Milking it

Regular readers will know that one of the recurring themes in my books and blogs is the idea that power has shifted along the supply chain first from farmers to traders, then from traders to processors, then from processors to retail and finally from retailers to consumers. The Internet and social media have empowered the final consumer. Not only that, but the gamma, the rate of change in consumer preferences, has accelerated.

I was reminded of this when I read this week that Borden Dairy Co, a major US milk processor, had followed hard on the heals of Dean Foods Co., another major US milk processor, to file for bankruptcy. Both are based in Dallas Texas, and between them they control(led) 13.5 percent of the US dairy market.

Both companies blamed the collapse in dairy milk consumption for their difficulties. Per capita consumption that has fallen more than 40 percent since 1975, of which 25 percent since the start of the century. And according to the USDA, per capita consumption continues to fall at 2 percent per year.

The reasons for milk’s fall from favour are numerous. Some people have stopped consuming milk on health grounds, concerned about its fat (and weirdly, its sugar) content, or because of their perceived lactose intolerance. Others cite concerns about animal welfare, particularly the way that young calves are seperated at a young age from their mothers. Others are concerned about the GHG emissions of livestock farming in general.

Partly as a result of these concerns milk has been facing stiff competition from the growing availability of plant-based milk substitutes such as soy and oat drinks. But it has also been a victim of a trend away from eating breakfast at home. The bowl of cereal (with milk) has lost out to the (dry) cereal bar that can be eaten on the move.

The collapse in milk consumption has forced many dairy farmers out of business. The U.S. has lost nearly 20,000 licensed dairy farms, a roughly 30 percent decline, over the past decade. In court filings, Borden said that 2,730 US dairy farms had gone out of business in the last 18 months alone. Ironically, this has increased the pricing power of the farms that have managed to stay in business. As a result farm gate raw milk prices have increased by 27 percent since this time last year, squeezing processor margins.

At the same time there has been a new entrant into the milk-processing sector: a customer has become a competitor. Walmart, previously one of Dean’s major clients, opened its own milk processing plant in Indiana in 2018. Some in the business have accused Walmart of using liquid milk as a ‘loss leader’ to attract customers into their stores.

Companies in the sector are doing what every sector under pressure does: cutting costs by reducing capacity through consolidation while diversifying into other products where demand is growing, whether they be plant-based milk substitutes or value-added dairy products such as cheese and yoghurt.

And while demand for ordinary milk is falling, demand for lactose-free or lactose-reduced milk is increasing, as is demand for specialty dairy products. US sales of flavored whole milk jumped 8.9% in the first ten months of last year while sales of lactose-reduced or lactose-free milk grew 11% between November 2018 and November 2019. Grass-fed milk sales grew about 51% in that period.

Some companies have even taken the dramatic step of exiting the shrinking dairy market to concentrate solely on the expanding plant-based substitute market. Elmhurst 1925, which operated dairy facilities in the New York City region, closed in 2016 and emerged a year later as a plant-based beverage producer without any cow products.

Unfortunately neither Borden nor Dean Foods were nimble or flexible enough to avoid bankruptcy. Borden’s CEO told Bloomberg, “Borden has a 163-year history that has stood for the goodness of dairy for all that time. We’re going to stay squarely focused on that.”

Finally, I was shocked to find out this week that Charles Darwin never said, “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” It’s a shame because it is a great quote, one that obviously applies in this case.

© Commodity Conversations ®

Wilding a marginal farm

Over the holiday period I enjoyed reading Wilding – The Return of Nature to a British Farm by Isabella Tree. It is the (true) story of how the author and her husband Charlie Burrell stopped traditional farming on  Keppe Castle Estate, 3,500 acres of heavy weald clay in West Sussex, and let it return to nature, with only the occasional nudge from themselves.

Before the Second World War Britain imported about three quarters of the country’s food by ship each year. During the war enemy submarines and warships prevented much of this food from getting in. Fearing food shortages, the British government launched ‘The Dig for Victory’ campaign. People were urged to use every spare piece of land to grow vegetables. More importantly, marginal farmland was switched to intensive crop production and grazing. When the war finished, the country did not return that marginal land to nature but instead farmed it more intensively.

It was this typical marginal British farm that the author’s husband, who had studied agricultural at college, inherited in 1987 at the age of 23. His family had owned the land since it was a medieval deer park. It is situated on the famously heavy clays of the Sussex Weald: poorly draining “marginal” soil that sets like concrete in summer and porridge in winter.

Although intensively farmed since the war it had rarely made a profit. The couple thought that they could turn the business around by investing heavily in better dairy cattle and new technology, but by the end of the century they were deeply in debt and still losing money.

They had little choice but to sell off their farm equipment and dairy herd, letting off two-thirds of their land on contract to a neighbouring arable farmer. The land closest to their home they returned to nature, spraying it first with glyphosate (!) and then replanting it with native grass seeds. Three years later the neighbouring farmer let his contract drop, also unable to make a profit from the marginal soil, and the couple let that land return to nature as well. Slowly they introduced free-roaming grazing animals – cattle, ponies, pigs and deer – to act as proxies for herbivores that would have grazed the land thousands of years previously.

The couple now has 350 head of English longhorn cattle (100 cows and their youngsters), Tamworth pigs, red and fallow deer and Exmoor ponies. Rather than set targets to protect specific rare species, their principle is to allow “natural processes” to unfold. There is no predator control.

As an intensive farm, Knepp lost money in all but two years as a result of both high running costs, particularly labour, but most importantly because of capital investments in new machinery, such as dairy technology or new slurry lagoons or sewage systems to adhere to new legislation.

The ‘wilded’ farm has much fewer capital demands and only one employee. Annual farm income (not profit) is now made up of £120,000 from selling high-grade organic meat, £500,000 from renting former farm buildings to local businesses (attracting 200 full-time jobs to the local economy), £118,000 from renting seven former workers’ cottages and £230,000 from a ‘glamping’ site. The couple has recently started running ‘safaris’ to allow visitors the wildlife and explain what they are doing.

As far as subsidies are concerned, the farm currently receives £220,000 for having its land in the highest level of environmental stewardship scheme and £195,000 in “basic payments” which every British farmer receives via EU funds. What happens to these EU payments after Brexit remains an open question.

The couple admits that not every farmer is as lucky as they are. First, they got their timing right. They sold off all their farm equipment and livestock before the market tanked; as a result they were able to pay off their hefty mortgage, leaving them with no debts. This was partly because the farm has been in the family for generations: Charlie and Isabella had got the land for free, something that many farmers could only wish for. In addition, the EU was at that time just beginning to switch subsidies away from production and more towards ‘setting land aside’, leaving it idle.

Second, the couple was lucky in terms of geography: their farm is conveniently located close to London in the populated (and wealthy) South-East of England. This has obviously helped them with tourist income, as well as enabling them to rent their old farm buildings.

In a way their situation is similar to my own family smallholding outside Canterbury in Kent. As I described in my recent book, our land was worth more to the sports club next door than it was worth as a pig farm.

Wilding is beautifully written and I would recommend it highly to any nature lover. It describes in detail how wildlife has returned to the farm with astonishing results in terms of biodiversity with purple emperor butterflies, turtledoves and nightingales, to name just a few.

I would also recommend the book to any farmer struggling to stay afloat – and I know that many of you are. The author clearly explains how and why their farm failed—it was marginal land that shouldn’t have been farmed in the first place—as well as the difficult steps that the couple took in getting financial support to ‘rewild’ it. The author also clearly demonstrates how they are now beginning to take advantage of the recent trend for pasture-fed meat.*

The book is also important because the author emphasizes the point that grazing animals are—and always have been—an essential part of nature’s heritage. Indeed her most important—and most positive message—is that farming can benefit nature; it isn’t necessarily detrimental to the environment.

The author doesn’t pretend to have all the answers, but at least she poses the right questions.

* If I have understood correctly, grass-fed livestock must be fed on grass for 51 percent of their lives while pasture-fed livestock must be fed on grass for 100 percent of their lives.

© Commodity Conversations® 2020

The cost of food subsidies

A report published in September 2019 by the Food and Land Use Coalition estimates the total value of world food production at $10 trillion per year. However, the report argues that the environmental cost of food production is an additional $3.1 trillion, an amount that is not being paid by consumers, but being passed on in debt to future generations.*

As the graph below shows, the report’s authors estimate that the annual hidden costs of our current system of agriculture are even greater once you add in health and development. However, I am not sure that one can blame our farmers for, say, the world obesity epidemic, nor for malnutrition.

However it is not clear where subsidies fit into the calculations. The International Food Policy Research Institute (IFPRC), using OECD data, estimate that governments pay out $700 billion in farm subsidies each year, three-quarters of which are paid directly to farmers.

The Food and Land Use Coalition estimate the figure at closer to $1 trillion per year, and argues that the world has to “switch these subsidies into explicitly positive measures.” They say that they are a massive lever that could be used “to incentivise the farming community across the world to act differently.”

The EU agricultural subsidy bill comes to $65 billion per year, accounting for around 40 percent of the EU’s annual budget. However, as the New York Times recently reported, it is not always clear where the money ends up. One well-known statistic is that about 80 percent of EU agricultural aid goes to the top 20 percent of farmers; some 125,000 beneficiaries receive around $14.3 billion, or about $113,500 per farmer.

In the past couple of years the Trump administration has given US farmers about $28 billion in additional subsidies to offset the effect of the trade wars and the resulting higher Chinese tariffs on US agricultural products.

However, when it comes to agriculture, direct subsidies are just one of the screwdrivers in a government’s toolbox. As the Food and Land Use Coalition write in another report, there are three types of agricultural support:

  • Trade or border measures such as tariffs or quotas that provide market price support;
  • Direct subsidies on output or on the inputs (such as fertilizers or seeds) that create incentives to increase output;
  • Decoupled subsidies that avoid incentives that change output levels but provide direct income support to farmers.

The nature of agricultural support has changed substantially in the past 20 years or so. The traditional pattern of agricultural support involved substantial support to farmers in the rich countries, while poor countries, on balance, used to tax agriculture. In wealthy nations, average rates have fallen and there has been a move away from trade measures and towards decoupled protection that seeks to avoid pushing for higher agricultural production and reducing the market access opportunities of other countries.

In developing countries, agricultural policy has shifted from net taxation to net assistance: most support is provided through border measures that generate revenues, such as tariffs, rather than subsidies paid by governments.

In an interview for my 2015 book The Sugar Casino, Sunny Verghese, CEO of Olam and current chair of the World Business Council for Sustainable Development, estimated that “between 55 and 60 percent of global agriculture is unviable (economically and environmentally), only supported by government subsidies and transfers from taxpayers to the farmers.” He cited 2012 figures that showed that the 30 OECD countries paid out US$387 billion in farm subsidies, while the rest of the world paid out around $615 billion.

I asked Sunny how he would resolve the dilemma that you need higher agricultural prices to reflect the true cost of food, but that higher prices will affect the poor people the most. He suggested a “simple” answer: transfer all the subsidies that the rich world gives to farmers who don’t actually need the money – to the poor.

“We need to start to try and use those subsidies to ensure that people below the poverty line are not impacted by high food prices,” he told me.

© Commodity Conversations ®

*I remember seeing another study, perhaps by the WWF, that estimates the annual environmental cost of food production at $2 trillion, but I have been unable to locate the report. If anyone does know where I can find it, please let me know.

Cheap Food

According to research by ‘New Which?’ UK food prices are lower in real terms now than they were 30 years ago. White fish is the only food that has risen in price during that period, from £12.21 per kg in 1988 to £14.41 per kilo now. All other foods researched by the magazine now cost less than in 1988.

Sugar—a food close to many of our hearts—has halved in inflation-adjusted terms from £1.44 per kg to £0.75 per kg over the past 30 years. Vegetables have also halved in price over the period, while meat (beef, pork and chicken) have all fallen between 10 and 15 percent. Bananas have seen the biggest fall in price, from £2.82 to £0.94 per kilo. Bananas are the top ‘impulse buy’ foods in UK supermarkets.

‘New Which?’ suggests three reasons why this has happened:

  • Increased yields, or what the magazine calls the ‘industrialisation’ of farming;
  • Increased imports, or what could be considered as increased competition for UK farmers—either that or economics doing its job through ‘comparative advantage’. It may be cheaper for example, to import winter strawberries from Spain rather than to grow them in UK greenhouses;
  • Increased purchasing power of the supermarkets as they compete with each other to be the cheapest.

In the 1950s, UK consumers spent a third of their income on food. By 1974 this had fallen to 24 percent and it is now estimated to be around 10 percent. After Singapore and the US, the UK spends the lowest proportion of household income on food shopping.

However it is not just in the UK that food prices have fallen. The UN’s FAO (Food and Agriculture Organisation) has published an index of world food prices since the early 1960s. In inflation adjusted terms the index is now at the same level as in 1961, and significantly lower than during the commodity price boom of 2006-2012.

This is an extraordinary occurrence when you consider the massive increase in population over the period, as well as the increased diversion of crops to both biofuels and livestock.

On the other side of the coin, energy prices—a major component of food production costs—have doubled in real terms since the 1960s.

Cheaper food my be good for consumers, but it makes life tougher for the world’s farmers. Last year the legendary cocoa trader Derek Chambers retired after 50 years in the business. In a farewell interview he told Bloomberg, “It is a great regret of mine that farmers in West Africa were poor when I came into the business and are still poor, probably even poorer now.”

(He had particularly harsh words for the movement for greater sustainability in the food supply chain: “The business that has grown up around the need for sustainability does not benefit the farmers anywhere near as much as it does the NGOs, companies and individuals involved in the circus.”)

Low food prices don’t just keep producers in poverty, they may also mean increased waste. When grocery shopping accounted for a quarter of a UK family’s budget they probably paid more attention not to waste food than now when it only accounts for 10 percent of the family budget.

Most importantly, current low food prices don’t cover the full cost of producing it: externalities such as deforestation, water pollution, and GHG emissions, along with the declining health of our soils, are currently not paid by anyone. Instead they are building up as debts to be paid by future generations—our children and grandchildren.

There is an old saying in economics that ‘there is no such thing as a free lunch’. Someone is paying – or will pay – the true cost of our food, even if we aren’t!

© Commodity Conversation ®

My PC lunch

“It depends,” he said. “If they are free range then that’s OK, but if they are battery-raised then you should really not eat them.”

I was having lunch with an old friend and we were studying the menu, a three course set lunch. I had told him that I might have the quail eggs as a starter.

“You see,” he explained, “quail are wild birds that are easily startled. When they are in cages they try to fly away and can often break a wing. Chickens are different: they have been domesticated for thousands of years and are not so easily startled. We will have to ask if the quails are free range.”

“What about the octopus?” I asked.

“Can you believe that they are now starting to farm octopus?” he asked me. “It is incredibly cruel. Octopuses are intelligent creatures; they will suffer terribly in a confined pond. But they will probably learn to escape anyway.”

“I think I will have the winter salad,” I said, taking the third choice starter. But what are you having for your main course?” I asked. The choice was beef, lamb, cod or pasta.

“It’s a problem,” he replied. “I read recently that lamb can have a higher carbon footprint than beef because there is less meat on each animal, but it depends on whether the lamb is locally produced or imported from New Zealand. Do you know that imported lamb can sometimes have a lower carbon footprint that local lamb?”

“What about the beef?” I asked, ignoring his question.

It depends if it is grass-fed,” he replied.  “I am trying to cut down on meat generally. I saw that documentary the other evening, The Game Changers, about top athletes switching to vegan diets. It seems to work for them.”

“I think I will have the pasta.”

“You’re lucky,” he told me. “I am gluten intolerant—not coeliac—but if I eat wheat I blow up like a balloon. It’s most uncomfortable!”

The waitress came to take our order. She looked nervous and I guessed it might be her first day in the job.

“Do you know if the quail eggs are free-range?” my friend asked her.

“I am afraid I don’t,” she replied nervously. “But I could ask.”

“Yes please,” I replied. I didn’t much fancy the winter salad and would have preferred the eggs. The waitress disappeared for quite a while and then came back crestfallen.

“The chef doesn’t know about the eggs,” she told us sadly.

“What about the octopus?” I asked. “Is it farmed or wild?” A look of panic crossed her face. “Don’t worry,” I said, “I will have the winter salad.” She looked relieved and noted it down on her pad. My friend told her that he would have the same.

“What about the beef?” he asked her. “Where was it raised—what is its origin? You know, you really should mark on the menu where you source your meat.”

For a moment I thought she would burst into tears.

“I will ask the chef,” she told him.”

“And please ask him for the lamb as well please.”

“Yes sir,” she replied as she fled back to the kitchen.

“Are we allowed to eat cod at the moment?” I asked my friend. “I read somewhere that the cod stocks were being depleted again. It is difficult with fish—there is always a danger of overfishing.”

My friend was about to answer but we were distracted by the sound of shouting from the kitchen. Our waitress returned, looking rather flushed.

“The meat comes from the UK,” she told us rather cautiously. “The lamb is from Wales and the beef is from Scotland.” I guessed that she was making it up, or that the chef had told her to make it up.

“I will have the beef then please,” my friend told her.

“And I will have the pasta.”

“Could you please choose your deserts as well please?” our waitress asked us.

I looked at the menu and chose the cheesecake. My friend ordered the same.

“But only if it is made with Bonsucro certified sugar,” he added.

“You’re kidding me!” I exclaimed.

“Yes,” he replied with a laugh. “I am kidding you! But I am not sure about the cheese. Dairy has a high carbon footprint, you know.”

© Commodity Conversations ®

Lessons learnt

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

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

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

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

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

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

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

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

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

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

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

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

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

© Commodity Conversations ®

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

Sugar’s New Normal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Commodity Conversations ®

Trading is a people business

A conversation with Ito van Lanschot

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you, Ito, for your time and insights.

© Commodity Conversations ®

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

Takeaways from GGG

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

What were my ‘takeaways’ from the event?

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

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

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

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

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

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

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

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

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

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

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

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

© Commodity Conversations ®

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

We Feed A Hungry World

A Conversation with Greg Heckman – CEO Bunge

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you Greg for you time and insight!

© Commodity Conversations ®

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