Category: Blog

A conversation with Brian Zachman, President of Global Risk Management Bunge Limited (NYSE: BG)

The views and opinions expressed in this interview are those of Brian Zachman and do not necessarily reflect the official policy or position of Bunge Ltd.

Good morning Brian. My first question is, how did you start in the business?

I am from St. Michael, a small town in Minnesota, just northwest of the Twin Cities. My family was in the dairy farming business, but it was never really my hope to have a career in the family business. My choice of university, Minnesota-Duluth, even came with an added bonus: it was too far from the farm for my dad to call at 3pm and ask for a hand milking the cows at 5 pm!

I was interested in markets and studied Economics and Math in college before applying to Cargill, but for a position in their financial markets department. Cargill likely saw the farming background and instead offered me a merchant trainee job in West Fargo, North Dakota.

What happened to the family farm? Is it still going?

My parents sold the milking cows and the young stock in the early 1990s, when Mom and Dad reached retirement age and when no obvious succession plan emerged for the farm—all of my five siblings also chose professions other than farming. Dad still lives on the farm, although suburban development and the resulting increase in land values means less and less of the land is directed to agricultural uses. It’s a tale as old as time, a pattern likely to continue throughout rural America.

Before joining Bunge you worked briefly for a hedge fund. What was it like?

I really enjoyed the experience. The ‘reason for being’ is very clear in a fund: it’s about delivering results, and that clarity has a way of creating the right kind of focus. Also, maybe contrary to popular perceptions, my experience is that hedge funds are very disciplined organizations. There’s a real recognition that outcomes are uncertain and that one doesn’t know anything with certainty, so a big part of the business revolves around managing risk.

My primary frustration in the managed money space was being limited to the Exchange-traded instruments and not being able to take positions in the underlying physical commodities (the basis) or in any other part of the value chain. The analytical process is the same in both settings—oftentimes at the fund we had very solid opinions about value migration in parts of the chain but with no way to express our opinion in those markets.

Are you optimistic or pessimistic about the future?

I am optimistic. Bunge is a global player with a global asset base. We physically originate 70 million tonnes of grains and oilseeds each year and have an end-to-end presence in the supply chain; that’s an inherently strong structural position, which is not easy to replicate.

From the standpoint of price risk management, our network also provides us with a lot of proprietary information that helps us optimize our value chains. In a way, our asset base is a call option on volatility in the supply chain.

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

My first piece of advice would be to remain intellectually curious. It seems to me that some of the most successful people in the business always ask the next question, not in the interest of information overload, but in the interest of drawing connections between cause and effect in the markets: What’s driving this? Why is this happening? Does it have any knock-on effects? What does it mean?

Second, be humble. If you don’t already possess humility, the market will eventually provide it to you—but it’s almost always more expensive that way!

Accept that you give something of yourself when you put on a position; it exposes your vulnerability to failure. In reality, markets can reward you even when your underlying logic was flawed, and a bet can go badly even when your underlying logic was sound.

Some of the best advice I received went something like “be less concerned about defending your logic and ‘being right,’ because you don’t have all the facts; be more concerned about the outcome and managing your capital.” When it’s framed that way you realize a bad bet isn’t an indictment on your intelligence.

Third, “never say never.” You can say that there’s a low probability of something happening, but you shouldn’t say it will “never” happen. We’ve all seen too many things happen that we thought would never happen. The options markets have this pretty well figured out.

Fourth, find what works for you and develop your own style. At the same time, though, seek the counsel of people that you trust, who can ground you in moments of emotion and the extremes, and who can help you put things in perspective.

Finally, appreciate the place that commodities have in the world…we are in a relevant business with great purpose!

Thank you Brian for your time!

© Commodity Conversations ®

This is a brief extract of a conversation from my upcoming book to be published in November.

A conversation with Ivo Sarjanovic

Could you please tell me a little about career?

I joined Cargill in July 1989, and after working in Buenos Aires and Sao Paulo, I was transferred to Geneva in 1993 as a wheat trader. In late 1994 Cargill asked me to join the soybean desk. I started as a junior trader and worked my way up to become head of the desk, a position I kept from 2001 to 2011.

I was in charge of Cargill’s worldwide activities in soybeans, including the coordination of crushing activities. It was a role that combined international trading with the strategic side of the business, so it was super interesting. I loved it!

So you were head of the bean desk through the whole of the super cycle?

I first visited China in 1997 at a time when they were buying almost no beans at all. Twenty years later they are importing 85 to 90 million tonnes each year, which is roughly 60 percent of the world total.

This created tremendous opportunities for the desk. I was lucky to be there at that time—and to have had the right experience and the right team to be able to enjoy it. For me it was like playing football for Barcelona in La Liga.

What was Cargill’s share of the world soybean trade at that time?

We had maybe 15 percent. The business was extremely competitive, but not only among the big trading houses. Chinese companies soon started to buy soybeans directly from the origins and trade them to destination.

In 2011 you moved within Cargill from beans to sugar. What prompted that move?

I had been in soybeans for almost 20 years, and I wanted a change. I also wanted to have a position that was more managerial, more asset-based and less trading-orientated. Becoming head of Cargill’s Sugar Division was a perfect opportunity for me. I jumped at the chance.

What are the main differences between the sugar and the soybean markets?

The biggest difference is the delivery mechanism. Sugar trading revolves around the delivery process against the futures market, especially the optionality that you have between the different origins.

What was a surprise was that physical margins were even worse in sugar than they were in beans. Traders are even more willing to discount physical prices to put on a short sales book to end destination.

After a few years of running Cargill’s Sugar Division you merged it into Alvean, a joint venture with Copersucar.

Alvean was probably the best idea I have ever had professionally, combining what at that time were the two biggest traders in a market that was desperate for consolidation. Cargill had the global trading expertise while Copersucar had the origination infrastructure in Brazil. The combination was very strong.

Moving on to your current position, you now act as an advisor to trading companies on risk management.

Risk management is a journey. We can only try for continual incremental improvements. Also, I don’t think there is a definitive way to manage risk; different companies have different methods.

Thirty years ago we managed risk in terms of the size of the position measured in tonnes. We then moved on to looking at the risk in monetary terms, the value. We then began to incorporate tools that were developed by the financial industry such as ‘Daily Value at Risk or DVAR”, “Drawdowns” and ‘Stress’. We combine all these tools into what we call a ‘Dashboard’ and then we try to find a balance, a way to combine each of the various legs such as flat price, spreads, premiums and freight positions within limits.

It was challenging at the beginning, but most people now realise that you can’t trade if you don’t use those tools. Without them you may overtrade relative to your equity and run the risk of ‘blowing up’.

In addition to my advisory work I give courses on agricultural commodities at the Masters level at the University of Geneva, as well as at the Universities of Buenos Aires and Rosario in Argentina. I love teaching young people about our business, and sharing my enthusiasm for the business with them.

Thank you Ivo for your time and input!

© Commodity Conversations ®

This is a short extract of a conversation that will be published in full in my new book due out in November.

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

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

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

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

And Manu, when did you join?

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

How big is the company today?

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

Do the big trade houses each have a shipping department?

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

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

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

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

Any other changes?

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

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

Could LNG be used as an alternative low emission fuel?

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

So how could the industry reduce emissions further?

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

What’s the average lifespan of a ship?

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

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

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

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

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

Thank you Riccardo and Emanuele for your time and input.

© Commodity Conversations ®

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Could you describe a typical TCF finance?

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

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

How do you see your business evolving in the future?

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

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

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

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

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

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

© Commodity Conversations ®

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

A conversation with Greg Morris

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

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

What tonnage of commodities does ADM trade each year?

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

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

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

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

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

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

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

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

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

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

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

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

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

 Is there anything that you’d like to add?

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

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

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

© Commodity Conversations ®

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

Jason Clay, the head of agriculture at WWF US in Washington, once famously calculated that the world’s farmers will need to produce as much food in the next forty years as they produced in the past 8,000 years. Can they do it?

The UN’s FAO believes that they can. At a world summit back in 2009 the Organisation predicted that in order to feed the world in 2050 global agricultural production would have to be 60 percent higher than it was in 2005. Although that sounds a lot, it would be a smaller increase than the agriculture sector achieved over the previous past half century.

Where will that 60% extra production come from?

The FAO expected that, in aggregate, more than 85 percent of the increase in production would come from improved yields. They projected global cereals yields would increase from 3.3 tonnes/ha in 2005 to 4.30 tonnes/ha in 2050. World average yields for other major crops were expected to follow similar patterns.

The rest would have to come from bringing more land under agricultural production. The FAO estimated that the world has a total of around 7.2 billion ha of land suitable for rain fed food production. After discounting for areas already in production, under forest cover or put to other uses – as well as land that is only marginally suitable – the world has some 1.4 billion ha of prime land that could be brought into cultivation.

Much of this, however, would have to come at the expense of pastures, and would require considerable investment. In addition, some of that spare land is not readily accessible due to lack of infrastructure and its distance from markets, making production uneconomical.

The FAO estimated that land under crops would increase by some 70 million ha by 2050. However it warned that much of the spare land is concentrated in a small number of countries, for example in Brazil. Some countries may find it difficult to increase the amount of land under food crops.

All this means that, at the global level, the FAO was optimistic that agricultural production could be increased enough to satisfy the 60 percent increase in demand projected to 2050 for both food and non-food uses.

Where are we ten years later? the World Resources Institute, a non-profit organization, still believes the challenge can be met, but only if certain  “gaps” can be overcome. In a recent report entitled “Creating a Sustainable Food Future” the WRI identified three gaps. The first is the food gap, the difference between the amount of food produced in 2010 and the amount necessary to meet likely demand in 2050. They estimated this gap to be 7,400 trillion calories, or 56 percent more crop calories than were produced in 2010. (Their numbers are pretty much aligned with those of the FAO.)

The second, the land gap, is the difference between global agricultural land area in 2010 and the area required in 2050 even if crop and pasture yields continue to grow at past rates. They estimated this gap to be 593 million hectares, an area nearly twice the size of India. The third, the Green House Gas (GHG) mitigation gap, is the difference between the annual GHG emissions likely from agriculture and land-use change in 2050 compared to emissions that have been targeted under the Paris Agreement to limit global warming to below an increase of 1.5°C.

The foundation argued that closing these three gaps would be harder than often recognized. The report’s lead author said, “If we tried to produce all the food needed in 2050 with today’s production systems, the world would have to convert most of its remaining forests, and agricultural alone would produce almost twice the emissions in 2050 allowable from all humans sources.”

The Intergovernmental Panel on Climate Change (IPCC)—a global group of scientists convened by the United Nations to study climate change—is also worried about agriculture’s GHG emissions. In a report published last month, the panel warned that cutting emissions from major polluters like factories and power plants won’t be enough to keep global warming below the two degrees Celsius agreed under the Paris Climate Agreement. They concluded that land use and food systems have to change, too.

The report found that food production (including post-harvest activities like transportation) accounts for between 21 and 37 percent of greenhouse gas emissions caused by humans. The scientists emphasized the need to manage land better and recommended diversifying cropland, reducing food waste and transitioning to vegetarian or vegan diets. The report found that methane emissions are rising again after a no-growth period between 1999 and 2006. Methane is a particularly potent greenhouse gas, and cows and global rice production are largely to blame.

They also warned that climate change will exacerbate food insecurity even in the best-case scenario. In fact, they say that climate change is already affecting agricultural production.

Many of the solutions outlined in the IPCC report—farming techniques that prioritize soil health, reforestation—take time. It can take years to rebuild soil that’s healthy enough to withstand a flash flood or a dust storm; a tree can’t start capturing carbon until it’s several years old. The IPCC warn that the time to act is now.

A failure to do so would lead to increased degradation of land because of intensive farming, while a rise in deforestation would accelerate climate change that would in turn make land less fertile and productive, the IPCC added.

We all agree that the way forward for agriculture, and for a sustainable food future, is through producing more food per hectare, per kilogram of fertilizer, pesticides, and herbicides, and per litre of water.

Are our farmers up to the challenge? You bet!

© Commodity Conversations ®

Good morning J-F. Could you briefly describe who you are and what you do?

I am a former banker with a banker’s DNA. I spent most of my career in international banking and trade finance, with stints in Greece and Asia. I was originally with Crédit Commercial de France -CCF, and then with HSBC, when they took over CCF. I moved to London where I built the structured trade finance activities, and then the global commodity finance activities for the group.

I’m now a consultant on trade and commodity finance and strategy for banks, companies and funds. I also teach commodity market dynamics at Sciences Po in Paris, and regularly lecture at the London Business School.

How are the different trade houses adapting to the changes in their business environment?

Although everybody is investing in logistics, Glencore is differentiating itself through a strategy of size. They believe that through size they can reduce costs, and perhaps even become a price-setter rather than a price-taker.

When you talk to ADM or Cargill, they tell you that they don’t trade commodities, but that they are an integrated supply chain from farm to fork. Their profits are not coming from trading; their profits are coming from sophisticated supply chain management. They also endeavor to generate commercial margins by producing and selling adding-value products downstream.

Cargill has been doing this for many years now, shifting focus to animal and fish proteins. This certainly makes sense when population is increasing and the middle-class is growing. The world needs more protein, and Cargill’s investment into the verticality of the protein supply chain is paying off handsomely.

ADM is a different animal. Let’s not forget that the original “A” amongst the ABCDs was André, not Archer Daniels Midland. ADM is by and large an agri-industrial company, not a trading house. It has developed into trading, but the bulk of their money is spent and earned on the industrial part of the business.

Dreyfus will also tell you that they are no longer a trading house, and that they are now supply chain managers. However, Dreyfus is probably one of the last true large trading houses left in the market. That is quite a challenge in a market where the odds of making money through trading get slimmer.

Bunge is somewhere in between Cargill and Dreyfus. There is more trading at Bunge than there is at Cargill, but Bunge is keen to complement their upstream capabilities with downstream access, in search for commercial margins. Their aim is to lower their reliance on trading and become more of an agri-industrial company.

What about COFCO, or rather their trading company COFCO International Ltd? You once said that their role was to feed the dragon.

COFCO International is a game changer in the world of agricultural commodity trading.

I believe their true mission is to optimize sourcing at origin and ensure a smooth and efficient supply for the Chinese market. Their grip on China as a destination is already strong and will only get stronger. This is a major issue for the ABCDs, as price discovery in China will get more difficult to read.

I believe the rivalry between the U.S and China is a new normal. If that view is correct, COFCO International’s role becomes even more important. It has to restructure the sourcing and origination of China’s food imports in order to lower the country’s dependency on the U.S. To fulfill it efficiently, I would expect further acquisitions/alliances down the road.

Do you believe that traceability is an integral part of a trade house model?

Traceability is not a luxury, it is “a must have.” Part of the process of industrialization is to efficiently support that traceability requirement. For now, consumers in developed countries are the most demanding, but with emerging urban middle classes around the world, requirements for traceability will only rise and spread.

There seems to be a growing trend for banks to link finance to sustainability and human rights objectives.

I see a future—not too far away—where at least the large banks will eventually only finance sustainable production. This is the trend. If you look at the coal business, not a single international bank will finance a new project in coal fired power generation. I think that banks will have to exit non-sustainable agribusinesses. Not doing it would merely be unacceptable to the society at large, and the reputational risk incurred would be too high.

 Will any of the big trading companies exit their bulk commodity trading operations to concentrate on higher value parts of the supply chain?

Trading companies will not “quit” trading. It is their core expertise and their culture. However, trading as a stand-alone is no longer generating profits in line with the risks undertaken. All large trading companies therefore are endeavoring to complement – or rather, enhance – their trading capabilities by capturing what they have identified as the higher value parts of the supply chains. This is easier said than done.

First, you need to identify the right supply chain and the right portion of it: upstream or downstream. Second, investing in supply chains is costly and companies need the financial strength to do so.

Not every player can afford the risks and costs involved. This leaves them with two alleys: partnerships and mergers amongst equals.

Do you think that trade houses should be publicly quoted?

A listed company has to have a growth story to tell, year after year to investors. This does not fit well with the cyclical nature of the commodity business. But I will go one step further. As I already said, commodity traders are currently struggling to make money, and I think that they will continue to struggle in the years to come. So I doubt we will see any commodity traders listing in the next 10 or 15 years.

Would you recommend a young person now to join one of the big grain trading companies?

There is no better school for someone to learn about markets and discover how the world works. Commodities are about history, demography, geography, economy, finance and geopolitics! It is a fantastic training for young people, even if they intend to move on to other activities.

Thank you J-F for your time.

© Commodity Conversations ®

This is a brief extract of a conversation that will be included in my upcoming book on the grain trade, to be published before the end of 2019.

What are the biggest challenges currently facing the grain merchandising industry?”

In the 2000 to 2010 boom the industry built up too much capacity, too many silos. Farmers around the world have also built storage capacity. Their need for merchants of grain to store commodities, and to take them off their hands at harvest time has become less. That is a significant change that challenges intermediaries such as ourselves. We need to add value to the farmers in a different way than we have done in the past.

Another challenge that we face is government intervention; the current trade conflict is an example. Tariffs and import and export bans make it harder and more costly to move food around the world. They lead to inefficiencies and extra costs.

Ian McIntosh, the CEO of Dreyfus, recently said, “One tweet and everything changes.” Traders need volatility, but they like volatility that is at least partially predictable.

If you trade you need price volatility. If the price doesn’t move, you can’t make money. You might not lose either, but not losing isn’t enough to stay in business. By definition traders require volatility.

However, unpredictable political volatility increases risks and costs. It becomes a casino, and then it becomes gambling rather than trading. There have been a lot of market impacting tweets. That has made trading difficult in the past year.

But one thing I would say is that our global scale has helped us to find solutions. Recently, trade tariffs have made it more expensive to supply US beans to our buyers in China, but because of our global scale we have been able to supply Brazilian beans instead. We couldn’t do that without global scale. If you were a small regional player in the US you would have been caught in that.

Can grain merchants still add value, or can the market now do without intermediaries?”

There are a lot of myths around the grain trade, that traders just make money hand over fist, that they are making huge amounts of money on the backs of farmers and consumers. It is not true. In reality, margins are very thin in the agriculture sector.

On the plus side, pressure on margins means that we are constantly looking to make the systems more efficient, to cut back costs, and to make sure that our agricultural products are moved in the most cost effective and efficient way.

So yes, there is a need for intermediaries as long as they can continually reinvent themselves to add value. We have to differentiate ourselves from our competitors and to add value on both ends of the spectrum, at origin and at destination. If you cannot add value, then there is no reason for you to be in business.

Is traceability compatible with tradability?

I don’t think traceability necessarily kills tradability, but it clearly restricts it. You end up with an IP (Identity Preserved) product. It is a value added product that is not really exchangeable. A commodity is a commodity because it is exchangeable. An IP product requires segregation; it is not a standard product.

Our objective within Cargill is for all products to become sustainable. Once that happens the distinction between traceability and tradability no longer exists.

How has Cargill changed since you joined?

At its core, the company has not changed. We are still a values-driven company where ethics and compliance is at the top of who we are. That has not changed over 150 years and I don’t think it will ever change. It is a family requisite. The Cargill family cares about the company, about passing on to the next generation, and that will only happen if we take care of the company in an appropriate manner.

Cargill has however changed from a portfolio perspective. When I joined in 1987 we were still predominately a trading company. The trading part of Cargill is still a critical part of the company. We still have an active trading business. We trade actively around our assets. We are a major supply chain manager. But we have also diversified our portfolio into the value-added products. We have invested heavily into animal feed, into the meat businesses, into starches and sweeteners, fermentation. That has diversified the revenue streams, but it has also allowed us to capture margins in the downstream supply chain just as the margins in trading were under pressure.

Chris Mahoney, the CEO of Glencore Agriculture, told me that something like 15 percent of his company’s revenue comes from trading and merchandising.

It is difficult to put an exact number on it, and trading is an art not a science; it varies from year to year. We still have a huge amount invested in people and talent to trade and position in the market place, and I would guess that it is larger than our competitors today. Nevertheless, the trading side of Cargill relative to the rest of Cargill is now less than it used to be. That is simply because our portfolio on the value-added side has grown significantly.

What makes Cargill different from other merchandising companies – what is your USP?

I am not going to talk about our competitors, so I will answer that question in terms of what I think we are good at.

Number one is our exceptional talent—our people. Number two is that we are truly global as a company; we have good assets in all the key geographies, whether at origin or destination. Number three is the way that the different businesses within Cargill work together. Number four I believe we can differentiate ourselves by the importance we place on our relationships with customers and suppliers. We work with our end users and our suppliers to adapt to their changing needs.

Would you recommend young people to become traders, to join Cargill?

You are asking someone with a fascination for markets and trading, so yes I would recommend anyone to become a trader. Trading will never disappear. We manage risks, and those risks will never disappear. There is risk all along the agriculture supply chain and that risk has to be managed. To manage risk you have to understand the marketplace.

To take that one step further, you go beyond simply risk management into trading opportunities, where you see something that the market is mispricing, and you seek to profit from that. That is how markets work. It is a fascinating business. You have global forces at play.

There is now greater need to understand mathematics and mathematical models than in the past. Data science is becoming increasingly more important. I joined Cargill before the Internet existed. And I studied law, not mathematics. But I guess I must have some ability at maths, otherwise I wouldn’t be where I am today.

So you need to be strong in mathematics now to be a good trader, and that is not for everyone.

You also need to be able to manage stress. Your job should not be at the cost of your health. It is a tough environment. A lot of people come and go. It is performance driven culture, if you don’t perform consistently you will be replaced. You are always at the cutting edge. Performance is quick to come and go.

Cargill is often viewed as a training programme for the industry. How do you feel about that—and how do you manage it?

 I have mixed feelings about that. In one sense it bothers me. Through our training we are obviously feeding our competitors with talent. But at the same time I am proud that we recruit and train people so well. That tells you a lot about this company and the way we invest in our people. I think that is a good thing.

But frankly there is no choice at the end of the day. We are a pyramidal structure. People are promoted on merit, and there will be people that fall out of that system. Our objective is to maintain our strongest talent. We don’t always succeed. But not everyone can make it to the top, so there will always be people that seek other opportunities. I think that is ok. It is the way the system works; it is inevitable.

What would like to read about in a book about the grain trade?

The grain trade plays a vital role in the agriculture sector and I think that story needs to be told. The industry has a stigma that is hard to lose but the key is transparency. We have to show we are doing good, but we also have to admit to our challenges and vulnerabilities. I am proud of the way that Cargill has evolved. We tell our story in good faith. We have very strong values, and we are in the business for the long run.

To feed a growing population we have to make sure that our farmers receive a fair payment for their crops and that they thrive. But at the same time we need to care for the planet. We don’t want any further deforestation. There are paradoxes that we need to manage. We are in the middle of this and want to play a role. There are a lot of conflicting issues to be managed. We cannot ignore one away in favour of another. They need to be handled and met at the same time.

Thank you GJ for your time!

The full interview will be published in my upcoming book, “Out of the Shadows: The New Merchants of Grain.”

 © Commodity Conversations ®

Gert-Jan (“GJ”) van den Akker is responsible for strategy and execution for Cargill’s agricultural supply chain businesses. He joined Cargill in 1987 in Amsterdam and held a number of positions across Cargill’s agricultural supply chain businesses, including roles with palm oil by-products in Kuala Lumpur, domestic grain markets in Tokyo, and corn and soybeans in Geneva.

GJ has also held leadership roles in Cargill’s energy, transportation and metals businesses. He was managing director of the worldwide ocean transportation business from 2007 to 2011.

In 2013, he left Cargill to become senior head of global regions at Louis Dreyfus, a privately owned food and agriculture company. He was a member of Dreyfus’ senior leadership team, a member of the Dreyfus risk committee and leader of business development in the grain and oilseed sector. He re-joined Cargill in December 2015.

You spent much of your career in shipping. What did you learn from your time in shipping that helps you in your current job?

I learnt that to be successful in commodity trading, you have to have a physical presence and a deep understanding of what is happening in the physical markets. That is clearly something that helped us as we built up our shipping operations. We had good insights into the physical movement of goods; this helped us with our trading.

Second, I learned the value and importance of building customer relationships. We were an operator, not an owner, of ships, and we had to provide our customers with a better service than any ship owner could. Sometimes it was on price, but more often it was flexibility. I also learned the importance of having very strong supplier relationships. At Cargill we treat our suppliers as if they were customers.

What does your current position entail?

Cargill is made up of four divisions: agricultural supply chain, animal nutrition, protein and salt; and food ingredients and bio-industrial. I oversee the agricultural supply chain business, what I would call the “original” Cargill. It includes everything that relates to grain, oilseeds and agricultural products, from origination along the whole supply chain to destination and distribution. It also includes all our oilseed crushing activities around the globe and includes our sugar business, Alvean, a joint venture with Copersucar, as well as our palm business.

Also, I am a member of what we call the Cargill Executive Team, a group of ten people who are accountable for strategy and who oversee the global enterprise.

What in your career has been the most challenging and what has been the most fun?

That’s a good question. I had the most fun in the shipping business. It was such a phenomenal time. I like businesses where you can invest and grow.

Without a doubt, the position I have today is the most challenging, simply because of size and accountability. It takes a huge amount of effort to grasp and understand the complexities around the world, and to manage all the different elements that impact agriculture markets. In addition, since I took on this role, we have had to make some pretty tough decisions around our portfolio of businesses. There are certainly areas where we continue to grow, but we have also taken some assets out of our portfolio. That is never fun. It often comes with job losses. Even so, although we have been managing the portfolio, our overall business has continued to grow.

Today’s environment is in itself a challenging one for commodity traders. The margins are thin, so you have to be on your toes. That puts a lot of pressure on me personally.

How have you managed your work / life balance—the stress?”

Commodity trading requires a high level of resilience. Markets don’t always go in your favour, and that can be very stressful.

I have been very fortunate in that I can see the relativity of things. I can go back home in the evenings, have dinner with my wife or family and I can let things go by. I can empty my brain of work. It doesn’t always happen, but generally speaking I can relax.

I do some exercise. I play golf. I am a mediocre player—a handicap of 15—but I enjoy it. I also spend quite a bit of time in the gym, although apparently not as much as Chris Mahoney. I love hiking. Working here in Geneva is great because it allows you to get out into the mountains in the weekends.

Good traders only talk about their bad trades—what was your worst?

I have had bad trades, but I am not sure that I want to recall them! Maybe I could tell you instead about what could have been anyone’s worst nightmare of a trade. This was back in 2009 when I was in charge of the shipping business and we had a lot of ships chartered out. Shipping rates collapsed: Capesize rates dropped from $200,000 per day to $5,000 per day in one month. Our market exposure was huge and we were worried that our charterers would default. We had to manage that exposure and ensure that we got contract performance. It took a year out of my life, but by and large we came out okay in the end.

Are markets your “passion” in life—or is it golf?

Neither! My family comes number one in my life, so if I have a passion at all, it is for my family. Managing my work / life balance has been one of the biggest personal challenges. It is tough to find the right balance. We have all made the mistake at some stage in our careers of not spending enough time with the family. But the older I get, the more I understand the importance of family. Even though my children are now grown up, I love seeing how they are getting on.

I am fascinated by—rather than passionate about—markets. I always have been. There are so many different variables that impact price. I enjoy the intellectual challenge of trying to work out what variable will have the most impact at any given time.”

How have the grain markets changed since you began in 1987?”

Although this may surprise you, I don’t think they have changed much; the business models have not really changed. Cargill’s function for the past 150 years was to be a global supply chain manager – to move food from farm to fork. Cargill has never farmed, except in the palm oil business where we operate plantations in Indonesia and pride ourselves on setting the highest standards in the industry. Instead, we build relationships with farmers, we acquire grains and oilseeds from them, we store them, we trade them, hedging our risk on the futures exchanges. We transport them, and we arbitrage between domestic and world markets. That has been what we have always done and that is still what we do!

What has changed a lot recently is the availability of new technology and data—and new ways to analyse that data. Cargill has always been at the forefront of data collection and analytics. We have always understood the value of data, whether proprietary information on the back of the businesses we are involved in, or publicly available information, such as weather.

Today, there is much more data available, and we have to able to analyse it, but our basic supply-chain business model has not changed.

Having said that, I believe the biggest change in the grain business is yet to come. With advances in technology the requirements to be successful will change, as will the services that you provide to your customers. The newer generation of farmers are latching onto technology in terms of production, and they now want to transact in a different way than they used to transact. That is all changing. Those relationships are going to change along with technology.

Is there going to be consolidation?

I think the market will consolidate to deal with excess capacity, but please don’t ask me how that will happen because I don’t know. It doesn’t have to be among the big five or six companies.

The last time we were in a situation of excess capacity was in the late 1980s and 1990s. We saw two huge players exiting the market because they no longer thought that the risks were worth the rewards. Could that happen again?

 Players come and go – that will never change. The way that the industry manages risk is going to have to change. In today’s world, you need the right talent, as well as investment in IT systems. In that sense, scale is critical—along with a physical presence. It will become increasingly difficult for companies with no scale or significant physical presence to participate in this business.

However you have to guard against bureaucracy. You can’t let bureaucracy stifle trading or discourage talent. There are still things we at Cargill must do to improve, but we know that adding layers of bureaucracy adds to costs. You can’t blow up the costs, stay competitive and be successful.

The full interview will be published in my upcoming book, “Out of the Shadows: The New Merchants of Grain.”

© Commodity Conversations ®

Jason Clay heads up WWF-US’ work on global markets and trends related to food. He launched WWF’s global work on agriculture, aquaculture, and market transformation for food and soft commodities companies. I spoke to him by phone from Washington DC.

The WWF seems to be an organization that looks for solutions to problems rather than just naming and shaming. Is that a fair assessment?

Naming and shaming is also very broad brush; you can name and shame a lot of people who aren’t actually the problem. If you want to find solutions you have to build coalitions, working quietly and more behind-the-scenes. This is WWF’s strategy. To solve most global problems, everyone should be part of the solution. At least that makes change happen faster.

WWF is a science-based organization. We base our programs on science and research. For us, it is “Get informed, and then get involved.”

WWF has been involved in setting up a number of sustainability certification programs such as the Round Table of Responsible Soy and the Round Table of Sustainable Palm Oil.

The fundamental question is, “Why do we have certification bodies?” The answer is “Because governments aren’t doing their job to protect the planet for future generations.”

Certification is not the best option, but right now it’s the one we have. Can it be better? Sure.

But you once said that the certification agencies are about certifying the top 10 percent, while it’s really the bottom 25 percent that is causing most of the damage and needs the most help.

Unfortunately we are often quite willing to let the perfect get in the way of the good. But once producers start seeing that better practices achieve better results they begin to ask how they can implement them too.

But, at the end of the day the biggest environmental impacts come from the bottom 25 percent. That’s where we need governments. The poorest performing producers either need to improve, or get out. Only governments can make that happen.

What is the role of traders, if any, in this?

Most people don’t understand that commodity traders are very efficient at what they do. The problem is that we’re asking traders to do more than the commodity trading system was designed to do. Commodity trading allowed buyers to purchase a product that is interchangeable with any other ton of the same product. If you buy number two yellow corn, you receive number two yellow corn.

From about 1860 to the 1970s, commodities were defined by physical properties, weights, moisture content, foreign matter, broken pieces, and other physically verified attributes.

Since the 1970s, however, people have begun to ask commodity traders to address such issues as labour conditions (e.g. minimum wages; child labour) and environmental impacts (e.g. pesticides, deforestation, soil health, etc). Buyers are asking traders to verify specific traits that pose reputational risks to retailers and brands that are more inclusive than weights and measures and physical properties.

What are the challenges traders face to make these changes happen?

Trading companies are trying to find ways to put such verification systems in place, but they have two problems. First, they need buyers to commit to more than one off purchases. Depending on the commodity, they need multi-year commitments.

If a trader puts systems in place to verify how a product is produced, it costs money. They need multi-year contracts to offset those costs. Otherwise, the trader could be stuck with this initial cost. If traders could get a five-year contract from a company to buy more sustainable palm oil, soy or whatever, they could amortize their one-off costs over that five-year period.

A trading company may make 1.5 to 3 percent on a single trade. If the verification cost is 1 percent, then on a 1.5 percent margin you’ve already lost more that half of your profit. But if the initial cost can be amortized over five years it gets down to a point where it is negligible. But for that to happen the downstream buyers have to put the money where their mouth is, but most have not done that. That is the issue that traders are facing.

So we have two issues to address. One: how do we turn retailer and brand commitments into actual purchases? Two: how do we get traders to work together without risk of collusion?

From a sustainability point of view we need companies to work together. Companies have to work together to solve sustainability issues. This is not about price fixing. It’s about internalizing environmental externalities into prices.

We have to work together to manage the planet. We can’t manage it one producer, one trader, one retailer, one brand or one government at a time.

You mentioned externalities. Although consumers say they will pay for externalities, they don’t. What could be done there?

If all commodities were produced more sustainably, consumers wouldn’t have a choice. Changing the definition of a commodity could help. Number two yellow corn could also be more sustainable. It is not clear that the price would go up, especially if producer prices for less sustainable products declined because they cost society more. We need to get the price signals right—today sustainable products cost more, but unsustainable products cost society far more. But ultimately, the consumer is the polluter. And the principle is that the polluter pays.

When you see what’s happening, how we’re living at 1.3 or 1.5 planets per year, do you get pessimistic?

Sure, but we only have one planet, and we have to address sustainability issues one way or another. My main motivator is my children’s future, but also the future of all other living things on the planet. This is literally about life on earth.

Thank you Jason for your time.

This is an extract of an interview with Jason, which I will publish in full in my upcoming book, “Out of the Shadows: The New Merchants of Grain”

© Commodity Conversations ®