A conversation with Jules Stow

Good afternoon, Jules. I believe that your father was a freight broker; did you get into the commodity business because of him?

Well remembered; my father was indeed a shipbroker and a director of the Baltic Exchange. The only career advice he gave me was to not go into shipbroking. For once, I followed his advice. I still focused on the city, sending over 300 application letters to various banks and brokerages in the hope of becoming a foreign exchange trader. I found a copy of one of the letters the other day. I was shocked at how punchy, pushy, aggressive, and arrogant I was at 21!

Goldman Sachs invited me for an interview (which didn’t translate into a job offer). While in their office, I met their one and only commodity trader (at that time). It sparked my interest in commodities. My father was friendly with the CEO of ED&F Man, and I had been at school with his son, Andrew. I applied to EDF Man as a sugar trader, but they turned me down because of my lack of language skills.

My brother-in-law told me that Czarnikow was looking for trainee sugar traders. I applied, and they gave me the job. They also gave me responsibility right from the first day. I loved it. I stayed with them for ten years.

After an initial period in London, Czarnikow sent me to Singapore, where their office handled Queensland’s sugar exports. There were only four of us in the office, and one of those other three, Peggy, still works there. She just celebrated her 50th year with the company.

After a few years in Singapore, I moved back to London, where I looked after Czarnikow’s Moscow office, but from London.

A few years later, ED&F Man offered me a job to return to Singapore to manage their Asian trading book. I had just turned thirty and viewed it as an opportunity that I couldn’t turn down.

As a company, Czarnikow prioritized client relationships; they always put their clients first. EDF Man were pure traders, and it was, I felt, a more transactional environment. I wasn’t entirely comfortable with their approach, and during the four years I was with them, I slowly fell out of love with physical trading.

In 2008, Barclays Capital offered me a derivative-trading position in Singapore and then London. I took it and stayed with them for about four great years before the bank ran into difficulties in copper and wound down the commodities business. I jumped across to Standard Chartered. They had about five traders on their commodities desk, but facing regulatory headwinds, they, too, wound down the size of their trading business after three years.

I found a position with Oak Capital in the City. They were market makers in oil, looking to expand into agricultural markets. They liked to move quickly, jobbing in and out of the market. I was more of a long-term trader who entered the market based on my perception of market fundamentals – and I held a position even if the market went against me in the short term. They weren’t comfortable with that. Our trading philosophies were a mismatch.

While at Oak Capital, I began to take an interest in quantitative trading. Quant trading involves using computer algorithms and programs—based on mathematical models—to identify and capitalize on trading opportunities. It consists of researching historical data to identify patterns and profit opportunities.

I felt that I was too emotional as a trader. I loved the idea of taking emotion out of my trading and trusting the algorithms. I started off down the rabbit hole!

Seasonality is a big part of agriculture, which is a natural fit with algorithms – and I did a lot of work on calendar spreads and relative value. I set up my own business running and designing systematic trading strategies for small hedge funds. The systems struggled during the Trump years when many historical patterns broke down. I then ran into Covid and lockdown.

I had a long hard think about what I wanted to do. I was in my late forties and realized I didn’t want to trade anymore. I think it is an age thing. Trading is a stressful business, but you only realize just how stressful when you stop.

A headhunter friend asked me what I enjoyed about trading – what excited me. I was shocked to realize that I couldn’t think of anything!

As we talked, I realized that the time I most enjoyed in my career was when I was at Czarnikow, building relationships and finding solutions for our clients. You don’t have that on the derivative side of the business.

My friend suggested that my interpersonal skills and experience would be well suited to headhunting, and I sought out the advice of Jakob Bloch at Commodity Appointments who I had been in a process with some years back. He confirmed that view and invited me to join him at CA – and here I am!

Commodity traders are primarily young. They have a limited shelf-life. You reinvented yourself as a headhunter, but what do you recommend other traders do when they get too old to trade?

I consider myself very lucky to have somehow solved that puzzle. I have just turned 50, and I am now seeing CVs from friends and former colleagues my age. The funnel narrows as you swim towards the top.

I think older traders need to identify which aspect of their job they genuinely enjoy and then orientate themselves in that direction. If like me, they decide that they don’t want to do it anymore, I suggest they consider moving on to something else.

It might sound negative, but it isn’t. It is incredibly positive. Traders, particularly physical traders, are great entrepreneurs. Trading is an entrepreneurial business that you must look at holistically. Every time you do something, you must ask what effect it will have on other parts of the supply chain.

So, my advice would be to see what business you want to be involved in and start it! You have the skills you need, so decide which niche interests you.

Are you a headhunter or a recruitment consultant?

I am a headhunter. As with any business, there is a spectrum. At one end, you have the uber-high-end individuals. On the other, you may be placing temps.

Commodity Appointments is a relatively boutique firm where we concentrate on the higher end of the spectrum. It is more of a numbers game if you come into recruiting straight out of university. In my situation, I try to utilize the network I developed in my earlier career. My edge is that I have sat in the seats of the clients and the candidates. It helps the conversation.

We are a commodity-specialist firm, and we only operate within commodities. We specialize in the front office, typically traders – especially physical traders. We have strong power, gas, and utilities networks, and I bring experience from agriculture and financial institutions. If you are a senior trader, you would probably want someone with similar experience to represent you. If you are a 25-year-old making your first job move, you would probably want someone of a similar age and understanding who is more relatable and relevant to you.

Apart from experience, what skills do you need as a headhunter?

Emotional Intelligence and the ability to empathize – to listen and not just hear what people tell you. You can never have a bad conversation, even if it eventually comes to nothing. The more data points you have, the better. Each talk is a data point. A big part of headhunting is joining those dots.

We are all different, so it is a matter of making the most of your skill sets. I am quite an affable guy, and I enjoy chatting with people. That’s my thing. Other headhunters may be more quantitative and analytical. You don’t have to be a particular person, but it is a people business. You can’t rub people up the wrong way – you wouldn’t last long!

Talk me through the process.

Most people misunderstand what a headhunter does. They look at it from the candidate’s point of view and think that a headhunter can magic them up a job. But that’s not how it works. It is the opposite.

The hiring clients drive the process. They contract us on a retained or contingency/success basis. If a client doesn’t retain us, we will at least want exclusivity. It doesn’t look good on me if I am the fifth headhunter to call a candidate about the same position.

We will sit with the client to work out what skills and experience they are seeking. There will sometimes be a job description, but the HR department often writes job descriptions with only an arm’s length idea of what is needed.

I prefer to sit with the head of the desk or with the person to whom the candidate will ultimately report. I need to understand the firm’s culture, the team dynamics, the essential skills, and the nice-to-haves. We will then put together a list of candidates and approach them to see if they are willing to move.

Being prepared to move is an important issue, particularly with senior people. They will be reluctant to move to a firm that might not have a long-term commitment to the business. A bird-in-the-hand is worth two in the bush.

I think of a candidate list as a colouring book that hasn’t been coloured in. My job is to colour it in –  to provide the information that you don’t see on a cv and which might not naturally come out in an interview. I sometimes feel a bit like a priest. Candidates tell me stuff they wouldn’t tell colleagues or competitors, and I must treat that in confidence. It adds colour and detail to a profile, and my job is to try and impart that as successfully as possible to the client.

Is headhunting a competitive business?

Yes and no. The advent of LinkedIn has made some aspects of the job more straightforward and, therefore, more competitive. There are few barriers to entry in headhunting.  Over the past few years, some large companies have employed people from headhunting firms to do in-house recruitment, but as far as I can see, many still engage headhunters anyway.

Some hedge funds don’t care whether everyone knows if they are looking for people and will simultaneously give the task to half a dozen headhunters and post the vacancy on LinkedIn and their website. However, the less transactional clients will generally only work through one headhunter they trust. It brings it all back to the essence of the job, which is the power of personal relationships. You may have 10,000 connections on LinkedIn, but it doesn’t mean anything unless you have at least some degree of connection on a personal level.

Your description sounds like what I used to do when I was broking physical cargoes. You broker people – but it is the same. I tend to avoid conflict and prefer physical broking to trading. With broking, you look for a win-win situation where everyone is happy – like what you were doing at Czarnikow – while as a physical trader, you ultimately have winners and losers. It makes me wonder whether you would have been better as a broker than as a trader – and that you may have missed your true vocation.

Your analogy of a broker is a good one. I happily chat with people all day long with no objective other than to try and find out what the employment market is doing – who is moving where, which firms are doing well – that sort of thing. When you were a broker, and someone came to you with a cargo to sell, you would already have a short list of potential buyers. The same applies to me. When a client approaches me with an open position, I already know who might fill it.

Have I been in the wrong job? It is almost too depressing to think about it, but I don’t think so. I enjoyed my experience as a physical trader, working with clients to get the most out of the market. I don’t think trading has to be transactional. I moved on to derivatives and loved it, perhaps because the market, not a particular client, was on the other side of the trade. There is no conflict when the market is your counterparty.

Was I any good as a derivatives trader? I was good enough to last as long as I did. If you are bad at it, you don’t stay more than a few months. But, on the other hand, if I had been excellent at it, I would have retired by now.

I feel lucky to have come into headhunting. I don’t think I should have transitioned into it sooner, as that would have meant missing out on something else. I am unusual to have come out of trading into headhunting. My experience as a trader helps me enormously in my current role. I think I am a better headhunter for having been a trader.

So, if you are a trader wondering whether to shift across to headhunting, I would advise looking at it closely. You would likely have a lot to offer.

 How does a headhunter get paid?

It varies between firms, but the employer generally pays a percentage of the first-year compensation package, including a signing-on fee if there is one. We prefer to concentrate on a few high-paying positions and do them well rather than doing many smaller ones.

 Could you describe a typical day?

I never looked at my diary when trading unless I was travelling somewhere. I knew when the market opened and closed, and that was enough. My working life now is divided into half-hour chunks. I spend most of my day speaking to people via video conference or telephone. I don’t know what life was like before Zoom and Microsoft Teams, but I suspect you just picked up the phone and called people. Now, I schedule most of my conversations.

Technology has set me free as I can now work between home and the office, but it is easy to get holed up and become a technology prisoner. It is essential to meet people in person, even without a specific reason. The best conversations I have are with people I meet for a coffee where there is no agenda. There is no substitute for face-to-face discussions.

I spend a couple of hours daily on video calls, but I haven’t swapped my trading screen for a video one. As a trader, you are a slave to your screen. I am glad to have left that behind.

I do my research. I constantly work to broaden my network, turn my second-level contacts into first-level ones, and learn about new markets like energy, power, and gas.

 Your company handles recruitment across metals, energy and ags. Are ag traders different from metals and energy traders?

I prefer to divide the market between derivative traders and physical traders. I think that physical agricultural commodity people are a breed apart. Energy guys have a confident swagger – and more of a dangerous look behind their eyes!

Most physical traders are social. They must be to get business done with their clients – real people. Most derivative traders don’t deal with people, just their market screens or OTC brokers. And any OTC broker will tell you they don’t get treated like real people!

What positions are employers looking to fill now – data scientists, programmers, sustainability professionals?

I see a great deal of interest in quants and data scientists. Commodity markets are booming while investors are looking to diversify their portfolios – the two are interrelated. Some funds are struggling to deploy some of their inflows and looking to diversify into commodities and agriculture.

We see a lot of demand, but it is a small talent pool. When a hedge wants an agri-commodities quant, there aren’t many people to choose from simply because it’s such a young sector.

The funds do realize that commodity markets are different. There is no point in taking a quant off, say, crypto and asking them to build a model around cocoa. They need someone who understands the underlying nature of the agricultural markets. It is a challenge to find that talent.

The commodity business has – or had – a reputation for being male-dominated – is that changing?

Yes, it is. First, companies are under pressure to employ more women. Second, women look at commodities differently than in the past. It is a bit of a snowball effect. More women are applying to the sector because it is becoming less male-dominated. The more women join, the more women want to join. It is self-reinforcing.

There are three “buts”.

The first is that the process will take time. Finding women with the required experience to fill senior roles is sometimes challenging. It will change as women work their way up the ranks.

The second is that women are sometimes less flexible geographically than men. We still have some way to go before it becomes the norm for men to give up a job to follow their partners to another country. Some women may be more reluctant to move countries if it means their children must change schools. It is becoming less so, but men may prioritize their careers while women may prioritize stable family life. Geographic flexibility is essential in our business.

The third follows from the second – women may be more risk averse than men when changing jobs. We had a recent search where a woman was the best candidate by far, but she decided not to take the risk of jumping.

When I joined the business thirty years ago, there were few female traders. That is no longer the case.

What advice would you give to a young person thinking of getting into the agricultural supply chain business – not just trading?

It follows my previous remarks. I would advise them to take every opportunity they get! If you are unsure about taking a new position – for example, if it means moving – do it! If it feels like an opportunity, take it. Nothing is forever. You can usually find your way back if it doesn’t work.

It doesn’t necessarily mean changing companies. If your boss is looking for volunteers for a new position or venture, stick your hand up!

And for someone already in the sector looking to change jobs?

First, identify what makes you stand out and then capitalize on it. Ask yourself what your edge is.

Second, identify any areas of weakness and take measures to improve them, for example, by taking night classes. Never stop learning and never stop asking questions. Continually improve your skills.

What would your 21-year-old self think about what you have done and who you are now?

When I was 21, I never really looked that far ahead. When I started in the business, I never asked myself where I would be in ten years, let alone thirty!

Another way of looking at the question is to ask, “Knowing what I know now, would I have done anything differently?” The answer to that is a solid “No.” I have enjoyed every bit of my career – admittedly, some more than others. Each experience has given me a different point of view and insight. I am lucky.

I have friends who joined Czarnikow at the same time as I did and are still there. They have had fantastic careers and are probably financially better off than me. I could have stayed at Czarnikow, and I would have been happy. But I am glad I didn’t. I liked the variety and the challenges that my career has offered me.

I am not one for looking back and wishing I wish I had done something differently. It’s gone. It’s happened. Move on.

In saying that, I realize I am more of a trader than I thought. Don’t beat yourself up over past mistakes. Learn from them and look ahead for new opportunities.

Thank you, Jules, for your time and input.

This conversation is part of the Commodity Professions – The People Behind the Trade series.

© Commodity Conversations ® 2022

In the joy of others, I find my own

 A conversation with Kiran Wadhwana

 Good morning, Kiran. How would you describe what you do?

 I am an origin broker active in the Indian export market for physical sugar. I act as a middleman between a mill wanting to sell physical sugar for exports and a trader looking to export that sugar. I earn a commission on any trades that I put together.

 Why do traders need origin brokers in addition to their own local offices?

When you have your own office, people move in and out, getting promoted or changing firms. It means that most relationships are with the company and not with the individual – and they could be weaker as a result. An origin broker builds up personal relationships with suppliers over a long period.

Origin brokers will have a detailed understanding of what is happening in their procurement areas regarding crop prospects and industrial processing capacity. For example, have any mills increased capacity or added a refining end?

As an origin broker, I keep my ear to the ground, and with my long-term relationships, I can get a good feel of the moves and trends in the local market – perhaps better than if a company has its own office.

There is also the issue of counterparty risk. As an origin broker, I must know the financial condition of clients. I must evaluate the risk that they may default on a contract if the market moves against them.

Do traders pay for you to bring the offers and put the trade together, or do they pay you for your market information?

It is a good question. The answer is probably ‘both’. In addition to broking, I also double up as a consultant for both local mills and international trading companies. Some take me on a retainer. I help domestic mills understand the world market and help international traders understand the local market.

I send out a weekly report that covers crop progress, government policy, industrial capacities, and trading issues. I also cover ethanol policy; it is critical to the sugar market.

Government policy is probably the toughest. It is also critical. India’s government can’t just look at one commodity. It must look at the total domestic food supply. We have such a vast population it would be impossible for other countries to supply our needs.

You could say that I am a bridge between the domestic and international markets, with information flowing in both directions.

Who pays you on a brokerage deal?

I structure my business such that the sellers, rather than the buyers, pay the commission. That may or not be the same for other brokers.

I usually charge 50 rupees per tonne, but some brokers charge double that.

Are there lots of origin brokers in India for sugar?

Yes. India has a large domestic sugar market. Last year we exported about 12 million tonnes, while the domestic market is 27 million. Most brokers only work in the domestic market, although some double up and do exports. A domestic broker may not understand the export market. I am probably one of the few who works exclusively in the export market. I don’t do any domestic broking.

There are probably 15-20 brokers active in the export market.

There is a thin line in India between a broker and a trader. One day someone may be broking, and the subsequent day trading. I think I am the only one who only does broking. I do not trade.

Could you describe a typical day?

I am lucky to have worked from home for the past 20 years, and there is no distinction between home and office life. It may sound good – and it is – even if it means that I work all the time!

I get up at around 5 am, do my morning exercises, and then read the overnight futures, physical market, and analytical reports. I use this quiet time to check recent trades’ logistical and execution details. I also do any administrative tasks that need to be done.

At around 8 am, I receive the overnight reports from New York. By then, my Indian clients have begun to contact me on WhatsApp, asking questions, exchanging market information, looking to buy or sell physical sugar, or checking on execution issues. I used to do everything by telephone, but it has now moved to WhatsApp.

European clients wake up at around 2 pm my time. It starts to get busy as they are either looking for sugar or trying to keep abreast of any policy developments that may have occurred overnight in India. That goes on until around 7 pm, when the New York futures market becomes more active. I advise some Indian clients on pricing their export sales on the futures exchange. The moves in flat price can also generate new physical business.

My day ends around 8.30 pm. It sounds like a long day, but I don’t have to commute. The line between home and office is, well, thin. I am a few years from retirement, and I don’t have to put as much effort into my business to get the same result as I used to. I like that.

What skills and experience do you need to be an origin broker?

An essential skill is getting on with people and managing relationships with clients. To do that I think that you must like people and social interaction. You must also be prepared to accept ‘no’ as an answer and realise that markets can be calm for extended periods.

Working in India, I must keep a keen eye on government policy. We have a new policy every year. I try to understand the workings of domestic politics and anticipate what policy may be and how it might affect the markets.

Perhaps experience is more important than any skill set. Over my career, I have been a farmer, a miller, a trader, a futures broker, and a consultant. It has allowed me to understand both domestic and international markets.

My grandfather started the family in the sugar business and founded the company ITC – International Trading Company – under which I still operate. He was a trader, but now I only do broking and consulting.

Tell me about your time as a farmer and mill owner.

When I finished my MBA in the US in 1985, my father said, “Well, you have been educated in the best universities in the world. I will buy a sugar mill, and you will run it for me!”

The mill came with the 4,000-acre farm, and I became one of India’s largest sugarcane growers. I learned the business from the ground up, even if I was a gentleman farmer.

So, you were not in the field with a machete cutting the cane?

I went to the fields in a jeep but didn’t have a machete!

Out of all the hats you have worn, which is the one that has taught you the most?

 My time as a gentleman farmer and miller helped me enormously. If I had not had that experience, I would not have such a good understanding of the underlying issues in the market – nor would I have been able to have such a good relationship with the mills. You can only understand the psychology of a farmer if you have been a farmer. The same applies to milling. I did both for more than 20 years.

What happened to the farm?

It is still there but under litigation with the government. The Urban Land Ceiling Act, passed in 1976, limits the amount of land a farmer can hold is 75 acres unless the farm is mechanised. Our farm is mechanised, but we are still fighting the issue in the courts. Local people have encroached on the land. It is still in our name, but local people live there and farm it.

The farm has an issue with water. The local government has diverted the farm’s water supply to urban areas as the population has grown.

The farm has become more of a liability than anything else.

What about the mill?

It is still there, but it has been closed for 20 years. We built a school in the factory area that we run along with two other schools we opened in local villages – a total of 1,400 students from nursery to year twelve.

We also built a religious temple on the mill site for the local population.

Which is the hardest job in your supply chain?

Farming is by far the hardest. It is the most complex and risky part of the sugar supply chain. Although Indian farmers receive a fixed price for their cane, many other factors can affect their crops: climate, weather, and insect infestations (sometimes from neighbouring farms).

New technology may make farming more accessible, but it remains risky and complex. Sitting here in an air-conditioned office is far easier than being out there in the fields.

What is the worst thing about your job?

When people default on a contract.

There are two types of defaults. The first can result from an adverse market move; for example, if a mill sells you sugar at one price, the market price increases, and the mill sells the same sugar at a higher price to another buyer. Knowing your client and helping them manage their sales can reduce counterparty risk from adverse market moves.

The second type of default can occur because of a change in government policy, for example, if the government restricts exports.

I find the second the most stressful. It can result in huge losses for both millers and traders.

Is government policy – and changes in government policy – the biggest challenge you face?

Government policy is OK. Policy changes – or the delays in announcing policy – cause problems. Mills need to sell their sugar three months in advance, but the government thinks that once they reveal the policy, the mills can export the next day. It doesn’t work like that. Mills are industrial units that must plan at least six months ahead.

Do you need different skills as a broker compared to being a trader?

The trader looks at a deal in terms of what it means for his bottom line – how he can make money from it. A broker aims for a win-win for both sides. When I sell sugar for a mill, I need to understand the miller’s costs, their concerns and what other options they have. But I also know that the trader must make money, or they won’t do the business. I tell the trader he must leave some money on the table for the mill, or he won’t return to you next time – and vice versa.

I am constantly looking to achieve a balance – that’s what makes you a proper independent broker.

When I was broking, I found that I was always trying to keep people happy. Broking suited my personality as I tend to avoid conflict. Traders often find themselves in a conflictual situation where they must fight for their margin. Does that apply to you as well?

Very much so! I work to bring people together. I avoid conflict.

Conflict avoidance is not just a question of personality. It makes sense from a business perspective. The only raw material I have is my time. I must use it wisely. If you get into a conflict, you waste too much time trying to solve a problem rather than doing any productive work. So, if you can nip a conflict in the bud – not let it develop – you will have more time to do more deals while keeping your existing customers happy.

Your brother works as a trader for a trade house. It is interesting that in the same family, we have two brothers, one a trader and the other a broker. How does your brother’s character differ from yours – and how do your skillsets compare?

 My brother is more of a risk-taker than I am. He has a higher appetite for risk.

As a trader, he may do business with a financially weak mill and take a chance on the counterparty to get a good deal. That is something I would fear doing. I prefer to have a financially strong counterparty and not get into a conflict over contract performance.

My brother doesn’t look at the physical volume of the business he does but rather the profitability of each trade he does. I have a fixed commission per tonne, and I will try to maximise volume while simultaneously ensuring that the counterparties are strong and that there is no risk of default.

Is your brother braver than you?

He takes risks that I wouldn’t be willing to take. It is also a question of age. As you grow older, you become more risk averse. I am 5-6 years older than him.

How does that affect your ego?

Markets have a way of beating the ego out of you, whether you are a broker, analyst, or trader! We can all get things wrong. Humility is an asset. No one is always correct, and, in your career, you will get things wrong.

What is your favourite thing about what you do?

Making money!

And your second favourite thing?

I am constantly learning. I learn something new every day. I learn from my clients and from people who ask me questions. My clients teach me everything.

I love to train younger people. When I teach them, I learn from them.

What advice would you give to a young person starting in the business?

Understand what drives production! If you don’t understand production, you will never understand your market.

Last question – what would your 20-year-old self think of you now?

Funnily enough, I recently asked myself that same question.

My 20-year-old-self would never have imagined the path I followed. I was in the US when I was twenty, finishing my undergraduate course in Houston, Texas, and applying for an MBA at the University of Michigan, ANN ARBOR.

There were six of us from India on the MBA course. Four stayed in the US and two, including me, came back to India. I keep in touch with the four who remained in the US. They are all successful and certainly have more money than I have. So, if you judge success purely on money, they are all more successful than me.

Religion plays an integral part in my life. As I mentioned, we built a temple on the site of our mill, and I am a trustee of the Akshardham temple in Delphi – the biggest Hindu temple in the world.

The guru who built the temple, Pramukh Swami Maharaj, always said, “In the joy of others, I find my own.” I have applied that motto in both my private and business life.

So, when it comes to life quality and philosophy, I am satisfied with – and proud of – the life I have led. I think my 20-year-old-self would be too!

Thank you, Kiran, for your time and input.

This conversation is part of the Commodity Professions – The People Behind the Trade series.

© Commodity Conversations ® 2022

A conversation with Jim Roemer

Could you please tell me a little about yourself and your company Best Weather Inc?

The weather has fascinated me since I was a boy growing up in New Jersey. I studied at a small college in Vermont, where my professor started the Weather Channel. I had long hair, and my professor felt that my hippy look – combined with my strong New Jersey accent – would limit my TV career. He suggested I do something else.

In 1982, I drove my beat-up VW bus 2,000 miles to Iowa, where I worked for many years for a small firm called Freese-Notis Weather. I joined the company knowing nothing about farming, but by the time I left ten to fifteen years later, I had the equivalent of a PhD in agriculture! While there, we built up their commodity advisory business with significant agricultural and food companies as clients. I learned about the importance of weather in the commodity sector.

I intended to return to school to study agricultural meteorology but decided to start managing some discretionary money, trading in the markets for clients. I didn’t have the personality for it and couldn’t handle the stress. I earned enough to send my sister through law school but decided that my real forte was in client advisory. I started Best Weather Inc in 1999 and became chief meteorologist for Blenheim Capital Management and other hedge funds.

In recent years, I have shifted focus to smaller clients – particularly in the farming community – and launched a couple of newsletters with trade recommendations. In addition to the weather, I look at climate change and produce long-range forecasts on yields etc.

They say that weather is the most critical driver of agricultural commodities, but politics currently has a firm grip on the steering wheel. Is the weather going to soon get back into the driving seat?

The weather has taken a bit of a back seat since the Russians invaded Ukraine, but agricultural commodity prices were already rising long before the war. There are some serious weather concerns out there.

South America has seen their worst drought in 35 years, which has significantly impacted soybean prices. It was too hot and dry in December and January, and although the situation is improving, it is a little late for the soybean crop. Soybeans pollinate and develop from December through February in South America. Recent rains may even negatively impact yields if they delay or slow the  Argentina grain harvest.  A wet spring in the U.S. could also delay Midwest corn and soybean planting for the next crop.

Last year, much of central and eastern Russia saw one of its worst droughts in 15-20 years.

Drought also hit the northern US plains and parts of Canada. We could see an easing of the drought in the Western Plains this year, but the moisture deficit is still severe from Colorado to West Texas and the Southwest. Water levels in the Colorado River have fallen significantly over the past few years.

China had a dry winter, but we expect to see more moisture during the April / July period. It could improve things pre-harvest.

Flooding in central and eastern Australia impacted their wheat harvest, but overall, this moisture is probably beneficial for Australian agriculture. The only concern is the far southwestern parts of the country.

Reading between the lines, you sound bullish corn and beans and bearish wheat?

As you said, politics and not weather currently drive the markets. Wheat depends on the Ukraine war, and that is tough to predict.

Also, wheat is grown in five of six countries, and you must get the weather right in all of them to get the market right. It is not easy to do.

The developing La Nina could be beneficial to many crops and take some of the sting from food inflation. Last year we had a whole series of weather problems. We are expecting fewer this year.

Compared to last year, I am more optimistic about most agricultural commodity yields for this harvest. Things could change going into the Northern Hemisphere summer, but for the moment, I am more bearish than bullish on the agricultural complex. Politics aside.

What about coffee?

Last year, Brazil’s coffee areas had their worst freeze in thirty years. Coming on top of the drought, coffee prices doubled.

There was also a drought in NE Brazil. Part of that might result from deforestation. It is hard to quantify the effect that deforestation has on local weather. Still, the data suggest that deforestation leads to more frequent and more severe droughts in northern Brazil.

La Nina could bring wet weather to Colombia and may delay the coffee harvest, negatively impacting coffee production. While prospects for Brazilian coffee production are improving, I would flag Colombia as a risk. However, I am bearish on coffee longer-term and have advised my Weather Wealth newsletter clients about selling call options.

I hadn’t thought of the effect of deforestation on local weather.

It is not just local weather. The smog from the Amazon fires goes into the stratosphere and can change the weather thousands of miles away.

To what extent is climate change already affecting the weather?

Climate change is undoubtedly making it harder to predict the weather. You may see variables coming together as in the past, but climate change changes how those factors play out.

We can put the pieces of the puzzle together and say, ah, this looks like 1978 or 1964, or whenever, but because of climate change and the warming oceans, you must adjust your predictions. It is not easy. Sometimes warming oceans can create colder conditions like last year’s Texas freeze. There are many variables.

I have an in house weather software program called climatepredict that looks at historical climatic variables, adjusts them for climate change with predictions sometimes months in advance.

Are you an optimist or a pessimist regarding climate change’s effect on agricultural production and yields?

Climate change leads to more frequent extreme weather events such as droughts, floods, freezes etc. It makes it harder for farmers to produce the food that we need.

Global warming is shifting the agricultural belt further north in the northern hemisphere, bringing new areas into production. Against that, hot and dry conditions further south make it more challenging for farmers in some developing countries.

But remember, there will be a lot of fluctuations from year to year, and the “normal” is made of extremes. Over the next 20-30 years, climate change will exaggerate those extremes, resulting in record crops in some areas and crop failures in others.

Which crops are the most vulnerable to climate change?

That is a tricky question, but the first would be coffee. The coffee belt is situated around the equator and is vulnerable to heat and moisture stress.

Many of the world’s wheat areas are susceptible to insufficient moisture. We saw this last year, and it may be a feature going forward.

Cotton and almonds are also susceptible to droughts. We could see significant variations in production from one year to the next, depending on moisture levels.

Luckily, grapes like dry weather – so wine production could benefit from global warming. There is some good news, at least!

What about cocoa?

Interestingly, warming oceans in the Gulf of Guinea and to the south of West Africa tend to correlate with normal to above-normal rainfall in West Africa. To this extent, warming oceans could benefit West African cocoa yields.

Any other thoughts?

Yes, two.

First, we must find new technologies such as carbon capture to fight climate change. The decarbonization of the global economy presents enormous opportunities for investors in the renewable energy space.

Second, weather and politics are the two most significant drivers of agricultural commodity prices, and everyone in the markets needs a good weather service!

© Commodity Conversations ® 2022

There is always a solution!

I am truly saddened to hear that Guy Hogge, former Global Head of Sustainability for Louis Dreyfus Company (LDC), has passed away after a long illness.

In his memory, I publish a short extract of a conversation we had back in 2016. It is as relevant now as it was then.

There is an old proverb that “the good die young.”  I offer my condolences to his family, friends, and colleagues.

Good morning, Guy. What are the biggest challenges that our sector faces in terms of sustainability?

One of our biggest challenges relates to the environment, particularly in terms of deforestation and the preservation of natural habitats. It is a huge challenge given the amount of food that we must produce to feed a growing population in the years and decades ahead. We must ensure that the expansion of food production does not come at a massive environmental cost.

Another enormous challenge concerns human rights and labour issues, particularly in developing countries, and especially around forced child labour and bonded labour. Trying to eradicate both from agricultural supply chains is a huge undertaking.

Where are the hot points now: palm, cotton, soy?

Palm is a concern, obviously. The anticipated expansion of soybean production in South America is attracting a lot of scrutiny.  There is concern in cotton regarding water usage in both growing and processing it, but also regarding the amount of water used in washing clothes during their life cycle—and I have no idea how to resolve that!

I read somewhere that the world will need to produce as much food in the next forty years as it did in the last 8,000 years. Can we do it?

Across a basket of the main agricultural commodities, there is currently a slowing down in the rate of increase in agricultural yields, the amount of food that each hectare produces. This trend needs to be reversed if we are to produce the food that we will need without cutting down forests or invading natural habitats. If we want to preserve those habitats—and I certainly do—we will need to see massive yield increases from limited and constrained resources like land and water.

Are you optimistic that we can feed the world in a sustainable way?

Large-scale agriculture is already relatively efficient in terms of how much of each crop is utilized. Sugarcane is a good example. The dry matter from the crushing process, the bagasse, is burnt to provide electricity both for the mill and for the surrounding areas. The sludge (vinasse) from the production process is reapplied to the land as fertilizer. Water treatment methodologies have improved tremendously to allow wastewater to be recycled and reused.

The mindset in agriculture now is to extract the maximum value from field crops and to reduce waste to a minimum. To move along that road, we need continuous improvement in technology and process efficiency. We need to use every part of the plant and recycle any waste material left over from harvesting and processing.

Africa is the one continent that is expected to see the biggest population increase. Can Africa feed itself or will it need massive food imports?

I am not an agronomist but in terms of suitable land for cultivation, I would have to say that with the proper investment Africa has the potential to be self-sufficient in food—and even to be an exporter of food. A lot of countries import food that they are perfectly capable of growing domestically.

As population and food production in Africa grows, the native flora and fauna will become increasingly under pressure. Is there any solution to this?

There is always a solution! We need to look at which areas can be brought into agricultural production, and which areas should be kept as natural habitats. There is a balance to be struck, but it requires good governance.

Many farmers in developing countries live in poverty. What can be done to improve their conditions?

Education is key, not just in general terms but specifically on husbandry techniques and yield improvement. That is tough for us to implement in areas where we as a company have no direct relationship with the farmers. In cases like that, it is the amalgamators of volume—the local cooperatives for example—that have a significant role to play in making sure that each farmer receives the necessary coaching and education.

If this isn’t done the next generation will abandon their land to seek better opportunities in the cities. This is already happening. We must incentivise that young generation—through better returns or through government support—to stay on the farms.

It is a sensitive subject as to whether agricultural land should be amalgamated to capture economies of scale, lower costs and give farmers better returns. It is a question as to how you achieve economies of scale while not harming local communities or culture. Going into a continent like Africa to farm huge concessions will invariably always have an impact on local communities. 

How do you deal with countries that have a less than perfect record in human rights or environmental sustainability? Do you engage with them, or boycott them?

In the context of sustainability, I believe that engagement is better than boycott.  Engaging with Indonesian palm oil producers, for example, can lead to positive change. The same applies to engaging with smallholder farmers as to why education for their children is more important than having a little extra help on the farm.

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.

Any other thoughts?

I want to make it clear that not everything is perfect. But we are moving in the right direction, that’s for sure. As the saying goes, “sustainability is a journey, not a destination”.

The second point I would like to make is that sustainability is one area in which we can be collaborative, even with our most ardent competitors. We can take what we do and share it with others through commodity roundtables or other networks such as industry associations and multilateral institutions. That is the only way we can have the collective brainpower to find the innovative solutions that we will need in the decades ahead.

The third point is that we need the politicians to take a neutral stance. We have recently seen some fairly worrying political thinking regarding climate change; it has been introverted and insular instead of being inclusive and collaborative. No individual, company or even country can solve these issues by themselves. But we can if we work together.

Having said that I find particularly encouraging the way that the private sector has responded to the lack of political engagement on issues like climate change. The consumer is clearly concerned about the issue, and businesses are reacting to that concern with the help of civil society. I am already greatly encouraged to see how the private sector can work together with civil society.

After all, we are all people—and we all live on the same planet!

 R.I.P.  Guy.

A Conversation with Devashish Chaubey

Good morning, Devashish. Could you please briefly describe your career so far and your current role within Olam?

I am head of rice and speciality grains within Olam. When I say speciality grains, I mean superfoods like quinoa, chia, and sorghum.

How significant a business is rice for Olam?

Rice currently employs roughly 2,000 people, and we rank second in terms of global volumes traded.

We operate a large rice farm in Nigeria – and we are a significant player in Nigeria’s domestic rice market.

In geographies such as Vietnam, we operate mills but also buy rice from millers. In origins where we don’t have mills, we buy rice from millers and then upgrade/reprocess the rice to our customers’ specifications. We have reprocessing facilities in Thailand and India that upgrade milled rice.

We sell to importers in various geographies, and in some we import ourselves and distribute the rice through the general trade and modern retailers.

 What are the biggest challenges that you face as a rice trader?

Counterparty risk is the biggest challenge for rice traders generally. The challenge is to build a deep sense of reliability and faith with your customers.

Managing price volatility is our second challenge, especially with climate change. In 2008, there was a drought-induced production shortfall in SE Asia and this severely impacted world trade flows and price. Any production shortfall in a major producer can have a significant impact on price. One example is Australia. The country swings from an excellent crop to a small crop primarily depending on water supply.

Climate change exacerbates the situation. Up until 2018, Thailand used to produce 10-11 million tonnes of exportable rice. This year, Thailand will export maybe 5-6 million tonnes. Thailand’s water reserves available for irrigation have lately not been enough, and they have experienced a rainfall shortage for the past few years. It has affected global supply and driven prices higher.

What are the main sustainability issues in rice?

Rice has more sustainability issues than most other staple crops, ranging across environmental and social issues. When you consider that one-quarter of all the farmers in the world grow rice, you realise how important it is to address these sustainability issues correctly.

Smallholder farmers account for nearly all the rice production in SE Asia. Most are in poor areas, which means a high correlation between rice farming and poverty. There is also a 65 per cent correlation between rice and malnourishment in regions where rice is either the main staple or the largest consumed crop. Rice has significant social issues.

If you take environmental issues, rice is the second-largest man-made emitter of methane after livestock. Rice emits about 12 per cent of all man-made methane and about 2.5 per cent of all man-made GHG emissions. That is significant from an environmental standpoint.

Methane emissions are high because rice is farmed in most areas through flood irrigation. Farmers flood the rice fields to stop weeds from growing. It leads to high methane emissions and freshwater use.

Rice uses about one-third of the world’s freshwater availability each year. You need on average 2,500-3,000 litres of water to produce one kilo of rice. Although that sounds alarming, some other field crops have similar figures. But even so, moving away from flood irrigation would not only reduce methane emissions but would also reduce water withdrawals.

Tell me a little about your farm in Nigeria.

At one time, Nigeria was the world’s second-largest rice importer after China, buying between 3 and 4 million tonnes a year – spending a lot of precious foreign exchange in the process.  Nigeria has the climatic conditions, the land, the people, and the water resources it needs to grow rice.

About ten years back, the Nigerian government encouraged their population to take up rice farming, giving them incentives to do it. The government also encouraged corporate investors to begin rice farming, giving out tax incentives and providing them with tracks of land with adequate water resources.

Olam now manages 13,000 hectares of contiguous land in Nasarawa State in central Nigeria, of which we farm 4,500 hectares. We keep some in preserved lands, forests, wetlands etc., to encourage biodiversity.

We realised that the only way we could farm 4,500 hectares would be to have it fully mechanised. Our farm is probably one of the most modern rice farms that exist. It is fully mechanised and integrated. We have a rice mill at the farm where we mill the paddy. We seed, apply fertiliser, pest and weed care aerially. All our harvesting is mechanised.

We run a large seed development unit on the farm. Historically, there has been insufficient investment into developing high-yielding seed varieties suitable for Africa. When we tried the rice varieties that grow in Asia, we found that they were often not suitable. The soil and the agroclimatic conditions are not the same. So, we set up a research and development centre and a plant breeding station. While the varieties we currently grow on the farm are bred by research agencies in Asia and Africa, we should have in-house varieties over the next few years.

Has the project helped the local community?

Although fully mechanised, our farm has brought employment to a rural area where little existed before. We have also built schools and clinics.

But that is the minor part of what we do. The more significant element is the out-growers programmes that we run for about 32,000 growers. We share developments that take place on our farm, whether in varietals, nutrition or pest and disease management.

Wageningen University has studied our out-growers programme in Nigeria. Our out-growers programme raised incomes, got more women and young people involved, and improved environmental sustainability. Farmers are now conscious and more concerned about the environment than they were before. Furthermore, our interventions are reducing food loss in the value chain which, for our farmers, is 30 per cent.

Thank you, Devashish, for your time and input!

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

A conversation with Jean-Luc Bohbot

Good morning, Jean-Luc. What is Wilmar’s position now in the sugar business?

We are the only global, fully integrated sugar company involved all along the supply chain. We produce sugar from both cane and beet. We are refiners, traders, distributors, and we have our brands.

We have 24 mills worldwide: eight in Australia, seven in India, seven in Morocco, and two in Myanmar. We process about 21 million tonnes of cane and 6 million tonnes of beet globally per year. All that adds up to an annual sugar production of approximately 3.5 million tonnes.

In addition to our cane and beet mills, we also have nine refineries: two in Indonesia; two in Australia; one in New Zealand; two in India; one in Saudi Arabia; one in Morocco – in total, about six million tonnes of refining capacity.

Without double-counting, we have an annual trading volume of around 16 million tonnes. In terms of distribution, retail and the food industry, we do about 3.5 million tonnes. We manage various consumer brands, for example, Chelsea in New Zealand, CSA in Australia, Madhur in India, Gazelle, and others in Morocco.

Our business model is to have our assets and trading fully integrated, where trading contributes to the asset performance using the assets’ ‘captive’ volumes.

Which countries have the most significant impact on the sugar price?

Two countries drive the price on the supply side. Brazil is the first, with about 60 per cent of the world export market. India is the second, with big swings in production and exports and a hefty dose of politics. India always has the potential to destabilize market equilibrium in one direction or another.

China drives the price on the demand side. It is the world’s biggest importer of sugar, and domestic demand continues to grow. It’s not just sugar. China is a major importer of grains and soybeans. These commodities, along with sugar, are of strategic importance to the country. China operates a system of strategic reserves. It often makes it difficult to predict whether they will meet domestic demand, or part of domestic demand, by running down stocks or through imports.

What are the other price drivers?

The world is going through an energy revolution of decarbonization, transiting from fossil to renewable fuels. We are just at the beginning of this revolution.

Developing countries face a more significant challenge than developed countries. Not only do they have to manage existing demand, but they must also manage two-digit growth in energy demand. It is an important issue for them. To reduce GHG emissions, they must react strongly and quickly. Bioenergy could play a growing role in the range of options offered to control footprint emissions.

Today, sugar is highly correlated to energy – particularly crude oil – due to the link in Brazil and, increasingly, in India. Brazil can swing 30 to 70 per cent of the sugar or ethanol ratio production – that’s a lot of sugar! Ethanol can also play a key role in hydrogen as an energy source. It could also be used in jet fuel.

This energy revolution will impact all agricultural commodities, and there will be increasing convergence between agriculture and energy – green energy.

At the same time, climate change is making the weather increasingly unstable and unpredictable. This year, we have drought across the Americas, frosts in Southern Brazil and floods in Europe. I can’t say for sure that climate change is producing these dramatic weather shocks, but I feel that they are a foretaste of what is to come.

Agricultural commodities, whether sugar or soybeans, depend too heavily on a few countries to produce them; weather shocks in these few countries have a multiplier effect on production and price.

Are you worried that electric vehicles (EVs) might negatively impact ethanol demand?

Not really.

Leaving aside deforestation, Brazil is one of the least polluting countries globally, thanks to hydroelectric power, ethanol, and bagasse. Ethanol produces 70 per cent less CO2 than gasoline. Brazil is a world leader in terms of GHG emissions from transport. Why would Brazil change its energy matrix to include EVs, considering the investment they would need to build the charging infrastructure?

EVs are a solution for Europe and the US – countries that can afford to invest massively in the necessary charging infrastructure or for local cars in highly polluted big cities like in China. Many countries don’t have the capital to build the required charging infrastructure. It will lead to a backlash against EVs and a slowdown in demand growth. EVs are great for people in rich countries who don’t drive long distances or remain within a specific range of their homes or offices.

Ecologists like EVs, but the GHG footprint of EVs depends on how you produce the electricity. India produces over 70 per cent of its electricity from coal. About 20 per cent of the lifetime GHG footprint of an electric car occurs during its manufacture. When, on top of that, you use coal electricity, your final GHG footprint is not a positive contribution. It is no surprise that India is making a significant move towards ethanol.

In China, coal provides most of the electricity. It is fossil fuel electricity, not green electricity. EVs won’t help China or India significantly transition from fossil fuels; instead, they will keep them in place. Natural gas is 50 per cent less polluting than coal but is still 20 to 30 per cent more polluting than ethanol. The transition in developing countries will be towards a mix of solutions, but with ethanol playing a more prominent role.

There is also a question of how long it will take to replace the existing fleet with EVs. The average car in India is 15 years old. It will take years for the country to move to EVs, and the world can’t wait that long. We need an urgent solution. Ethanol is a cheap and immediate option for developing countries to reduce their CO2 emissions from road transport.

 Thank you, Jean-Luc, for your time and input.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

A Conversation with Alex Sanfeliu

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

I joined Cargill in Barcelona in 1995 as a junior trader and moved to Geneva in 2000 as a wheat trader for Europe and the Black Sea. In 2003, I transferred to the bean desk, eventually becoming soybean meal desk head by 2007. In 2010, I moved to corn as desk head, and, in 2014, I became the Business Group Leader in our World Trading Group (WTG).

The WTG sits at the centre of Cargill in terms of agricultural commodity trading. From here, we manage and lead the whole organisation for all our trading in wheat, corn, beans, meal, vegetable oils, palm, and softs. I am effectively the trading manager for Cargill in the agricultural space.

 Which of your roles have been the most fun and which have been the most stressful?

Trading is my passion, so I have enjoyed all my roles. I had the most fun as a desk-head, a job which is 120 per cent focused on trading. Wheat is my favourite commodity because of the different countries and qualities involved and because it switches quickly between deficit and surplus. You must be agile to trade wheat. It usually has the highest volatility of all Agri commodities, which means it gives you plenty of opportunities throughout the year. My second favourite is vegetable oil, again because of its optionality and trading opportunities.

Physical defaults are the most stressful part of my job. The most difficult ones to predict are usually politically driven, like when there is regime change in a country or a financial or forex turmoil that results in commodity defaults. The stressful part is that our jobs turn into limiting losses instead of capturing opportunities; it is like playing to tie instead of to win.

The agricultural supply chains have shown resilience during the recent pandemic. How do you explain that resilience?

Agricultural supply chains are efficient and flexible. Our business is not a high margin one, and we constantly strive to keep costs down. We must be efficient to be successful and adapt to changing environments. COVID was unique, but we have had other unusual events over my career and had to adapt quickly to changing circumstances.

The second point is that our sector is not labour intensive – crushing plants and feed mills do not require a large labour force to operate. Many agricultural workers spend most of their time outside, whether on a farm or an elevator; they do not work in offices where people sit close together. As for our offices, we operated from home right from the beginning of the pandemic. At one point, we had 60,000 Cargill people working from home, and things went perfectly.

We tend to say that Cargill shines when things get tough. It happened in 2008, and it happened again in 2020. Challenges drive us. Resilience is in our DNA.

Agricultural commodity pricing has become more transparent, but Cargill has continued to operate profitably. What is the secret?

I must be careful not to reveal all our secrets, but part of our success results from our ability to reinvent ourselves constantly. Being a private company makes this easier. It allows us to have more of a long-term view than some of our competitors and to pay less attention to short-term results.

Agricultural commodity prices are cyclical. Trading companies tend to downsize in quiet times, reducing investments in data, analytics, and infrastructure. We do the opposite. Margins shrunk in the flat markets from 2014 to 2018, and it was tough to make money as a trader in low volatile and oversupplied markets. We used that period to invest in data, analytics, systems, and people. When the tide changed, we were ready to take advantage of the opportunities that appeared. There is only a narrow spread between excellence and doing average in quiet markets. When things get more exciting and volatile, that spread widens considerably.

We have three further advantages when it comes to trading.

First, Cargill is present in most geographies and is all along the food supply chain. We have data that goes from the farm to the fork. Second, we have long experience successfully developing trading talent and knowledge of agricultural markets. Third, we have invested heavily in new technologies such as Artificial Intelligence or Machine Learning. Combining those three elements – data, top trading talent, and technology – gives you a winning combination.

Do you envisage a day when agricultural supply chains no longer need intermediaries?

I don’t like the word intermediary. We are not intermediaries. We don’t just buy something and try to sell it at a profit. We originate, transport and process agricultural commodities. We operate silos, warehouses, port elevators, ships, and factories, and we add value at every stage of the supply chain.

What advice would you give to someone starting in the business?

First, I would ask them to enjoy what they do. They need to be true to themselves. Do you love the job or not? There is no middle pathway in trading. Trading attracts people because of the excitement and the financial rewards, but you quickly discover whether you love it or hate it once you are there. You need to love it. It is an intense and challenging job, so you better enjoy it!

Second, I would advise a recruit never to stop learning! You will be quickly left behind if you stop learning. You can quickly go from excellence to obsolescence.

Third, I would tell a recruit to stay humble. A big ego is the enemy of many traders. There is nothing to gain from having a big ego. The best traders that I have seen in my career have been humble.

Thank you, Alex, for your time and comments!

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

A conversation with Dave Whitcomb

Good morning, Dave. Could you tell me a little about yourself and your background in commodity trading?

In 2004, I joined Cargill’s pension fund management team at their headquarters in Minneapolis, Minnesota. In 2010, I moved to Cargill’s grain trading group in Geneva to help build what they called their Non-Fundamental Analysis (NFA) group.

I founded Peak Trading & Research in 2018 as a quantitative agricultural research and trading company, where I’m currently the Head of Research.

How do non-fundamentals affect the markets?

The contract price will always converge with the cash (physical commodity) price when a futures contract expires. However, as a percentage of market participation, the number of players who use futures to source or deliver cash is decreasing. At the same time, the total number of players trading non-fundamental inputs has increased.

Until they expire, futures contracts will often make significant moves based on non-fundamental factors such as macroeconomic data and momentum trader flows.

You may be bearish based on your S&D balance sheet. Still, the macro-economic environment may be bullish – it’s challenging to stay short if crude oil is going up, the dollar is down, and inflation expectations are rising. You also need to take seasonal factors into account. Is it a time of year when prices typically move higher? You must also look at momentum; is it pointing upwards?

What does every fundamental trader need on their non-fundamental dashboard?

We refer to the non-fundamental price drivers in agriculture markets are the “Four Ms”: Monthly seasonality, Macro, Momentum, and Market Structure.

Agricultural markets have strong seasonal price patterns. Every commodity is different, but we see predictable and consistent seasonal patterns across most grains, oilseeds, meats, and softs.

Macro-flows are critical for agricultural markets: macroeconomic data, central bank policies, currencies, and energy, particularly crude oil.

Momentum is our third M. Many hedge funds focus on momentum as a reason to get into or out of markets. They try to catch the big moves, especially at the front edge of the futures curve. Momentum traders try to stick to the most liquid part of the curve.

Market structure is our fourth M. Fundamental traders must be aware of the Commitment of Traders (COT) reports showing how market players like hedge and index funds are positioned. Are they over-extended, either long or short? How vulnerable are those positions, given what prices are currently doing? Will we see a long liquidation, or, if they are short, will we see a short squeeze?

Can a fundamental trader be successful now just trading fundamentals?

It isn’t easy. Markets see cash convergence at expiry, but in the meantime, futures are increasingly following non-fundamental inputs. Traders who trade non-fundamentals continue to attract capital and are having more impact on our markets.

There’s a lot of focus on inflation right now – how is that affecting the markets?

The easy money is probably behind us. The Fed has announced that it will start tapering, winding down its Quantitative Easing (QE) purchases. We could have hikes in interest rates in the middle of 2022. Central banks are now actively working against inflation. It doesn’t mean that inflation can’t continue. One year ago, central banks were trying to manufacture inflation. They are now slowly shifting to capping inflation. Over time it will take some wind out of the sails of this supercycle story.

What would you put on a macroeconomic dashboard for agriculture traders?

Every trader should watch the US dollar and Crude Oil.

For the US dollar, we often say, ‘US dollar up = Ags down.’ Most of our markets are dollar-denominated, and changes in the dollar can impact the competitiveness of US products. A strong dollar encourages origin selling and acreage expansion while making US products less competitive.

Crude oil also matters for the ag markets. Strong energy markets ripple through the ags in many ways: higher fertiliser prices, production costs, transportation costs, etc. Then there are the secondary impacts like hedge funds buying futures because crude oil is going up. Energy market strength lifts ag futures prices in many different ways.

Beyond crude oil and the dollar, it’s essential to watch US and Chinese stock markets, commodity currencies like the Canadian and Australian dollar and the Russian rouble, bond and inflation markets.

What you have on your dashboard depends on the market you trade. Every commodity has its unique set of macro indicators.

And these macro indicators change over time. You must look at correlations and see which macro indicators move which market. Soybean traders currently watch fertiliser prices, propane, and natural gas. Five years ago, they watched Chinese rebar prices as a good proxy for Chinese growth expectations and soybean import demand.

Do physical traders still have an advantage?

Physical traders have a massive advantage if they work in trading houses where they can trade the various arbitrages available to them. They are beginning to understand how these new market participants operate and are learning to complement their views with non-fundamental inputs. It is absolutely a move in the right direction.

If they haven’t done so, every trader should build out a dashboard of non-fundamental trading inputs that matter for their market. Every market is different. Sugar has strong seasonality. Lean hogs are an excellent breakout market. Cocoa is mean-reverting. Bean oil trades all these macro flows. Work out which non-fundamental factors are essential in your commodity, and then follow them like a hawk!

Thank you, Dave, for your time and comments.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

‘Going where no one else would go’ in the digital age


by Wouter Jacobs – Erasmus University

In their book, The World for Sale, published in 2021, Bloomberg reporters Jack Farchy and Javier Blas documented in rich detail the evolution of global commodity markets during the late twentieth century. They made explicit the modern-day commodity trading firm and the practices of their top-dog traders and executives. The crux of their analysis is that traders “go where no one else would go”. It is a trait that resonates with the characteristics of the merchant trader from an earlier era. Still, it remains a critical human-based skill in our current period dominated by Big Tech, Big Data, and Artificial Intelligence (AI)-based machine learning.

However, the ongoing financialisation of commodity markets, digitalisation, the quest for sustainability and inclusion, the emergence of decentralised and alternative forms of finance, the decommodification of supply chains and when or how to navigate the geopolitical and macro-economic restructuring of the world economy are all changes that require commodity trading firms (CTFs) to integrate new skills and mindsets.

CTFs need more analytics and more analysts to synthesise the increased amount of data points to inform decision making and trading strategies.

CTFs need to install compliance, due diligence, and Know Your Client (KYC) protocols to meet the demands of regulators, financiers, and the public. These protocols can be expensive, and they can constrain the intrinsic capability of a company’s traders to go where no one else would go.

CTFs need to take the time, effort, and leadership to incorporate sustainability into their company’s DNA. It requires specific skillsets to monitor and report on Sustainable Development Goals (SDGs) with nitty-gritty detail, such as the amount of water used per plantation or the carbon exposures of a particular trade. It may require a public relations office protocol and narrative to deal with any criticisms. It may require strategies to maintain a local license to operate and a moral compass.

Finally, CTFs need to digitalise their operations to synthesise complex information. Adopting information technology has been critical for commodity trading, but CTFs are not leaders in the space. Some struggle to define and optimise their digitisation needs to adapt to the rapid emergence of decentralised platforms for exchange, finance, and post-trade execution.  

Given all these changes and the specific demands for skillsets, CTFs need to develop what Berkeley university professor and business guru David Teece has referred to as dynamic capabilities. Dynamic capabilities refer to the ability to sense, seize, and transform.

Sensing refers to scanning the business environment and identifying new opportunities that emerge from new technology. CTFs must seize any opportunities and translate them into their business model and adapt it accordingly. CTFs can encourage sensing through scenario planning and actively scouting for opportunities.

Seizing is more complicated. It requires clever re-combinations of existing competencies, such as rapidly prototyping new technologies into the workflows. An example of this was when some CTFs first ran in-house pilot projects on blockchain before joining a platform. Another (digital) seizing strategy is to consider lean start-up methodologies.  An example is Farmer Connect, founded by Sucafina’s head of trading, David Behrends.

Transforming is the most complex. It sometimes requires a wholescale redesign of its business model, asset portfolio, routines and competencies while insourcing entirely new or related skillsets. Internal shaping might involve – as Olam has recently done – an organisational separation of business lines. External shaping might include investing in universities’ education and training programmes or B2B platforms and digital ecosystems.

The Covantis platform, in which the ABCDs, Viterra and Cofco took the lead, is an example of the latter. Its scale and incumbent support can capture ‘network effects’ and dominate the market quickly, similar to other platforms (e.g., Netflix, Uber, Airbnb) in different markets and industries. While Covantis is now about trade execution, it may evolve into something more commercial. Be that as it may, it is not unthinkable that new platforms might even displace many of the intermediacy benefits of individual CTFs.

Finally, dynamic capabilities require managers to overcome company-internal barriers to novelty while designing governance structures and a business culture that enables adaption or business transformation. Often periods of crisis, low profitability or the risk of a hostile takeover can act as wake-up calls and remove internal barriers to change.

The archetypical successful trader goes where no one else would go. This risk appetite, combined with an intermediate position that captures value from information asymmetry within global supply chains, still defines a CTF’s business model.

But the amount of information upon which to act has increased exponentially. CTFs have increased their analytics teams accordingly. The larger companies have invested in technical analysis and quant-based trading modelling and strategies, predictive analytics, etc., while internally optimising their data systems. They have added new skill sets to the company, which do not involve ‘going where no one else would go’ in the traditional sense.

However, ‘going where no one else would go’ still matters in a world defined by digital apps and algorithmic machine learning.  It may matter even more in the future, although with a smaller physical presence than in the past. Understanding and appreciating local circumstances, cultural conventions, and languages is necessary for building trust and relationships.

‘Going where no one else would go can give you an informational edge that no algo (still) could grasp’.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

A Conversation with Michiel Hendriksz

Good morning, Michiel. Could you please tell me how you got involved in the cocoa business?

After leaving Cranfield, I worked for a Dutch company exporting agricultural products, mainly frozen vegetables, to Spain and Portugal. I stayed in food marketing and distribution, working in the UK, Spain, and France before accepting a position with ADM, marketing their cocoa products into Southern Europe. I already knew all the buyers and understood food systems, so it was a great fit. Technically speaking, cocoa powder, cocoa butter and liquor are all food ingredients with specific attributes.

In 2007, I migrated from sales to trading and became director of trading and manager West Africa.  Trading cocoa was increasingly about what we now call sustainability, and I worked closely with the Sustainability Director until he left in 2011. I took over his role, shedding my previous trading responsibilities, but remained in contact with clients on sustainability issues. I represented ADM Cocoa in many initiatives, steering committees and working groups.

Why did you found FarmStrong?

ADM decided to get out of cocoa; it didn’t fit well with their other commodity trading businesses at that time. It took time to find buyers. Cargill eventually bought the chocolate assets, while Olam bought the cocoa processing, grinding, and pressing.

In 2015, I left ADM and started FarmStrong to have the independence to advise trading companies looking to make their supply chains more sustainable. The French commodity trading company Sucden was an early customer and supporter.

What does FarmStrong do?

We design sustainability programmes for most of the significant international chocolate manufacturers and some smaller family businesses. We also currently run two programmes partly financed by the Swiss government. We do some work with UN agencies, developing and scaling up their environmental interventions. We also receive UN support to scale our programmes. We are a non-for-profit recognised by the Swiss federal government for its work in the public interest.

Our programmes include training in good agricultural practices, but agriculture is not necessarily the most significant problem farmers face. The cocoa tree is not the problem. The most important issues that farmers, families, communities face are health, nutrition, education, security, and poor infrastructure.

Why have the chocolate companies failed to eradicate child labour from their supply chains?

The NGOs put pressure on the chocolate companies to eradicate child labour, but independent research has shown that it hasn’t worked even in their narrow supply chains. Chocolate companies can do more, but they can’t solve the problem on their own.

The fact that child labour exists in West Africa has nothing to do with cocoa. Child labour is still widespread regardless of the crop that the farmers are growing. It is a correlation, not causation.

One of the biggest problems is that many children in the Ivory Coast do not officially exist. They don’t have birth certificates or registration documents. Their (grand) parents immigrated and never went through any registration process. A child cannot go to school in Ivory Coast without a birth certificate, and they can’t get a birth certificate if their parents don’t have an ID. It is difficult to get an ID if you don’t have a birth certificate or are not registered.

Sometimes local schools allow unregistered children to attend classes, but as soon as they are twelve years old, they must take an exam to move on to secondary school. They can’t take the exam unless they show they have a birth certificate or are officially registered. So, their schooling ends at 12 years old, and they work on their parents’ farms. Sitting at home is not an option.

The sector is facing enormous challenges. What is to be done?

Chocolate companies, trade houses, governments and the public are putting massive amounts of money into cocoa, channelling it at a high cost into aid agency programmes. These programmes are well-intentioned but largely ineffective. Independent research shows that they had little impact for the last 20 years.

If you want to improve cocoa farmers’ livelihoods, don’t help them grow more cocoa.  Encourage them instead to grow more food crops that they can either eat or sell locally. And acknowledge their issues around health, nutrition, education, registration of births and land.

Thank you, Michiel, for your time and input. 

© Commodity Conversations ® 2022

This is a short extract from my next book Commodity Crops & The Merchants Who Trade Them – available now on Amazon.