Connecting with Farmers

I recently chatted with Dave Behrends, the Founder and President of Farmer Connect. I asked him how it all started.

In 2017 I attended a coffee conference in Medellin Colombia. Professor Jeffrey Sachs, an economist from Columbia University, got up on stage and told the audience,

“Every day I go to a famous coffee shop and pay $1.95 for my medium sized black coffee, but how much of that $1.95 actually goes to farmers? The answer is five cents.”

The conference descended into chaos, with everyone arguing as to whether the coffee chain makes too much money, and why the farmers don’t make enough. But what was lost – and it was this that personally inspired me – was the second statement that Jeffrey Sachs made. He said,

“If as a consumer I was given the option to pay $2 for my coffee instead of $1.95, but I was sure that that the extra five cents would go back to the farmer, or back to the farmers’ community to either double their income or really significantly improve his livelihood, I would gladly pay that extra five cents.”

That was a light bulb moment for me. I realised that he was right. Consumers would be willing to pay a little bit more as long as they could trace that money flow back to farmers and their communities.

And has that vision now come to fruition?

Yes, it has. Farmer Connect currently offers three main components, or solutions: the first is Farmer ID, the second is an Enterprise Blockchain Solution; and the third is Thank My Farmer.

Farmer ID gives each farmer a self-sovereign digital identity that stores two types of credentials: one transactional and the other behavioural (in terms of sustainability). Having the transaction and the behaviour on the platform creates a trust score and a credit score that micro-finance institutions can use to determine the farmer’s credit worthiness.

In addition to the transactional and behavioural credentials, Farmer ID also has a link to digital wallets, bank accounts or other means of payment.

The Enterprise Blockchain Solution is the second component of the scheme. It records two types of data: prices paid at every stage along the supply chain, as well as what we call ‘the journey of the product’.

Thank My Farmer is the third component. It will allow a consumer to scan a QR code on his cup, or bag, of coffee and immediately see the journey that product has taken.

It will allow consumers to contribute to social projects in the farmer’s geography or to make a donation directly to the farmer who grew the coffee.

Do you think that consumers will use the Thank My Farmer app to tip a farmer in the same way that they would tip a barista?

I think there are consumers who will engage. The millennial and post-millennial generations may be a little bit more inclined to do so compared to older generations. Also, some countries have more of a tipping culture than others, so it could vary by geographies.

But we don’t want to limit it just to that. We’re speaking with brands who are saying that they want to give money to sustainability projects, and they want to allow their consumers to choose which project to support.

How will Farmer Connect increase farmer revenues?

Farmer Connect will enable consumers to engage in a new way with the supply chain and allow them to know that every cup they’re drinking is positively impacting the lives of the farmers who produce it. Once that happens, we believe that consumers will be willing to pay more for their coffee, and probably drink more.

This changes the game for everyone. Instead of fighting over whether the brand owner or the retailer make too much and the farmer make too little, we’re going to grow the whole pie. And as we grow that pie we will make sure that the farmers are getting a more than equitable share of it.

I believe that you are currently raising money.

Yes, we are going through a series A fundraising, looking to raise US $10 to 20 million, and we envision bringing in three to seven investors.

We’ve purposely gone out of our way to turn down Venture Capital and Private Equity money. Even if it means that we have a lower valuation we’ve put most of our focus on finding industry partners. We really believe that this should be done by the industry for the industry.

Dave, thank you for your time and explanations, and I wish you every success with the venture.

To see Dave’s latest blog on child labour click here.

© Commodity Conversations ® 2020

Grounds for optimism?

I met recently with Nicolas A. Tamari, the CEO of Sucafina. I asked him about the geographical spread of his business.

We are in the top five of global coffee traders. One out of every 20 cups of coffee drunk in the world comes from Sucafina. That is a big number, but we look more at profitability than at volume. We say that ‘volume is vanity, profit is sanity and cash flow is reality’. We look to be profitable, not to fight for market share.

We source about one third of our coffee from Africa, one third from the Americas, and one third from Asia. Historically we were more of a robusta based company, but in the last decade we’re now doing more arabica. The majority of our business is now arabica.

Our strategy in the next five years is to build in Asia in terms of both origination and destination. A couple of months back we acquired a specialty coffee merchant operating in Hong Kong, Australia and New Zealand. It used to be called MTC, which stood for Mountain Top Coffee, but has been rebranded as Sucafina Specialty.

Who owns Sucafina today?

The company today is owned by the family and by the management. We believe that commodity trading companies should be owned by the management. It’s a people business. We are about one thousand employees in total in the company.

We encourage key people to become shareholders. To become a shareholder, you have to have worked for the company for a minimum number of years, to share our values, and to contribute to the bottom line financially.

Why are coffee prices so low and do you see any relief for growers in the near future?

Prices are currently low because the Brazilian Real is low against the US dollar. Brazil is the largest producer and exporter of coffee, and the low Real gives producers there a reasonable return.

As you know in coffee, we have two exchanges: one in New York that trades arabica and one in London that trades robusta. They are two different qualities. To make an analogy, they are like red wine and white wine.

The contract specification for the New York contract is washed arabica. Brazil mainly produces natural Arabica, which means that the vast majority of Brazilian coffee cannot be tendered on the Exchange – even if it still trades on that Exchange.

It’s a little bit like the cotton anomaly of a decade or so ago. You remember how most of the cotton in the world cannot be tendered against the futures market. It has to be US origin.

We have a similar phenomenon in coffee now where most of the physical coffee trades against a market where it cannot be delivered. I believe that this technical situation in itself will lead to a rally in prices.

In addition, even with the Coronavirus I am confident that coffee consumption will keep growing in the decade to come.

So yes, I believe we will soon have a rally, and that the New York market will reflect the fundamental tightness in washed arabica coffee.

If the New York contract is washed arabica while Brazil produces only natural arabica, why doesn’t Brazil just wash the coffee and make it deliverable?

Less than 10 percent of Brazil’s arabica coffee can be washed in Brazil. That 10 percent can be delivered on the exchange. Traditionally – for the last hundred years or so – the Brazilians rarely washed their coffee. The majority do not currently have the infrastructure to wash it, and it would need substantial capex to build it.

Do the futures markets in London and New York work well?

Both are liquid. Both set prices correctly.

But as I mentioned, most of the coffee traded against the New York Exchange is not tenderable. This results in a de-correlation between physical and futures prices in terms of the basis, which we call the ‘differential’.

Historically differentials were not particularly volatile, except for Colombia in 2009 when we had a weather problem. Recently differentials have become more volatile leading to a total de-correlation between physical and futures.

Right now, we’re currently living with a scenario where washed arabica coffee is trading at the massive premium to the underlying futures. There is a shortage of washed arabica coffee, but an excess of natural arabica coffee.

So, what would stop someone taking delivery of New York and getting the washed coffee?

That’s what’s happening as we speak and that’s why I believe the market will rally.

Thank you, Nicolas, for your time and your insights.

© Commodity Conversations ®

This is a short extract of an interview that I plan to publish in full in my new book Merchants and Roasters – Conversations over Coffee – hopefully out at the end of this year.

The highs (and lows) of hemp

While the rest of the world is stockpiling toilet paper, California is buying marijuana. Sales from licensed retailers have spiked in the last week as users worry about future shortages and a lockdown. 

Unfortunately the spike in marijuana demand is having no effect on the price of hemp; it has fallen by 90 percent or so in the last few months.

Although the same plant, hemp is different from cannabis in the amount of the psychoactive substance THC (tetrahydrocannabinol) that it contains. Hemp plants contain no more than 0.3 percent of THC, while marijuana typically contains 5 to 20 percent THC. This means that cannabis plants with 0.3 percent or less of THC are hemp, while those with more than 0.3 percent THC are marijuana.

I talked with Charlie Stephens, the only hemp trader I know. Having started his career with Gavillon, Charlie, together with his brother Watt and fellow partner Jack, now runs Halcyon Thruput, a hemp drying and processing operation in Hopkinsville, Kentucky, that was recently acquired by Generation Hemp.

The hemp harvest kicks off mid-October and goes through to early December. Charlie told me that once harvested, hemp has to be processed and dried within a couple of hours; if not it starts to combust. His facility works 24 hours a day during the two months of the harvest, with farmers allocated two hour slots in which to deliver the crop.

“The primary product that we are left with after drying,” he continued, “is the biomass from which the CBD oil is extracted. The co-product of that process is bast fibre, the stock and stem material that can be used for fibre for clothes.”

The number of US acres under hemp has increased 100 fold (to 146,000 according to the USDA) since the crop was first partially legalised in 2014. (It was finally fully legalised in the 2018 Farm Bill.) That acreage increase has been driven by two factors: first, the US farmer’s need to diversify away from traditional crops that weren’t paying the bills; second, the expectation of a sharp increase in hemp demand for the production of Cannabidiol (CBD) oil.

Although CBD oil made from hemp contains virtually no THC, it is still believed to have a number of health benefits such as anxiety and pain relief.

“All the soft drinks and food companies had been expecting FDA approval for their products,” Charlie told me, “but the FDA came out and said they weren’t going to do anything, that they were sceptical of the health benefits of CBD, and that they wanted to do their own testing. That really threw a wrench in the market.

“Prices were $60-70 per pound last year, and have now fallen to around $6 per pound. The expected demand spike for CBD oil has not happened, and farmers are left with no choice but to sell their hemp for fibre and seeds.

“I believe that CBD demand is still growing,” Charlie told me, “but there is a lot of noise in the market and we all struggle to keep track of it. The big health companies are doing some serious testing as to health benefits, so we could have some progress there.

“I really believe that hemp will eventually develop into a mainstream commodity. It is an easy crop for farmers to grow. It is pretty much organic. It requires less water than cotton. It acts a sponge in the soil, sucking up all the heavy metal content, and for the lack of a better term it cleans the soil, which means it is nice plant to add into your rotation.”

“So you are bullish for the future?” I asked him.

“On the demand side the clothing companies want to trial it, to blend it with cotton. The clothing brand Patagonia recently announced that they will be making hemp blue jeans.

Meanwhile, Hempcrete is really taking off and there is a lot of potential for it as a building material. The cement industry is the second biggest GHG emitter in the world, and hempcrete is an alternative.

“One problem is that there is little infrastructure in the middle of the supply chain, and no one wants to build capacity without greater certainty on both ends. Another problem is that hemp has to be cheaper to compete. Production will need to be mechanised, industrialised and done at scale.

“I have just got back from Colombia where the government is encouraging farmers to switch from coca to hemp. Because of its climate, Colombia can grow hemp year round, which means that the industrial infrastructure can be used year round. This obviously reduces costs enormously. So I am particularly bullish on production in Colombia.

“As for the US market, it is difficult to find liquidity. Panxchange are doing a good job both as a trading platform and as a PRA (Price Reporting Agency), but a lot of the time no one has any idea as to what the price should be. And when you do find transparency the bid / offer spreads are massive.

“I believe that there is a huge opportunity for some of the bigger trade houses to get involved, but so far they are hesitant. Maybe they need more transparency and liquidity to get involved. It is a chicken and egg problem. They are waiting until the market takes off, but it will be hard for it to take off without them.”

PS If you would like to talk to Charlie directly, please contact me using the feedback or comments buttons, and I will put you in touch.

© Commodity Conversations ®

Who moved my cheese?

Many years ago, before the advent of internet and email, I placed a telephone order  for some office supplies: paper for the photocopier, pens, files etc. I also ordered 20 rolls of toilet paper.

A few days later a huge truck pulled up outside our ground floor office and the driver called through the window. “Are you the guy that ordered the toilet paper?” he shouted.

Somewhere along the line the order had got messed up; the truck was full of toilet paper: 20 packets of 200 rolls each. I explained to the delivery driver that we didn’t want or need 4,000 rolls of toilet paper, and finally managed to negotiate taking just one packet of 200 rolls. It took us years to get through it!

I remembered this story last week when I was in our local supermarket in Switzerland. I have never seen so much toilet paper: the shelves were full of it, and there were piles of it everywhere. I had seen a video of people fighting over toilet paper in Australia (of all places), and I suppose the Swiss wanted to be prepared in case of panic buying here. However, no one was panic buying toilet paper, and I suspect the supermarket had somewhat over-ordered.

My mission that day was not to buy toilet paper, but parmesan cheese. I couldn’t find any. I asked an employee. He pointed to some empty shelves in the cheese display and told me that they had run out. “Panic buying?” I joked. “Yes,” he replied. But he wasn’t joking.

I was wondering why anyone would panic buy parmesan, but then I saw the empty shelves where the pasta should have been. I realised that if you are stocking up on pasta, you would probably also want to stock up on parmesan. To test my theory I checked out the tomato sauces: there wasn’t a single can or bottle of the stuff left in the shop.

In theory, Switzerland is the one country in the world where you should never have to worry about running out of food. It is, as far as I am aware, the only country that maintains a three month strategic food stockpile.

Switzerland was also for a long while the only country in the world where every dwelling, school and office had to have a nuclear shelter. The shelter had to be kept clear, clean and stocked with enough food and drink to last until any nuclear holocaust ended.

As a child I had sometimes wondered what it would have been like to be the only survivor of nuclear war. Having lived in Switzerland for nearly 15 years I now wonder what the world would have been like if only the Swiss had survived a nuclear war.

Switzerland’s food stockpiles hit the headlines a few weeks ago when the government decided to no longer store the 15,000 tonnes of coffee that were part of their strategic stockpile. The government felt that coffee contained almost no calories, and hence was not a food. Their decision caused a social media storm, and the government eventually delayed their decision under pressure from local coffee companies. Coffee is important for Switzerland. Not only is the annual per capita consumption of 9kg double the 4.5kg consumed in the United States, 60 percent of the world’s coffee is traded through Switzerland.

As well as coffee, Switzerland stocks three of four months consumption of a whole list of staples including directly consumable foodstuffs such as sugar, rice and cooking oil, as well as products that need to be processed before consumption, such as bread grain. Fertilisers and animal feedstuffs are also stockpiled, as are petrol, diesel, heating oil and aviation fuel. Medicines such as painkillers and vaccines are also stockpiled.

The stocks are held and financed by 300 private companies. The coffee stocks are, for example, financed by a fee of 3.75 Swiss francs on every 100kg of imported beans, raising 2.7 million Swiss francs annually to compensate private companies for storing beans.

The government estimates that in total, the system of strategic stocks costs each of Switzerland’s inhabitants an average of about CHF 12 a year.

Although it may sound a silly idea, these stocks have come in handy recently. In 2018, the level of the River Rhine fell so low that ships carrying mineral oils and fertiliser could not get to Switzerland, and the Swiss dipped into their stockpiles. Also, during a global shortage of antibiotics in 2017, Swiss hospitals dodged a crisis because of their stock of the drugs.

In addition to these stocks, each Swiss resident is encouraged to have enough food and basic necessities at home to last them one week. In 2016 the government even produced a video (in German) to remind them of their civic duty to do so.

This basic list of necessities includes toilet paper, but apparently the government doesn’t include the stuff in strategic reserves.

Having failed to buy any parmesan I did pick up a packet of toilet paper on the way out. You never know!

© Commodity Conversations ®

Removing the clouds from your coffee

Last week the UK’s Channel 4 Dispatches programme highlighted child labour on Guatemala’s coffee farms. Posing as researchers, the Dispatches’ team visited farms they were told supply Starbucks or Nespresso. They found children as young as 11 or 12 working long hours in gruelling conditions for as little as £5 per day.

The programme found that most of the children were working to help feed their families, and highlighted the piteously small amount of money that coffee farmers receive for their beans. The programme put the the average cost of a cup of coffee in the UK at £2.50 of which the coffee shop receives 88p, staff receive 63p, and the taxman 38p. The programme estimated miscellaneous costs at 28p and profit for the brand owner (ie Starbucks or Nespresso) at 25p. This leaves 10p for the coffee supplier, of which only 1p goes to the farmer. A fraction of that 1p goes to the coffee pickers.

You can perhaps argue whether that breakdown is accurate, but whatever the exact figures, the coffee farmer receives only a tiny proportion of the final sale price of his production. Poverty is widespread in coffee-growing areas throughout the world, and local families often have no choice but to send their children out to work at a young age.

Although it is no excuse, this situation is not new. In his book ‘Uncommon Grounds – The history of coffee and how it transformed our world’, Mark Pendergast writes, “Children begin helping with the harvest when they are seven or eight. Though many campesinos keep their children out of school at other times for other reasons, it’s no coincidence that school vacation in Guatemala coincides with the coffee harvest.’

It is not clear whether the Dispatches team filmed the children during school vacation, or whether the children were skipping school to work, but both Starbucks and Nespresso have made clear that child labour is unacceptable at any time in their supply chain.

In a statement George Clooney, Nespresso’s ambassador, said “I was surprised and saddened to see this story. Clearly this board and this company still have work to do. And that work will be done. I would hope that this reporter will continue to investigate these conditions and report accurately if they do not improve.”

Meanwhile, also in a statement, Nespresso’s chief executive said that the company had launched an investigation to find out which farms were filmed and whether they supply Nespresso. “We will not resume purchases of coffee from farms in this area until the investigation is closed,” he added.

Starbucks also said that it had launched an investigation into the claims brought by Channel 4. “We can confirm we have not purchased coffee from the farms in question during the most recent harvest season, and we will not do so until we can verify that they are not in breach of C.A.F.E. Practices – our ethical sourcing program developed in partnership with Conservation International that provides comprehensive social, environmental and economic standards, including zero tolerance for child labour.”

However, in an interview with The Guardian, the Dispatches’ reporter said that it was far too easy to to announce an investigation and halt supplies from these regions, but doing so will further punish the farmers and the desperately poor families who rely on them. “The reason these kids are working is that their parents – and the farms they work on – are not paid enough,” he added.

Unfortunately, problems in the coffee supply chain are not limited to Guatemala. A Thomson Reuters Foundation investigation published last December, uncovered extensive slave labour in Brazil’s coffee industry. The investigation found that coffee produced by forced labor was stamped slavery-free by top certification schemes and sold at a premium to major brands such as Starbucks and Nespresso.

The coffee supply chain has two problems that are common to many commodities sourced in poor countries: lack of transparency and low prices. It therefore really encouraging that the coffee industry is launching two initiatives to combat these two problems.

The first is FarmerConnect, which is built around a blockchain core powered by IBM. The second, again powered by IBM, is the Thank My Farmer app that will be launched later this year. Working in conjunction with FarmerConnect the app will allow consumers to know exactly where their coffee comes from and allow them to contribute directly to the farmer, and/or to support social and educational projects in coffee growing regions.

We will be writing more about these promising initiatives in coming weeks, and of course we give them our full support.

© Commodity Conversations ®

Image by Pixabay

More on government intervention

Continuing on the theme from last week of government intervention, the following is an extract from my book The Sugar Casino, published in 2015:

In a freely functioning market supply and demand is, in theory at least, matched by price. If demand increases or supply falls, prices rise to encourage supply while at the same time reducing demand. If supply increases or demand drops then prices fall, sending a signal to producers to reduce output or to consumers to increase demand.

This process is what is often described as the “invisible hand”, the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. Adam Smith introduced the phrase in 1759 in reference to income distribution and then used it again in “The Wealth of Nations” in 1776. He argued that an economy works best in a free market scenario where everyone works for his or her own interest – and where the government leaves people to buy and sell freely among themselves.

The American baseball player Yogi Berra once said, “In theory there is no difference between theory and practice. In practice there is”.

In practice, markets may not always be efficient, and governments may need to interfere to correct those inefficiencies. This might happen if producers club together into a cartel to raise prices, requiring the government to intervene to break up the cartel. But even without a cartel a sugar mill might be so big in a particularly region that it could in its own right be a monopoly employer or buyer of cane, forcing down wages and cane prices, or a monopoly seller, forcing sugar prices higher.

In addition, sugar producers might not correctly price what economists call “collective goods”: these could be the environmental costs of factory pollution or heavy traffic on the roads at harvest time. Individual producers might not also correctly value the benefits of research into new cane varieties or of infrastructure investment such as railways or ports. On a wider scale governments, rather than markets, may better provide collective goods such as education and health services.

Inefficiencies sometimes creep into markets due to a lack of information. To counter that a government could encourage the setting up of commodity exchanges to facilitate trade and improve price transparency.

But governments also interfere in markets, not to correct market inefficiencies, but to obtain specific policy objectives such as the alleviation of poverty or a fairer distribution of wealth. Interfering in the market in this way can however have a cost: it can create price distortions that prevent the most productive and efficient allocation of resources. This “economic loss” has to be measured against the “social gain”, say, of a more equal income distribution.

Governments may also interfere in markets for diplomatic reasons, for example by applying a lower import tariff on sugar from one country compared to sugar from another. Lower import tariffs might be applied to curry favour from a neighbour or in exchange for lower tariffs on other goods within the framework of a Free Trade Area (FTA). Altruistic governments may also reduce or remove import tariffs on sugar imports as part of a policy to promote growth in developing countries.  Such an example would be the EU’s “Everything But Arms” agreements.

In the agricultural markets some governments, in particular China, may try to keep cane prices high in order to maintain rural incomes and to slow down the migration of the population to the cities. Other governments (or more correctly politicians) may try to keep cane prices high for less altruistic reasons: to win political votes. India is an obvious example of this; perhaps Thailand is a less obvious example.

Governments may also often interfere in markets to maintain employment. It would certainly be more cost efficient, say, for Bangladesh to close down their few remaining sugar mills and import the sugar they need from Brazil or Thailand. (The same also applies, but on a much larger scale, to China.) However, closing factories can result in a politically unacceptable increase in unemployment. Sugar industry employees in Bangladesh and China might be better off making something else other than sugar, but a reallocation of that sort takes time. It would involve short-term hardship for the employees concerned and would be a difficult “political sell” in the short term. And everyone knows that politicians operate in the short term: their time frame is the next election.

© Commodity Conversations ®

Are governments back at the table?

Bloomberg published an interesting opinion piece last week on the resurgence of government in our daily lives.

Since the Reagan / Thatcher era, government has been seen as `the problem not the solution`, particularly in terms of the economy. Over the past 40 years, privatisation and other market liberalising measures have reduced the role of government, leaving space for `market-based solutions`.

The international commodity trade benefited from this trend. When I started in the commodity business in the late 1970s, it was dominated by state agencies. Prodintorg was the monopoly importer in the USSR, as was COFCO in China and BULOG in Indonesia, along with a host of other government agencies in many other countries. If you wanted to buy sugar from Brazil you could only buy it from the IAA, a stage agency. And if you wanted to buy sugar from Australia you had to deal with QSC, a quasi-state agency.

Most of these agencies were dismantled during the 1980s and 1990s as governments withdrew from the international agricultural commodity trade; our business was effectively privatised.

If the Bloomberg opinion writer is correct, the pendulum is now swinging the other way. Governments now have the support of voters to be increasingly interventionist.

Once again, international agricultural commodity markets are not immune from this trend. The Chinese government, through COFCO, is an increasingly important player in managing China’s food imports. The Russian government, through VTB, is becoming an increasingly important player in Russian grain exports. Meanwhile, other countries are becoming more interventionist in imposing tariffs and other trade barriers.

What effect might this have on our business?

First, politics could become more important than price as a market driver. Although not perfect, markets do a reasonable job of sending the right signals to producers and consumers, importers and exporters. When governments interfere, these market signals become distorted: farmers end up growing the wrong crops while importers import the wrong quantities or the wrong commodities. Markets are better than government committees at balancing supply and demand all along the food supply chain.

Second, the trade in food could be weaponized. Less democratic governments have sometimes used food supplies as leverage to gain power over dissenting groups, using starvation and famine as a political weapon. More solid democracies happily no longer do that, but they do use food as a weapon in their international relations. Look at Russia’s ban on food imports from the EU, or China’s import tariffs on agricultural imports from the US. These types of intervention can distort markets and lead to an inefficient allocation of resources. 

Third, we may see the return of corruption, both institutional and local. Putting a poorly-paid government bureaucrat in charge of a country’s food imports could lead him to favour one supplier over another – or to grant an import licence to a ‘friend or relation’. 

Localised corruption is rare in advanced democracies, but institutionalised corruption is widespread. If governments become more involved in our business, the power of the lobbyists will grow. It will be increasingly worthwhile, and profitable, to lobby for or against a tariff, or for or against an import or export ban. Politicians need money to get elected even in the most transparent democracies.

If the Bloomberg article is right, it could become even harder for the world’s grain and agricultural commodity traders to make a living.

First, trading companies got out of the business of bribing government officials long ago, and for both ethical and good business reasons they won’t want to get back into it.

Second, western agricultural trade houses may be handicapped if government-owned competitors trade for political rather than price reasons.

Third, politics increases risk. Throughout 2019, for example, the price differential between Brazilian and US soybeans could – and did – change at the click of a tweet. Traders like volatility as long as it is not political.

If the world wants to feed the estimated almost 10 billion people that will be will living on this planet in 2050, then it will need international free trade in agriculture. Let’s hope that the pendulum doesn’t swing too far in the wrong direction.

© Commodity Conversations ® 2020

Cheap food and politics

As I wrote in a recent post, Stalin believed that the political and economic future of the Soviet Union lay in industrialisation. He set high prices for industrially produced goods and low prices for agriculturally produced goods in order to encourage a shift from agriculture to industry. He reasoned that surplus workers in the countryside would be better employed in industry, and that a policy of cheap food would drive economic growth.

This view has not disappeared. Within the developed world, most governments keep food prices low (to placate urbanites) while quietly transferring money back to rural areas through tax-funded subsidies. And in the developing world, many classical economists still believe that industry, and not agriculture, drives economic growth.

The data, at first sight, appears to support that view. The chart below shows how workers moved from farms to factories as the industrial revolution gathered speed in 19th century Europe.

While this chart, again from ourworldindata.org, shows that the richer the country becomes the smaller the percentage of the workforce employed in agriculture.

This third chart shows how agricultural productivity increases as countries get richer. This could be because a shortage of labour in rural areas leaves farmers no choice but to improve productivity. It could also be because farmers get better access to information, finance and technology as their country develops.

The conclusion is therefore clear. Stalin was right: a country develops when farmers migrate from field to factory. This migration leads not only to GDP growth in the cities but also to greater productivity on the farms. Everyone gains.

As a result, development economists and politicians give this process a nudge through low food prices, forcing productivity gains in the countryside while subsidising workers’ wages in the cities. (This is known as ‘urban bias’.)

However, there may be some confusion here between causation and correlation. Forcing displaced rural workers into the cities does not guarantee that industrial activity will pick up. The industrial revolution in the UK ‘pulled’ workers into the cities; displaced rural workers did not ‘push’ industrialisation. People are ‘pulled’ from farms to factories once factories offer them better wages and a better future for their families. Pushing workers from their fields may lead to an increase in poor urban dwellers – and hence a fall in urban wages – but it does not directly ensure economic growth.

In a closing address to last years FT Global Foods System Conference, Pavan Sukhdev, President of WWF International, argued that the number of people employed in agriculture in developing countries is simply too large to be absorbed by industrialisation within any reasonable timeframe. He argues for a different approach, one driven by economic growth in the countryside fuelled by sustainable agriculture. He cites the Indian state of Andhra Pradesh in India as an example, where six million farmers practise what is called ‘zero-budget’ farming.

So why then do governments continue a policy of keeping food prices low? It seems redundant in developed countries where the shift in population from farms to factories has already occurred. Meanwhile in developing countries it can drive people from their farms without helping the country’s economic growth.

The answer can possibly be found in the way that governments quietly transfer money back to farmers through subsidies. City dwellers pay partly for their food through taxes.  Governments do this because urban voters are better organised than rural ones, and there are more of them. Cheap food buys votes in democracies.

Cheap food also helps keep leaders in power in less democratic countries. Consumers protest – and riot – when food prices are increased. The Arab Spring may have started in Tunisia, but it was food price protests in Algeria that gave it momentum.

So everyone wins with cheap food. The farmers are happy; they get paid partly through the sale of their produce and partly through tax transfers. Consumers are happy: they get cheap food in the shops, blissfully unaware that they are actually paying for it through their taxes.  Governments are happy, because they stay in power.

The problem is that not everyone wins. But more on that in future posts.

© Commodity Conversations ®

Silent Spring

“We stand now where two roads diverge… The road we have long been travelling is deceptively easy, a smooth super-highway on which we progress with great speed, but at its end lies disaster. The other fork of the road – the one ‘less travelled by’ – offers our last, our only chance to reach a destination that assures the preservation of our earth.”

Thus wrote Rachel Carson in her best selling book ‘Silent Spring’, published back in 1962. ‘Silent Spring’ is largely credited as the catalyst that began the environmental movement and (eventually) the formation of the US Environmental Protection Agency.

In the book, Ms Carson writes about the widespread use of chemical pesticides and the negative effects they can have on biodiversity. In particular she highlights how aerial spraying of DDT led to a collapse of local bird populations – hence the book title.

Although dated, the book has some useful lessons for us all. The first, and most obvious, is that if you are a hammer everything looks like a nail. Chemical pesticides largely came out of research during World War Two into chemical warfare. Once the war ended, scientists used the knowledge that they had acquired to use chemicals to kill insect pests rather than humans.

In this sense, chemical pesticides have a similar history to nitrogen fertilizers. As Michael Pollan writes in The Omnivore’s Dilemma, the US government found itself at the end of World War II with a surplus of ammonium nitrate, the principal ingredient in making explosives. Ammonium nitrate is an excellent source of nitrogen for plants, and the chemical fertilizer industry was the product of the government’s effort to convert its war machine to peacetime purposes.

In her book, Ms Carson writes of a USDA programme in 1958 to exterminate the fire ant, an insect that has a sting similar to that of a bee or a wasp. A million acres were sprayed in Florida and Louisiana with dieldrin and heptachlor, two relatively new chemicals many times more toxic than DDT. The results on wildlife, particularly birds, as well as on livestock, mainly pigs and chickens, were catastrophic. The poisons also accumulated in cow’s milk.

Spraying continued for the following two years but without any meaningful impact on the fire ant population. It appears that the pesticide only killed off the weaker fire ants but left the stronger ones alive to adapt and develop an immunity to the poisons. Ms Carlson likens it to human-induced Darwinism.

So that is the second lesson from the book: because nature constantly adapts, pesticides become increasingly ineffective. You either have to apply them in greater concentration or constantly develop new ones.

The third lesson is that everything in nature is related: try to solve one problem and you may create a worse one. As the author writes, ‘nothing in nature exists alone’. She gives the example of the US Forest Service’s use of DDT for combating the spruce budworm in 1956. The pesticide was successful in eliminating the spruce budworm but also killed off the natural predators of the spider mite, whose population then exploded to become an even worse problem.

Finally, Ms Carlson makes the point that, once they have been applied, these pesticides do not disappear, but build up in dangerous quantities in the soil, in earthworms, in the fish in the adjoining rivers and lakes, and in livestock. They then work their way along the food chain in surprising and dangerous concentrations. The spring was silent in 1962 because the birds had died after eating earthworms poisoned with DDT.

The world is a different place now than it was when Ms Carlson wrote her book 58 years ago. However, as the current ruckus surrounding glyphosate shows, the issues remain. The general public, including jurors, do not trust scientists. They believe that they are either in the pay of big chemical companies, or that they do not have sufficient data over a long enough period of time to evaluate a product’s safety. This distrust began with Silent Spring.

© Commodity Conversations ®

Food miles

Our local grocery store owner has begun to put a label on each of the fresh products that she sells to show its ‘food miles’: the distance that each product has travelled between the farm and the shop.

Although popular, it is debatable whether buying locally produced food actually helps the environment.  As can be seen from this chart published last week by Our World in Data, transport (in red on each bar) only accounts for a small part of the total GHG emissions in the food supply chain. If you want to help the environment, what you eat is far more important than the distance it has travelled.

For example, a Defra study in the UK estimated the CO2 emissions of tomatoes produced in Spain and shipped to the UK at 630 kg per tonne compared with 2,394 kg per tonne for tomatoes produced in the UK. Tomatoes in Spain are grown unheated under plastic while tomatoes in the UK are usually grown in heated greenhouses.

A later study found that New Zealand lamb imported into the UK had a smaller environmental footprint than home produced lamb.

DEFRA has also looked at the road transport part of the food supply chain in the UK. They found that half of the vehicle kilometres, when measured in terms of the amount transported per kilometres, were driving the commodity from the store to the home. In other words, the best way to reduce your food miles is to walk, cycle or take the bus to the supermarket to do your shopping—and leave the car at home.

But what about bulk commodities? We as traders are often criticised for moving huge tonnages of grain (or sugar in my case) over vast distances. Surely it would be more environmentally friendly to grow the crops locally?

As most bulk commodities are transported by ship, the GHG emissions are really quite insignificant. Global shipping accounts for around 2 percent of total GHG emissions, but that includes minerals as well as finished industrial products such as cars and machinery. The total world trade in iron ore is about 1.4 billion tonnes compared to wheat, for example, at around 100 million tonnes.

A study for Canada, a major sugar importer, found that sugar accounted for about 13 percent of the country’s total food imports by weight and about 21 percent of the tonnes per kilometre (because it mainly comes from Central and South America). However, because it is shipped to Canada in big cargo vessels and transported internally by rail, sugar only accounted for 2 percent of the country’s farm to store CO2 emissions.

The concept of shopping locally and counting food miles to help the environment has therefore been largely discredited. So why then has our local shop made the move to label each of their products with the kilometres it has travelled?

I asked the owner that question and she told me that consumers want to do something positive for the environment, and they believe that shopping local does help. More importantly, she added, her customers like to feel that they are supporting local farming communities.

“Shouldn’t we also be supporting farming communities in the developing world?” I asked her. She shrugged and moved on to the next customer.

In frustration I walked down the street to the local MIGROS supermarket where I found that the vegetables and fruit pre-packaged in plastic were cheaper by the kilo than the vegetables and fruit that were displayed in bulk. Packing vegetables in plastic reduces food waste because they are handled less. This waste has an economic and environmental cost that is greater than the plastic packaging.

Perhaps we shouldn’t ditch the cling film after all!

© Commodity Conversations ®