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.

A conversation with Paul Hickman

Good morning, Paul. Could you first tell me how you ended up in Singapore trading palm oil?

I worked for Cargill until 2013 when I joined Golden Agri-Resources (GAR), where I am now head of global vegetable oil and oilseeds.

How significant is GAR in palm oil?

 Palm oil differs from other commodities in that the top traders are also producers. Why is that?

Several things differentiate palm from many of the competing food crops. First, you must wait four years before the trees get to an age where they bear fruit. It’s a substantial upfront cash investment with no returns for those early years.

Second, there are no government subsidies, unlike the significant taxpayer-funded contributions paid to European and American farmers.

Third, once the trees are mature, harvesting takes place every two to three weeks.

Given the size of the upstream investment and the need to ensure a home for the product year-round, many producers felt the need to control their destiny by vertically integrating into processing, trading, and distribution.

How important are physical assets in trading palm oil?

You don’t need physical assets to trade palm oil. There is plenty of liquidity in the Dalian futures market in China and the BMD in Malaysia. However, assets are a necessity if you want to be involved in the physical movement of palm oil. End users are increasingly demanding. They insist, rightly so, that their suppliers control their supply chain at every step of the process. It is not just about sustainability but also about food quality.

 People talk about palm oil plantations, but what percentage of world supply is produced by smallholders versus large companies?

At least three million smallholders worldwide make a living (or part of a living) from oil palm; they produce more than 41 per cent of the world’s palm oil. Even though smallholders are a vital part of the palm supply chain, they are frequently ignored in the palm story. The focus is inevitably on the more prominent actors like us. The reality is our business relies on smallholders producing more and better-quality palm oil in line with sustainability requirements. It’s in our interests to help them get there.

The average income for palm oil farmers in Indonesia is $2,500 per hectare per year compared to only $250 per hectare for rice. Palm oil contributes up to 60 per cent of income in rural areas in Indonesia. The palm oil sector has lifted millions of Indonesians out of poverty and has had a substantial impact on the welfare of rural communities through the provision of schools and clinics. Palm oil companies also provide and maintain critical infrastructure like roads, increasing connectivity and ease of access to previously remote rural areas

How do you react when people blame palm oil for deforestation?

Given the persistent negative stories and images linked to palm oil production, it’s easy to get defensive. Many of those images are highly emotive – orangutans fighting bulldozers comes to mind. In most cases, these are images from the past. They do not reflect the amount of work that the sector has done and continues to do to address deforestation.

Facts are on our side, but truth generally loses in a battle of reality versus emotive imagery.

But I’ll give you the facts. The most important one is that, worldwide, cattle farming causes the most deforestation. The World Resources Institute (WRI) has analysed satellite data and found that, from 2000-2015, cattle farming resulted in 45.1 million hectares of deforestation. During the same period, palm oil was a long way behind, responsible for 10.5 million hectares of deforestation.

Just for comparison, soy cultivation led to 8.5 million hectares deforested over that period. When you consider that virtually all soy goes to animal feed, meat production is responsible for 53.6 million hectares of deforestation during the period – more than five times more than palm production.

Compared to the meat industry, the palm oil sector has taken significant steps to combat deforestation. A combination of corporate and government policies has led to a decrease in deforestation in the palm oil supply chain, especially in the last five years.

What challenges does palm oil face in the future?

I would say there are three main challenges:

First, trade barriers effectively ban palm oil in specific markets – in Europe, the US, and elsewhere, where sustainability is used as a barrier to market access rather than an incentive for change. The palm sector faces regulatory barriers and shifting rules of engagement even though it has demonstrably done more than any other deforestation-linked commodity to address the issue. The EU’s REDII rules that take palm oil out of biofuels, along with ongoing due diligence regulation developments in critical markets, could have a chilling effect on the progress made. It’s absolutely the opposite of what the industry needs.

The second challenge is a lack of manpower. It will get harder to recruit palm oil workers as younger people do not want to work on the land. Palm oil remains an incredibly labour-intensive industry. The manual nature of harvesting is hard work and less attractive to young people.

Third, climate change and extreme weather will increasingly impact palm oil production. Any agribusiness needs to factor in not only the reduction of its carbon emissions but also carbon adaptation strategies.

Thank you, Paul, for your time and comments

© Commodity Conversations ® 2022

This is a brief excerpt from my new book, Commodity Crops & The Merchants Who Trade Them available now on Amazon

A Conversation with Colin Iles


Good morning, Colin.  You are responsible for both cotton and sugar at Viterra. Are the two commodities similar?

Commodity traders tend to focus on the differences between their different commodities, but, ultimately, once you block out the technical language and focus on the concepts, they’re all the same.

Cotton and sugar are similar in how the trade houses get involved in the futures expiry process.  As a percentage of open interest, I suspect that the positions taken into the expiry – or in the case of cotton, into the notice period – are larger in sugar and cotton than in other agricultural commodities.

Sugar and cotton trading distils down to ‘What is your view on the spreads?’ Your view on the spreads will impact your opinion on the physical premiums. The two are interrelated.

What is the secret to making money in cotton trading?

If there is a secret, it is assessing value.

You can assess value in various ways. In terms of time spreads, the value of cotton may be too low relative to the future, and you can arbitrage that difference.  In terms of geographies, you can find dislocations in value across different regions. Essentially all we do is look at the value of something relative to everything else.  We try to pick out the outliers that are either over or undervalued and make it work. Trading is about assessing value. You must reduce every discussion down to what value am I measuring this against?

Do you trade spreads and differentials more than the flat price?

I like to trade the time spreads in cotton because time is our only consistent value benchmark.

I don’t like trading cotton flat price. When you trade sugar flat price, you get price points where things happen and the balance sheet changes. The best example is the optionality that the Brazilian mills have in whether to produce ethanol or sugar. You can look at the price of sugar compared to ethanol and make a robust case for the flat price to move higher or lower. You have a value anchor where a move in price changes the balance sheet.

We don’t have that in cotton.  Fundamentally, it doesn’t matter if cotton moves from 65 to 90 cents a pound. It doesn’t bring significantly more cotton into production. Nor does it change demand from the spinning mills in Vietnam or the price of jeans on a shelf in Walmart in Texas. Consequently, trading flat price in cotton is often an exercise in second-guessing sentiment.

What advice would you give to a young person beginning in the cotton trade?

Get involved in the physical commodity and understand the full implications of any trade. Once you make a sale, someone must create a shipping order, book containers, send people into the cotton fields to draw samples and test them. Someone must go to the bank to open a letter of credit. You must understand how all those things interact.

You don’t have to be an expert in everything, but you must talk knowledgeably about every aspect of trading. You must understand the implications of tweaking one part of a trade; what does it mean further down the chain?

You must also be comfortable with large amounts of data. The future of trading is in understanding and analysing data.  On the production side, it may be in interpreting satellite crop data. On the demand side, it may involve getting live feeds on point-of-sale volumes in retail outlets.  Data mining and analysis are becoming a crucial part of our market analysis. It is a huge opportunity.

Thank you, Colin, for your time and input!

© Commodity Conversations ® 2022

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