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.

A faster and bigger world

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

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

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

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

And Manu, when did you join?

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

How big is the company today?

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

Do the big trade houses each have a shipping department?

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

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

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

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

Any other changes?

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

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

Could LNG be used as an alternative low emission fuel?

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

So how could the industry reduce emissions further?

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

What’s the average lifespan of a ship?

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

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

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

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

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

Thank you Riccardo and Emanuele for your time and input.

© Commodity Conversations ®

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

Agriculture is our backbone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Could you describe a typical TCF finance?

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

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

How do you see your business evolving in the future?

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

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

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

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

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

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

© Commodity Conversations ®

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

Trading with a purpose

A conversation with Greg Morris

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

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

What tonnage of commodities does ADM trade each year?

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

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

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

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

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

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

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

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

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

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

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

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

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

 Is there anything that you’d like to add?

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

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

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

© Commodity Conversations ®

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