nidera who had a trading and risk management experience. A financial manager took over after me, and ultimately a gentleman from Unilever. As often seen in the various trading industries, it is difficult to manage traders, you can have the best governance structure and control systems, but you always have to keep your eyes open for anything that looks out of the ordinary. So, I believe it is easier for an experienced trader to understand and to know what is not right. It takes a trader to catch a trader.

Do you think there is still a role for small trading houses in today’s market?

You have to be highly specialized to operate in a trading market. With the strength of the farmer and the strength of the consumer, the trader has to have a very defined role and to add value. I find it hard to believe that the smaller traders can add value unless they have something really unique in their product offering. And the markets are so transparent that this is unlikely.

The large guys are struggling as well. Our whole industry is going through a period that is similar to the time after the Great Grain Robbery of the 1970s. It was difficult to make money in the 1980s and 1990s, and it is difficult to make money now.

What are the greatest risks or challenges that the trading houses face today?

The biggest risk a manager has is in taking decisions on reports based on incomplete or incorrect information. It is a real struggle for companies to collect the correct data in these fast moving and complex markets. Senior management needs to drive this effort and embrace technology themselves, and not leave it to their IT-staff alone.

In the past, trading companies had margins, so they could get away with taking the odd bad decision; everyone makes bad decisions from time to time. But today there are practically no margins in the business, and you are punished immediately for a bad decision.

Thank you, Ito, for your time and insights.

© Commodity Conversations ®

This is a brief extract of a conversation from my new book Out of the Shadows – The New Merchants of Grain available on Amazon

Takeaways from GGG

It has been a few years since I last attended a Global Grains Conference (GGG), and I was surprised to see just how big it has grown. With over 1,000 registered attendees and 80 speakers the event must now be one of the biggest agricultural conferences in the world. So congratulations to the organizers for that achievement, but also for the seamless way they ran the event. Kudos!

What were my ‘takeaways’ from the event?

My first, and perhaps the most worrying, is that we have probably seen peak globalization; the pendulum is now swinging back to nationalism. We need international trade to feed the world and as Bunge’s CEO Greg Heckman pointed out in a recent interview, the grain companies have invested on the basis that free trade would continue. This now has to be questioned and factored into forward planning.

Unfortunately, it is difficult for grain companies to plan—and invest—with this current level of political uncertainty. We live in a world where everything can turn on a tweet.

My second takeaway was that of oversupply, and the role that technology continues to play in increasing yields. Although the media often worries how the world’s farmers will feed 9 billion people by 2050, farmers worry that oversupply might drive them out of business before they get to 2050!

But it is not just technology that is driving supply. The expansion in Russia and Ukraine, as well as the second safrina corn crop in Brazil, has also contributed to current oversupply. Production in those low-cost areas is likely to continue to grow.

While supply increases, demand stagnates. I come from the sugar market where demand ‘is the background against which changes in supply play out’. The price of sugar is a function of supply.

The price of grain, it seems, is a function of demand. The price over the past ‘super cycle’ has been driven by biofuels and China. As both now level off, grain analysts are searching for the next ‘demand driver’. They are failing to find one and are worried that African Swine Flu will actually exacerbate the situation. No one I spoke with at the conference expects much of price rally from current levels.

My third takeaway concerned the growing importance of sustainability. When I used to organize conferences we always put the topic of sustainability as the last panel, by which time most people were already heading for the airport. Sustainability has now moved up the agenda; it pretty much dominated GGG’s first sessions.

As usual, the discussions were interesting but inconclusive. They will remain inconclusive until someone finds a way to persuade consumers to pay extra for sustainable food. Until they do, it is the farmers who have to bear the costs of certification—and the traders who have to bear the cost of operating traceable supply chains.

On a lighter note, there was a brief discussion as to whether we are ‘traders’ or ‘supply chain managers’. The vote went in favour of ‘traders’. As Swithun Still, the current president of Gafta told the audience. “We are grain traders—and we proud of the role that we play.”

There was a brief discussion on consumer trends—and what the consumer wants. The answer to that is a complex one: it depends on which consumer you are talking about. And the complexity is increased because there is a huge gap between what a consumer says he wants and what he really wants. He may say he wants a sustainable healthy product, but what he really wants is one that tastes good and doesn’t cost much.

As for the current interest in plant-based meats, I was surprised that some panelists dismissed it as a short-term fad rather than a long-term trend. It reminded me of similar discussions at sugar gatherings ten years ago when the anti-sugar movement was lightly dismissed as a short-term fad.

It is obviously impossible to summarize GGG in a short blog. And it is important to note that others will have completely different takeaways. In other words, you had to be there, but if you weren’t there is always next year! (Global Grain also organise regional events that you might want to check out.)

© Commodity Conversations ®

My book Out of the Shadows The New Merchants of Grain is now available in paperback and electronic versions of Amazon

We Feed A Hungry World

A Conversation with Greg Heckman – CEO Bunge

Greg Heckman grew up in Cerro Gordo, IL – a farming community of 1,200 people 13 miles from Decatur. He studied Agricultural Economics at the University of Illinois and took a job with ConAgra as a trainee trader. He spent 24 years with ConAgra, becoming CEO when he took the commodities businesses private in 2008, renaming it Gavilon. He remained as CEO of Gavilon until he retired in 2015.

Greg joined the Bunge board in 2018 and became CEO of Bunge in 2019.

When you first joined the grain business did you ever imagine that you would end up as CEO of an ABCD?

No, I never really looked that far ahead. The team and I took on the challenge that was in front of us, conquered it and then looked for the next hill to climb. The rest of it kind of takes care of itself.

I do love leading teams though, I really enjoy putting people in the best position to succeed, putting them in a role that is their highest best use for the organization while also being a place they can continue to develop. Seeing them be successful and do more by working together than they every imagined possible.

I also really enjoy seeing people’s success enable them to do the things they want for their families – like buying homes and educating their kids and spending quality time together with family.

What are your biggest challenges in being CEO of an ABCD?

The current global environment is my biggest challenge. The industry has been overbuilt and needs some consolidation. Technology is changing rapidly and Ag and Food have been slow adopters. In addition, consumer trends are evolving and changing rapidly.

The industry has been built on what we expected to be continued globalization and open, fair and free trade. However, we have been experiencing a move back to nationalism recently, which is causing major trade flow disruptions.

You recently launched a strategic review of your business. This has led to rumours that Bunge might exit grain and oilseed trading to concentrate on higher value-added businesses. How would you respond?

We are looking at everything in our business to ensure we are creating shareholder value.

That being said, there will continue to be volume growth in agricultural commodities to feed a hungry world, and the majority of that supply volume growth won’t be where the demand volume growth happens.

We also have a global processing infrastructure to feed and support. We are the #1 Global Soy Crusher, we have an excellent soft seed crushing franchise and a strong wheat milling franchise in S. America, and wheat and corn milling in N. America.

Our newest business is our acquisition of Loders Croklaan, which has given us an excellent platform to value-add our fats and oils output from our crushing.

Bunge appears to be navigating the trade wars reasonably well. Do they remain a threat to your business model?

Absolutely, these businesses were built believing free, open and fair trade would continue to drive globalization. This is what needs to happen to feed a hungry world in the most low cost and sustainable way. Allowing crops to be grown in the areas with the most comparative advantage, and move in the most low cost value chains to where they need to be processed and ultimately consumed.

Investors in publicly quoted companies look for steady growth, but G&O trading is cyclical. How do you resolve that contradiction?

We are much more than a trader and distributor of agricultural commodities. We do need to continue to build out our diversification, which will lower our volatility of earnings and dampen some of the cyclicality.

The other thing we must do is communicate our business better, make it more transparent and simple to understand, so that our investors can appreciate the seasonality and cyclicality, and what it means for our earnings and returns.

Thank you Greg for you time and insight!

© Commodity Conversations ®

This is an extract of a conversation in my book Out of the Shadows – The New Merchants of Grain, available now on Amazon.

Global Grain Geneva

The Geneva Global Grain (GGG) Conference will be held from 12th to 14th November 2019 at the InterContinental Hotel, Geneva. GGG is the ‘must-attend’ event for anyone involved in the international grain trade.

Dan Basse, President of AgResources, will be giving the keynote presentation on Wednesday 13th November, the first day of the main conference. I recently had the pleasure to interview Dan for my new book, ‘Out of the Shadows – The New Merchants of Grain’. We found we had something in common. We both grew up on pig farms, and we both founded our own analytical and research companies: his on grains and mine on sugar.

During our conversation he told me that he was worried about ASF—African Swine Disease—and the impact that it could have on global grain and oilseed demand. He explained that pharmaceutical companies have spent millions of dollars trying to find a cure or a vaccine for the disease, but so far have come up with nothing. “It’s an old disease,” he added, “first discovered in the early 1900s in South Africa. It’s virulent.” He added that we are at least five years from a vaccine or antidote.

Dan told me that he was also worried about the weedkiller glyphosate, explaining that there isn’t a good substitute except for manual or mechanical cultivation. He estimated that if glyphosate were banned or removed from the market, “we could lose 15 to 20 percent in yields. And of course, if we go back to tilling, we’d have more carbon in the atmosphere, and we’d have to have more passes over the fields. And we’d have to bring in more land to produce the same amount of food.”

Guy Hogge, Global Head of Sustainability at Louis Dreyfus Company, is on the keynote panel that follows Dan’s presentation. I interviewed him for my earlier book Commodity Conversations’. At the time, I asked him then whether it was better to engage with, rather than ban, suppliers that fail to meet social and environmental norms.

He replied that “avoiding questionable supply chains completely may be an easy way to refrain from dealing with an issue, but it is not the best way to inspire and encourage change on the ground. If you want to address issues, you have to be involved in them, alongside other relevant stakeholders.”

Swithun Still, Director of Solaris Commodities S.A., and current President of Gafta, is also speaking at GGG. I interviewed him for ‘Commodity Conversations’ and he has also written—in a personal capacity—the preface to my new book.

In that preface he writes, “People can get by without buying many things in life, but not food. We’re dealing with the very fabric of life, with grains that make our bread, our pasta, our couscous, our biscuits. As the world population booms, our agricultural systems will be tested fully. As merchants of grain, we have a duty to help our farmers and customers make sure that, together, we feed the world without destroying it.”

“I’m a merchant of grain,” he added. “I’m proud of the work that we conduct in the grain trade.”

About 1,000 ‘Merchants of Grain’ from 65 countries will be attending Global Grain Geneva, of which 80 will be presenting or moderating over 30 sessions, including Dan Basse’s assessment of the 2019 harvest season and trade projections for 2020. The event is perfect both for networking and learning. I will be there, and I hope you will be there too.

If you haven’t yet registered, it is not too late. Click here not to miss out!

Right Time, Right Place

A conversation with Khoon Hong Kuok

Wilmar International Limited was founded in 1991 as Wilmar Trading Pte Ltd in Singapore with an initial capital of $100,000. It is now Asia’s leading agribusiness group with a market capitalisation of US$16 billion and a turnover in 2018 of nearly $45 billion. That’s not bad for a relative newcomer in what is traditionally considered to be a slow growth industry.

I caught up with Khoon Hong Kuok, the co-founder and CEO of Wilmar, in Beijing, where he told me that this was the first interview he had ever given. I asked him the secret of Wilmar’s success.

“Right time, right place and plenty of luck,” he replied. “In 1991 when I started Wilmar, Malaysia and Indonesia produced 9.0 million tonnes of palm oil compared to 62.5 million tonnes in 2018. In 1991, China imported 136,000 tonnes of soybeans compared to 84 million tonnes in 2018. These developments enabled us to become a major palm oil trader and a major agriculture commodity processor.”

“NGO’s have criticised Wilmar over sustainability and the environment. How would you respond?” I asked.

“In the old days palm oil plantations were burning forests to clear land and some even discharged effluents in the rivers. Today most major plantation group adopt sustainable practices. The NGOs have been a force for good in this.

“We are the biggest player in palm oil. So even though we stopped planting oil palm in new areas many years ago—and we were among the earliest to adopt sustainable practices—the NGOs still criticised us for buying palm oil from other producers who were burning to develop new areas. The NGOs attack the big names like us, not the smaller producers who sell to us.

“Having seen the deterioration in the environment due to burning and other irresponsible practices of some plantations, we decided to take a lead even if we had to sacrifice some business. The accusation that palm oil is not environmentally friendly is no longer fair.”

“What about labour issues?” I asked.

“Palm plantations bring good jobs deep into inland areas far from the towns. You need engineers, agronomists, and accountants—a lot of people. We need about 0.2 people for every hectare of palm. So if you have 10,000 hectares you need about 2,000 and if you include their families, it supports a lot of people. To attract and retain staff, you have to build good housing for your employees, as well as schools and clinics. In those rural areas the government does not usually provide good facilities.”

“I have been told that you could increase palm oil production without increasing the area…that with better trees you could double production. Is that true?” I asked.

“With better seedlings, technology and management, the yield of new palm plantations today are much higher than the past. This is especially so in Africa where production can be increased significantly by re-planting the old plantations thus minimizing deforestation.”

“You have concentrated your energies in Asia and Africa. Why don’t you invest in the West?”

“We have a strong position in Asian and African countries with over 4.5 billion people. The population and economic growth of these countries are among the highest in the world, and per capita consumption of agri-commodities is increasing. The population of North, Central, South America and Western Europe combined is less than 1.5 billion and per capital consumption is not increasing much.

“We do not have the financial resources, brands and distribution network of the food giants in the West. We don’t want to go to markets where we have no comparative advantage.”

“How do you see the Chinese market developing?” I asked.

“The Chinese are the fussiest people in the world when it comes to food. China will soon become not only the biggest but also the most sophisticated food market in the world.

“To succeed in a very competitive country like China you have to produce, market and distribute the best quality product at the lowest cost. Our integrated plants mean that our production costs are lower than our competitors, and our bigger volumes and multiple locations give us lower marketing and distribution costs.”

“You are known for working 16 hours a day. How do you manage to grow into such a big business but still maintain control over it?”

“I work 16 hours on some days but not every day. If I were to drop dead tomorrow our existing business would continue successfully. People think I spend a lot of time running our existing businesses. I don’t. The time I do spend is to ensure we have sound risk management, to ensure we have good people managing it and to make sure our operations work closely with each other to bring out the full synergies of our group.”

“Have you tried to persuade your children to come into the business?”

“I believe that you must let your children pursue their interests. Our job is pretty tough; you have to have a passion for it. The decision in my case is simpler because I don’t have a controlling interest in Wilmar. My children do not have the birthright to take over from me. They can only do so if they are good enough.”

“Thank you Khoon Hong for your time and insights!”

© Commodity Conversations ®

This is an extract of a conversation that is published in my new book Out of the Shadows – The New Merchants of Grain available soon on Amazon

Slaves or Masters

Most people believe that early agriculture enabled humans to build settlements, and that subsequent agricultural improvements have made humankind better off.

In his thought provoking book, Against the Grain – How agriculture has hijacked civilisation, Richard Manning disagrees on both issues. In particular, he questions the traditional view that the shift from hunting and gathering to agriculture led to “the surplus of food that allowed the leisure and specialisation that made civilisation.”

He also argues that it was only when hunter-gatherers, particularly fisher folk, started to live in settlements that agriculture could take form. He writes, “the archaeological evidence suggests that…sedentism—the radical human experiment with staying put, made agriculture possible, and not vice versa. Agriculture did not arise from need as it did from relative abundance. People stayed put, (and) had the leisure to experiment with plants.”

He is also an early exponent of the argument that agriculture has turned mankind into slaves. He writes, “We tamed the plants and animals so they could serve us, a sort of biological slavery, but if coevolution is true, the converse is also true. In biological terms, wheat is successful; its success is built on the fact that it tamed humans. Wheat altered us, altered our genome, to use us…. To a hog in a pen it must appear that he has enslaved the farmer. Why else would the guy show up twice a day with a buck full of feed? The hog believes this until the day he dies.”

Finally, he argues that somewhere along the line we have stopped eating food and begun eating commodities.

“Consider the range of plants humans consume, the hundreds of species. That’s food. Consider that two thirds of our calories come from wheat, rice and maize. Add sugar and you have a nearly complete picture of commodities. It is an oversimplification, but a useful one, to assert that these commodities have a fundamental and key distinction from the rest of food; they are storable and interchangeable and close to currency in their liquidity; in fact they are traded in markets just as currency is. They form the basis of wealth, and have done so for ten thousand years.”

Rice, he argues, is different, because “well over half of rice consumed is eaten by the same people who grew it.” He continues, “True, rice is storable, tradable, a dense package of carbohydrates that meets the definition of a commodity, but because it is the most important foodstuff of the world’s poorest people, it has many of the hallmarks of food.”

Yuval Noah Harari took up many of the same themes in Sapiens – A Brief History of Humankind. He writes,

“We did not domesticate wheat. It domesticated us. The word domesticate comes from the Latin ‘domus’, which means ‘house.’ Who’s the one living in a house? Not the wheat. It’s the sapiens….What then did wheat offer agriculturists..? It offered nothing for people as individuals. Yet it did bestow something on Homo Sapiens as a species. Cultivating wheat provided much more food per unit of territory, and therefore enabled Homo Sapiens to multiply exponentially….This is the essence of the Agricultural Revolution: the ability to keep more people alive under worse conditions.”

But is that really true? It would be true if we all lived in farming villages, wracked by disease and the occasional famine. But we don’t. Most of us live in comfortable cities. In the U.S. only one percent of the population is still engaged in farming. In Europe the figure is 4 percent; the global average is 28 percent.

Agriculture has enabled 99 percent of the U.S. population—and 72 percent of the world population—to escape the drudgery and hard labour of farming. Meanwhile, technology has lightened, at least a little, the workload on the farm. Agriculture has enabled all of us to live better lives.

At the same time agriculture has, along with improvements in health care, been one of the main enablers of our growing population. This is now putting a strain on the earth’s ecosystem. Agriculture has also contributed to environmental degradation through deforestation, reduced biodiversity, and climate change (through GHG emissions). To some extent, therefore, agriculture has become a victim of its own success.

The solution, however, is not to go back to some mythical golden era. The solution is in developing new technologies to improve the way in which our hard working farmers grow food, in order to reduce agriculture’s negative impacts on the environment.

This is already work in progress, and unlike Richard Manning, I am sure that it will succeed.

© Commodity Conversations ®

Learning to navigate

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

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

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

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

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

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

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

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

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

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

Are you optimistic or pessimistic about the future?

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

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

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

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

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

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

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

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

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

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

Thank you Brian for your time!

© Commodity Conversations ®

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

Playing for Barcelona

A conversation with Ivo Sarjanovic

Could you please tell me a little about career?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you Ivo for your time and input!

© Commodity Conversations ®

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