Sleep and obesity

When I was researching my book « The Sugar Casino », one of the questions that puzzled me was why we are consuming more calories than in the past. Referring to USDA data, I wrote,

« According to the loss-adjusted food availability data, Americans are consuming more calories per day than they did 40 years ago. In 1970, Americans consumed an estimated 2,109 calories per person per day; in 2010 they consumed an estimated 2,568 calories….

The average American is eating 459 calories more each day today than he, or his parents, were eating in 1970. »

I have now, rather surprisingly, found part of the answer to that question in « Why We Sleep: The New Science of Sleep and Dreams » by Matthew Walker, a British scientist and professor of neuroscience and psychology at the University of California, Berkeley. He was previously a professor of psychiatry at Harvard Medical School. (An article in last week’s Guardian newspaper summarised some of the main themes of the book.)

Regarding the effect that sleep has on health, particularly on obesity, Mr Walker explains that two hormones in your brain control your appetite: leptin and ghrelin. Leptin signals a sense of feeling full, while ghrelin triggers a strong sense of hunger.  He writes that clinical tests have shown that « inadequate sleep decreased concentrations of the satiety-signalling hormone leptin and increased levels of hunger-instigating hormone ghrelin. »

Looking to see what this might mean in practice, one clinical test found that individuals who slept between four and six hours per night consumed 300 calories per day more than individuals who slept eight and a half hours per night. He writes, « Scale that up to a working year, and assuming one month of vacation in which sleep becomes abundant, and you will have consumed more than 70,000 extra calories. Based on calorific estimates, that would cause 10 to 15 pounds of weight gain a year. »

But it is not just a question of how much you eat, but also what you eat. Sleep loss increases the levels of endocannabinoids which, like marijuana, can give you the « munchies ».

In one test, participants were given access to an unlimited lunchtime buffet. « Despite eating almost 2,000 calories during the buffet lunch, sleep-deprived individuals dove into the snack bar. They consumed an additional 330 calories of snack foods after the full meal, compared to when they were getting plenty of sleep each night. »

Tests also found that sleep deprived individuals were 30 to 40 percent more likely to have cravings for sweets, carbohydrate-rich foods, and salty snacks compared to protein-rich foods such as meat or fish.

And Mr Walker counters the argument that your body needs more calories the less it sleeps. He writes, « Sleep, it turns out, is an intensely metabolic active state for body and brain alike. » What’s more, the less you sleep, he argues, the less active you will be during the day. He writes, « inadequate sleep is the perfect recipe for obesity: greater calorie intake, lower calorie consumption. » He continues,

« Of course, the obesity epidemic that has engulfed large portions of the world is not caused by lack of sleep alone. The rise in consumption of processed foods, an increase in serving sizes, and the more sedentary nature of human beings are all triggers. However, these changes are insufficient to explain the dramatic escalation of obesity. »

To emphasise the point, Mr Walker plots the reduction in sleep time (dotted line) over the past 50 years in the US on the same graph as the rise in obesity rates (below).

He summarises the current state of scientific research as follows: « Short sleep (of the type than many adults in first-world countries commonly and routinely report) will increase hunger and appetite, compromise impulse control within the brain, increase food consumption (especially of high-calorie foods), decrease feelings of food satisfaction after eating, and prevent effective weight loss when dieting. »

And as a warning for future generations, he argues, “We are now observing these effects very early in life. Three-year-olds sleeping just ten and a half hours or less per night have a 45 percent increased risk of being obese by age seven than those who get twelve hours sleep a night. To set our children on a pathway of ill health this early in life by way of sleep neglect is a travesty”

Going back to my original question, it is possible that changing sleeping habits explain 300 of the more than 450 extra calories that we consume each day compared to our parents. The rest, I imagine, can be explained by the greater availability of calorie-rich processed foods and larger portion sizes.

So if after a long night entertaining customers you are now reading this blog on your telephone while trying to stay awake at the back of a conference hall, let yourself drift off. It may mean you eat less at the conference lunch buffet!

It is about people

A conversation with José Orive, Executive Director of the International Sugar Organisation

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

I grew up on a ranch in Guatemala; we were mainly cattle, but we did have some sugarcane and we fed the molasses to the cattle. My brother stayed on the farm and I studied law at Georgetown University in the US, and then did a masters degree in international trade agreements. That led to me working with the Guatemalan diplomatic service as a trade negotiator.

So you are a diplomat with experience of trade negotiations. Does that help in your current role?

It does, especially given the sensitivity around sugar at the moment. Different people have different expectations—and the cultural differences are enormous. Although most people view the ISO as “being about statistics,” we are really about people.

But what does the ISO do exactly?

We are a United Nations body that came out of the Bretton Woods Agreement. It was part of the post-World War era, where food security was of paramount importance.

At first, the ISO intervened actively in the world sugar market, telling people what to produce, when to market it, what stocks to hold and what price to sell at. But by the end of the 1970s, countries realized that the market did all those things better, and did away with the so-called “economic clauses” of the agreement.

Our role now is to monitor, analyse and study the world of sugar and biofuels. Our goal is to produce intelligence that enriches people’s decision making. We avoid telling people what to do, but we lay out the variables and the key factors around issues that are pertinent to the sugar world.

We have 88 country members, including the EU, which acts as one party, and 10 staff.

Is it part of your mandate to defend the sugar industry?

Yes it is. We have an advocate role. It is an interesting function, as many governments do not have a single voice on the issue. Sometimes we act as arbitrators between ministers of health and ministers of trade and agriculture—around the importance of sugar for sustainable development and its role in nutrition as part of a healthy diet.

You have to remember that the sugar industry is a key driver for development and incomes in rural areas in many developing countries. When you visit these countries you can see how villages and small towns can be lifted up when a sugar mill opens nearby. You will see schools and hospitals being built, and then the next generation ends up with a college degree. That is something that governments have to encourage. Sugar plays a huge part in that; it is a driver for development.

Does the ISO also get involved in arbitrating between farmers and millers?

We are currently undertaking a study of the payment systems of cane and beet worldwide. One of the main drivers for this has been the desire of growers of beet and cane to participate in downstream projects such as ethanol, electricity co-generation and green plastics.

Some millers want farmers to participate in the downstream products, but they argue that farmers have to invest with them and assume some of the risk. Other millers say, “No, we acquire the raw material and we pay for it. What we do with it is our business and not yours, because you have been paid. We can lose money in a bad year if the price of these products is
low, but that is our risk and not yours.”

With governments becoming increasingly anti-sugar, are they asking themselves why they should be members of an organization whose role it is to promote the sugar industry?

I haven’t seen a country or a government directly question their membership as a result of their position on sugar. That said, it is almost impossible to stop finance ministers from considering a sugar tax. They look at the additional revenue and it is hard for them to resist. Sugar taxes are driven both by politics and revenue. The tax in Mexico raised $1.2 billion over two years.

Do sugar taxes reduce sugar consumption?

If you take Mexico as an example, domestic sugar consumption dropped during the first year after the tax was introduced in 2014-15, but by the beginning of 2017 it was back to its pre-tax level. By September 2017, consumption was above the pre-tax level.

Politicians suppose that if they make a product more expensive people will stop consuming it, or consume less of it. But that is not the case when the product is relatively cheap to start with.

But aren’t sugar taxes just taxes on the poor? Rich people don’t care, but people on low incomes do. And as you have shown in Mexico, they don’t consume less; they just pay more in taxes.  

That is exactly the case in Mexico where sugar consumption is overwhelming concentrated among the poorer sectors of society.

But is that money being given back to the poor in terms of education or healthcare?

That is the question. I don’t understand why governments aren’t making a big fuss about all the schools and hospitals that they are building with the revenue from the sugar tax. But they aren’t. It is total silence.

If you have $600 million coming in per year and you are only spending $200 million on schools and hospitals, people will start asking what you are doing with the rest of the money. And people will start asking whether the money has been spent efficiently. Politicians hate that.  We have tried to look at the figures in some countries, and we must try to get the politicians to stand up and be transparent with the numbers.

Some advocates of sugar taxes have asked for the revenues raised to go into a separate fund, but in most cases this hasn’t happened. The money just gets funnelled into the general kitty box.

Are you arguing that the sugar taxes have not had any effect on sugar consumption?

Sugar taxes don’t seem to have affected consumption in developing countries, but per-capita consumption in niche markets of developed countries is falling, and the anti-sugar lobbyists are claiming credit for that.

But per-capita sugar consumption in developed countries has been falling for the past fifty years.

Historically, global sugar consumption has been rising at 2.0/2.1 percent per year. Now it is rising 1.6/1.5 percent. The growth in global sugar consumption has slowed, but the total amount consumed is still growing. England is an exception to that; total sugar consumption is dropping in the UK.

Apart from sugar taxes, what are the other challenges facing the industry?

Producers are realising that they have to diversify, and not to put all their eggs in one basket. The companies that are diversified are doing well in spite of the current low sugar prices. I think the traditional model of specializing in, and just producing, sugar is outdated.

I also believe that more effort needs to be made to bring together cane growers and millers, beet growers and factory owners. The industry also needs to work together better to share best practises in terms of sustainability, nutrition and new technologies.

And what are your main challenges at the ISO?

First, we have to stay relevant, to constantly tweak our products and services to make sure that they are relevant to our members. I am sure that we can do more with the data that we have, and we are working on that.

Second, we have not only to maintain our existing membership but we also have to bring in new members.

Third, we have to organize good events—events that are rich in content, interactive and dynamic.

Fourth, we must build relations with our sister organisations in other commodities, to learn from them and share with them.

Fifth, we must learn how to better engage with NGOs, for example on child labour and sustainability, and with health organisations, on sugar and nutrition. If governments are going to adopt policies that affect our industry, then our industry needs to have a seat at
the table.

Where are the success stories in the sugar industry?

There are many. The role that sugar plays in rural development is well documented, but it also has a role in nutrition. Guatemala has the world’s most successful micronutrient programme with the fortification of sugar with Vitamin A. The programme has completely eradicated infant blindness in the country, as well as leading to a fall in child mortality. Malawi and Tanzania are now following Guatemala’s example. We need to do more
to highlight these successes.

Thank you José for your time.

A conversation with Arnauld Petit, Executive Director of the IGC

“Study grain long enough and the world shrinks.” Dan Morgan

As some of you may know, I am currently working on a book that will look at the ways in which the grains markets have changed in the forty years since Dan Morgan wrote Merchants of Grain back in 1979.

At the time, Dan had already identified many of the trends that would drive the grain markets into the future.  On the demand side, he wrote about population growth, rising incomes, changing diets, and in particular the increase in demand for meat protein. On the supply side, he foresaw that agricultural yields would continue to improve. He also foresaw the increase in international trade that would accompany globalisation.

But what didn’t he foresee? What have been the shifts in the past 40 years that have moulded the current grain trade? To help me answer that question I went to see Arnauld Petit, the Executive Director of the IGC, the International Grains Council, based in London.

By way of introduction, Arnauld told me that the IGC is an intergovernmental organisation that was formed post World War II in order to ensure an egalitarian distribution of wheat. Today, the IGC has 56 member countries, and its mission is to facilitate international cooperation in the grains trade; to promote openness and fairness in the grains sector; and to contribute to grain market stability and to enhance world food security. It does this by improving market transparency through information sharing, analysis and consultation on market and policy developments.

In 2012, the IGC joined the Secretariat of the Agricultural Market Information System (AMIS), an initiative established at the request of the Agriculture Ministers of the G20. AMIS covers four crops (wheat, maize, rice and soybeans) and aims to promote food market transparency and the coordination of policy action in response to market uncertainty.

            The GTC holds an annual conference in London in June that brings together the public and private sector in the world of grain. Last year the conference attracted over 350 delegates from 60 countries. I made a note to myself to attend this year.

When I contacted Arnauld I told him about my book project, and I warned him that I would be asking him to list what he considered to have been the top five most significant shifts in the grain market in the last forty years. He had since given it some thought, and we got right into the heart of the matter.

“Number 1 on the list,” he told me, “must be the shift to Asia, particularly the economic take-off in China. Rising consumer incomes, combined with urbanisation, have had a relevant effect on diet and food demand. As the Chinese get richer they eat more meat and fish. This demand for meat has driven the huge increase in vegetable protein imports, and has been the driver behind the explosion in soybean production worldwide. Forty years ago, China imported only a marginal quantity of soybeans. In 2019 the country is expected to import 87.5 million mt, more than half of the total trade in soya.

“At the same time,” he added, “Asian people are eating more wheat products. This has in turn increased their demand for wheat.”

“And Number 2 on the list?” I prompted.

“Before the First World War, Russia was a major exporter of wheat, but by the 1960s the Soviet Union had turned around to become a major importer of grains. In 1979/80, the USSR imported 12 million mt of wheat and 14.5 million mt of corn; and in 1984/5, the bloc imported a massive 28 million mt of wheat and 20 million mt of corn. Now the situation is quite different: in 2018/19 Russia alone is expected to export more than 36 million mt of wheat and 3 million mt of corn. Meanwhile, Ukraine is expected to export over 16 million mt of wheat and 28 million mt of corn. That is an impressive turnaround that nobody would have been able to predict.”

“Do you think Russian exports will continue to grow,” I asked.

“Not necessarily,” he replied. “Most of the new production is in Siberia where it is too cold to plant winter wheat. The short Siberian summers leave farmers only a short window to plant and to harvest; production in the region depends very much on the weather.

“In the meantime, the Russian government is keen to move from grain production to livestock production, mainly pigs. They view this as a way to add value to their supply chain. If the Russian meat industry continues to expand then we could see a decline in grain exports. Some people are asking whether we have already seen peak exports.”

“And what would be third on your list of structural changes?” I asked.

“It would have to be the expansion of the biofuels industry. Forty percent of US corn is used for ethanol production while 50 percent of EU rapeseed is used for producing biodiesel.”

“Those figures are surprisingly high,” I interrupted. “Such a big diversion to biofuels must have had a big impact on prices.”

 “Not really,” Arnaud replied. “When the US ethanol industry started to take off in the mid-2000s there was a big debate in the press as to whether corn should be used as fuel: the “food versus fuel” debate. Looking back, it is now evident that that debate was flawed. US ethanol production hasn’t seriously impacted either the price or the availability of corn for food or feed.”

“Why is that?” I asked.

“Because corn contains both protein and carbohydrates; you can use the protein for animal feed and use the calories to drive your car. When you make ethanol from corn you get a by-product called “Distillers’ Dried Grains with Solubles” (DDGS), which can be used as a feed ingredient for livestock. Each 56-pound bushel of corn used in dry-mill ethanol production generates about 17.4 pounds of DDGS.

“A similar situation exists in Europe with rapeseed: you use the oil for biodiesel and the high-protein rapeseed meal as feed for animals.

“But there is another reason why the whole fuel versus food debate of the early 2000s was flawed. People forget that in Europe after the Second World War, 70 percent of your acreage went to feeding (fuelling) your labour force, including feed for your horses.  Today a rapeseed farmer will see only half of his production going for fuel! The debate was based on the assumption that the market is fixed, and that we have a choice between food, feed and fuel. That is incorrect.”

“But what about the negative environmental impact of using land to grow food for fuel? Aren’t we losing biodiversity?”

“Not in the EU or US at least,” Arnaud told me. “Arable Land has been falling as from 2008, while forestry and urbanisation has increased.”

“Is that because yields have increased?”

“We saw yield increases in Europe until about 2007, but these have now plateaued, particularly for wheat. Corn and soybean yields have continued to increase in the Americas because of GM technology and new breeding techniques. Remember there is no GM wheat anywhere. Wheat yields depend on the weather: sometimes good and sometimes less good.

“What is 4th structural shift on your list?” I asked.

“It is the development of the starch industry for sweeteners and food use. High Fructose Corn Syrup (HFCS) has taken a significant part of the market for sweeteners in both China and the US, largely because it is cheaper than sugar. Isoglucose, as HFCS is called in Europe, has had less impact in the EU, largely because production has been restricted through quotas. Those quotas have now been lifted, and we will be watching closely to see how the market develops.”

“And the last one on your list?” I asked Arnauld.

“Number 5 on the list has to be the big expansion of soybeans. In 1978/19, global soybean production was just 77 million mt, but is set to reach 363 million mt in 2018/19 according to our latest forecasts. This has been achieved through a heavy expansion of acreage around the world, and especially in the US, Brazil and Argentina.  Demand and trade have also risen especially strongly and we have seen some significant shifts over the decades, with Brazil now by far the dominant exporter.

The question now is whether palm oil will follow the same path, and compete with soy oil in all its outlets: We are following this carefully. ”

“Thank you Arnauld. Your comments have been very helpful. Is there anything that you would like to add?”

“Only that I look forward to seeing you at our conference in June!” 

The ebbs and flows of sugar trading

The recent announcement from Olam that they are exiting the sugar trading business has provoked mixed feelings among those left in the business, especially as it comes fast on the heels of Bunge’s sale of their own sugar trading business to Wilmar. Fewer trade houses may mean less competition, but are these just more rats leaving a sinking business?

Forty years ago, when I joined Cargill, I was told that the company made no money on selling grains to destination: the FOBS to CIF portion in the supply chain. Instead, the company viewed these sales as a necessary evil. The money was made upstream: tiny margins on (at that time) selling seeds, fertilizer and other chemicals to farmers, buying and storing the grain at harvest time, shipping it in barges down the Mississippi, storing it again at the port and then elevating it onto the ships. Cargill also made money by offering risk management services to the farmers, and even executing their transactions on the futures markets.

The final stage of selling and shipping the grain to the final buyer was a mug’s game that you had to play as best you could, without losing too much. As Bunge, Cargill and the other heavyweight trading companies knew 40 years ago, the money was in originating grain, not in marketing it to destination.

After completing my training program I moved to Cargill’s sugar department. There I looked after the futures and kept the position, first in London and then in Minneapolis. It was a sharp learning curve; during my time on the futures desk the sugar price rose from 9c/lb to 44c/lb, and then back down again. We didn’t get every move right, but we made money and had fun doing so!

At that time Cargill was the new kid on the block in the world of sugar trading. The company had launched the desk a few years prior to me joining, and then had promptly lost their trading team to Phibros. At that time, EDF Man, Sucden, Tate and Lyle, Woodhouse Drake and Carey, and Kerry (led by the King of Sugar, Robert Kuok) were “the big five” companies that dominated the sugar market.

The big five knew the business inside out, and they had the long-standing relationships that helped them to get trades done. They had all made considerable fortunes in the 1974 sugar bull market (that had seen sugar prices rise to 66c/lb). They were well financed, well connected, well trained and with a considerable depth of experience and expertise. All that the two American newcomers (Cargill and Phibros) could hope for were a few crumbs from the table.

Back in London, Cargill transferred me from futures to white physical sugar. My new role was to buy white sugar from European producers and sell to the MENA region. At that time most sugar-importing countries bought through government tenders. I had a miserable time trying (and failing) to make money by buying FOBS Europe and sell CIF MENA. It was exactly the sort of business that the company had warned me against on my training program.

I found life as a physical sugar trader so tough that I eventually threw in the towel and left to be a broker, first on the futures and then on the physicals. After I left, Cargill gradually expanded their footprint in the sugar sector and eventually invented a profitable business model of leveraging their loss-making physical business into huge profits in the futures markets.

A byproduct of this, however, was to make the standalone physical business even less profitable. As other companies tried to replicate Cargill’s model, the competition to make the physical sales became even fiercer. Over time, traders ended up losing more on the physicals than they gained on the futures. The model broke through overuse, and no one has yet found a satisfactory, and equally profitable, alternative,

Trading companies tend to do well when a market is dislocated— when traditional trade flows are disrupted and buyers have to find alternative supplies. This can occur because of poor weather, or because of government intervention, such as tariffs. Trading companies with a global footprint can really add value in such disrupted markets, but they struggle to make ends meet in dull ones.

If not dull, the current situation in the world sugar market is difficult. Supplies are ample and producers, particularly in India, are sitting on large stocks. Because of the nature of the cane cycle, this situation has lasted longer than many had hoped. All that traders can do is be patient and to wait for the cycle to turn.

What applies to sugar also applies to the companies that trade sugar. New companies enter a market when trading conditions are favorable; old companies leave when conditions deteriorate. Unfortunately this often happens with a lag: new entrants usually appear after markets have peaked; existing participants often leave just as conditions are about to turn up.

Of the “big five” companies that dominated the sugar market in the 1970s, two have disappeared completely. In volume terms the “big three” list today would arguably comprise Alvean, COFCO and Wilmar (including RAW), with EDF Man, Sucden and Dreyfus following closely behind.

The main participants have changed, but this amount of ebb, flow and natural wastage is not out of line with what has occurred in sectors outside of the commodity business. It is less than what has occurred, say, in technology or healthcare.

The physical sugar trade has always been tough, and companies have continually had to reinvent themselves to thrive and survive. Structural change and disintermediation are making things even tougher.

But then no company in any sector can sit back in the belief that what worked in the past will work in the future. As Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.”

“We are becoming the value chain”

A conversation with Ian McIntosh, the CEO of Louis Dreyfus Company – Part Two

The CEOs of both LDC and Glencore Agriculture come from the sugar market, as did the previous Vice-Chairman of Cargill. Why do you think that ex-sugar traders reach such prominent positions in the business?

 That’s a question I didn’t expect! Sugar has always been a truly global commodity with a global futures market, a global geographic producer base – and a wide consumer base. It has a direct link to the end user through white sugar, as well as an intermediate refining stage. As such, it has the ability to teach you a lot about the different elements that you need to understand the business. People that come up through the grains or oilseeds tend to be from a smaller part of much bigger markets. Sugar propels you very rapidly into a global focus. Sugar has always been an excellent training ground for commodity traders.

Which leads me on to a difficult topic. The Brazilian sugarcane industry has been exceedingly challenging for companies such as yourselves and also Bunge. Can you see any end to the tunnel?

As you say that is a difficult question; it requires a lengthy answer, possibly too lengthy for this conversation. However, I will do my best to walk you through my thoughts.

First, you have to realise that sugar is a multi-faceted commodity. It is a food and energy commodity with a long cycle compared to grains and oil seeds. Sugar production responds relatively slowly to price. Sugarcane is a grass; once it is planted it stays in the ground and can be cut for up to six or seven years. As such the cycles are longer and more complicated.

Regarding the Brazilian sector, I read recently that Brazilian cane production had increased tenfold in the past ten years. That is complete nonsense. Cane production is up only a couple of percent on ten years ago, and there has been no expansion in area in the past five years. In addition, contrary to popular belief—and with one small exception—cane is not grown anywhere near the Amazon jungle.

Once the juice is squeezed out of the cane the dry matter, called bagasse, is burnt to provide electricity both for the mill and for the surrounding areas. The sludge, the vinasse, from the production process is reapplied to the land as fertilizer. The cane fields in Brazil are rain fed so there is no need for ground water irrigation, and wastewater from the mills is recycled and reused. All this means that sugarcane is a relatively environmentally-friendly crop.

In addition, about half of Brazil’s sugar cane is used for ethanol, nearly all of which is used domestically. The sugarcane absorbs carbon dioxide when it grows and some of this is then released back into the atmosphere as the ethanol is burned. In terms of net absorption and release, ethanol produces ten times fewer greenhouse gases than gasoline. This is extremely positive for the environment

Meanwhile, the majority of cars in Brazil are now what is called “flexfuel”: they can burn either gasoline or ethanol. In addition, the sugarcane mills have significant flexibility as to how much sugar they produce and how much ethanol. This provides tremendous flexibility to the mills and “optionality” to the trading companies that own them. Cane is therefore an attractive crop for companies such as ourselves who thrive on flexibility and optionality.

So the Brazilian sugarcane industry has all the ingredients for both economic and environmental success. However, the sector has suffered from government intervention. Successive governments have kept gasoline prices below their economic and environmental cost; this has made it difficult for ethanol to compete and resulted in losses for the sector. The president-elect seems supportive of the country’s domestic ethanol industry and we are optimistic that this situation will be changed going forward.

On the sugar side, world prices have been negatively affected over recent years by significant production increases in Thailand, India and Europe. It looks as if this is slowly changing: the current forecast is for a global sugar deficit for next year and the following year. So I think we will slowly be pulling out of this down cycle in sugar prices.

Having said that, there are still a lot of questions over long-term sugar consumption trends as well as over ethanol policy globally.

 Continental Grain sold their agricultural merchandising business many years ago to Cargill. They apparently felt at the time that the risks weren’t worth the rewards. How difficult is it for a company like LDC to shift these massive quantities of foodstuffs around the world while at the same time manage the associated risks?

That comes back to an earlier point. When Continental Grain sold their trading business most trading companies were trading in a traditional way. The current trend towards disintermediation makes it easier for us to manage our risk. It mitigates risk rather than increases it. If you are your own consumer you are taking your own credit risk.

It is also clear that diversification does have a clear benefit. A number of the companies that have either left the business or been consolidated were relatively narrow sector. The correlation across commodities varies: some are highly correlated but others aren’t. For example, the correlation between coffee and corn is low. The risk management benefits of a portfolio approach are significant, as too are the benefits of a diversified global footprint.

It is true that you have a different type of risk the further downstream you go, and the more you immerse yourself in developing economies. Back in the 1990s you were mainly concerned with market risk. Now you are concerned with market, geopolitical, country risk and company risk. Having an integrated approach mitigates that.

When I joined Cargill they always said that if you traded twenty commodities, five would have a lousy year, ten would have an OK year and five would have a stellar year.

 The last 20 years have proven that. You always have some sectors of the portfolio that are having a tough time while others are performing extremely well.

Trading conditions have been tough recently for the grain trading companies. To what extent do you think this is structural and to what extent cyclical?

Grain is a simple commodity with relatively low barriers to entry. It has an animal nutrition component and a human nutrition component. It also has a biofuel component through corn. Companies that are successful today in grains participate in all three sectors. The value proposition today is integrated logistics across geographies, and with links to oilseeds.

Having said that, a combination of over-supply and competition means that the grain market is currently difficult, but that is part of the cycle. All commodities are the same in that sense.

How do you see technological change affecting the business into the future, particularly Blockchain?

Blockchain is part of a broader move towards digital documentation. New technologies, like blockchain, can mitigate a number of risks and work well with traceability and the integrated value chain approach that we are pursuing. They represent a significant move in the right direction in making the agricultural supply chain appropriate to the requirements of consumers.

LDC did the first Blockchain transaction in agricultural commodities—a cargo of soybeans to China—and we intend to remain at the leading edge of technology. Having said that, I don’t see Blockchain as revenue transformative. I see it as a mandatory evolution of the value chain. Overcoming the challenges of integration, interoperability and industry standards will create a more robust, efficient and transparent way to manage our flows and reduce operational risk. It will also improve the credibility of the supply chain. In addition, it will lower barriers to entry and potentially bring more liquidity to our market.

About 30-40% of food is wasted between farm and fork. How can LDC help to reduce that wastage?

Most food waste occurs outside of the supply chain in which we operate. In most cases LDC is not a food producer, so our ability to reduce waste at the farmer level is limited. At the other end of the chain the fact that supermarkets sell goods with defined sell-by dates—that may or may not be appropriate—is not something that we can control. That is not to say that we have no desire to control it, but we have no interface with that. It is therefore wrong to say that the solution to food waste sits within the commodity-merchandising sector. There is virtually no waste in what we do, and quite often what we do regard as waste is a by-product, which is further used.

Would you recommend a young person to enter the business today?

Yes very strongly. We operate in a unique sector—and it is more unique now than ever—where you can combine an interest in geopolitics, with economics, with logistics, financial elements and at the same with industrial activities, and with agriculture. It is the most multi-faceted business that I can think of. That’s what attracted me to commodities in the first place.

One of the areas where a young trainee can come in and really make a difference is in how the world is nourished, and how farmers can not only survive, but thrive. In addition there is the whole area of traceability, sustainability, human rights…it is a hugely multi-faceted sector. For any young individual with an ambition to be part of a global business it is a great career.

LDC is an exception in that your chairperson is a woman, but the commodity merchandising business is generally male-dominated. Why do you think that is, and what should the industry be doing to encourage more women to join the sector?

That is an important question. It is important that we convey the message that this is an interesting career where people can make a real difference—where people can succeed. I strongly believe that there is no reason why that should be male or female—or anything—centric. Our business requires a broad set of skills that can be found in everyone, irrespective of their gender, nationality, etc.

As to why the percentage of females in senior management positions is low, it may be due to a combination of historical factors. Nothing would give me greater pleasure than to see a more balanced situation and I am committed to make that happen.

Commodity trading has always had the reputation of being very macho…

When I started in the business that was probably true, even to the noise level on the trading floor. We didn’t have instant messaging and electronic communications. You shouted down the telephone and if you weren’t getting your message across you shouted a bit louder. That did tend to come across as quite an aggressive environment, but that’s not to say that there weren’t some extremely successful female participants even then. My head of grains when I worked in Paris was female.

Commodity trading today is a much more diversified and complicated business We need the best talent that we can find, whatever the gender.

What advice would you give anyone joining the business today?

First, maintain a high level of ambition. Ours is an industry where people can progress very rapidly when they have the right skill sets. So don’t be afraid to push. People’s careers develop by filling vacuums. Vacuums occur all the time. You must never be afraid to put your hand up to fill the vacuum. People succeed in this business on their ability, not because of some hierarchy.

Second, remain humble. There is a graveyard of egos in this business. Recognize what you don’t know. Recognize that there are people that do know and learn from them. You can’t learn if you can’t listen. Listen to people.

Is there anything that you would like to add?

What I really want to stress is that preconceived notions of what a trade house is and does no longer apply. Those notions are outdated.

I would also like to emphasise the importance of adaptability. The companies that succeed are the ones that rapidly recognize change, and then adapt their structures and staff accordingly.

I started life as a “commodity trader” and I have never lost that trader’s DNA; it runs through everything I do. However, I and we as a company are much less traders than we were thirty years ago. And that trend will continue.

People still use the term “trade houses” to describe us, and I think it will be hard to change that. However, I don’t think there is such a thing as a trade house any more. We are all supply chain operators within the agricultural sector, but we are also nutrition companies. And we are all moving in our different directions.

But it will take a while for old mnemonics to change.

Ian, thank you very much for your time and for what has been an interesting conversation.

“We know where we are going”.

A conversation with Ian McIntosh, CEO of Louis Dreyfus Company – Part One

Good morning Ian, first of all congratulations on your recent appointment as CEO. Could you tell me a little about your career path with the company?

I joined Louis Dreyfus in 1986 as a trainee on their domestic grains desk in Norfolk in the UK. Relatively quickly I moved to London where I ended up running the UK grains desk before moving to Paris to trade global feed grains. After Paris I moved to Melbourne to trade Australasia grains. In 1993 I moved back to London as a sugar trader and in 1996 I took over as manager of the global sugar trading operation, which I ran until 2004, adding sequentially coffee, cocoa, rice, ethanol, grains.

In 2007/2008 I exited LDC to create a new company with the LD group, Edesia Asset Management. It had a brief to use the insights, information, access and skill sets gained at LDC to the benefit of third party capital, and to create a fund management entity. We launched in November 2008—which was probably the worst time ever to launch a hedge fund—but by 2010 we had $3 billion under management. We were one of the largest commodity focused asset management groups in the world. It was a great story.

By 2016 the hedge fund world was undergoing a period of change, a combination of investor dissatisfaction with commodity returns—not our returns, but commodities as a sector. This led to a large number of high profile hedge fund closures. We certainly saw a change in sentiment for hedge funds as a whole. In consequence we had gone from 52 investors in 2012 to 17 investors by end 2016 when our assets were running at $1.7 billion. We were still one of the largest, if not the largest, commodity hedge funds in the world, but we realised at the group level that the future of the business was uncertain. Concentrating on agriculture we had become a niche within a niche. We decided that we would profit from our successful track record and the ability to return capital to investors in a profitable performance year. We exited with a strong reputation and we moved key individuals, who had gained experience outside of the physical trading world, back into LDC.

We closed Edesia at the end of 2017 and I was asked to come back to LDC where I became Chief Strategy Officer. I took over as CEO in September 2018.

Knowing what you know now, do you think that there is a future for hedge funds in agricultural commodity markets?

Unless you have a deep understanding of the physical markets and the geographical relevancies of the different commodities it is challenging to be a hedge fund in the commodity sector. The necessary skill sets usually sit within large integrated physical commodity trading businesses. So in a sense the only way a hedge fund can succeed in commodities is by being closely aligned to a trade house’s geographic footprint and management.

That poses questions regarding structure and information conduits. We managed that challenge well at Edesia, but it is a big hurdle to any new start-ups. I suspect that the probability of success for any new entrant is low.

However, I do think there is a future for integrated asset management in commodities, but not necessarily via hedge funds. Our investor base in Edesia was primarily large pension funds, sovereign wealth funds, and corporate and state pension funds. Most of the commodity trading companies today are not listed, and it is difficult for investors to get access to what they are looking for—the relatively clear long-term agricultural story. There is an appetite for external capital to find a way into the sector. That may be through private equity or venture capital; it probably today isn’t through hedge funds.

Glencore recently opened up their agricultural commodity unit to outside capital. Is this something that LDC would consider?

That is a decision for our shareholders and Akira B.V. the Louis-Dreyfus family trust that has a majority shareholding in LDC. Our Chairperson, Margarita Louis-Dreyfus, has said on several occasions, including recently, that Akira wishes to keep all options open, with the interests of the company always as a priority. She has said that this could be in many forms, including strategic partnerships. So, no options are excluded. We are also looking to grow different parts of our business through joint ventures, partnerships, acquisitions, etc.

Algorithmic trading systems have changed the way markets move. Do you think that computers now make better traders than humans?

The advent of algorithmic trading systems is just one of the changes that the sector has experienced. Our business has changed completely since I joined back in the 1980s. I remember when I went on my first business trip to Russia; counterparts there didn’t even have fax machines, let alone Reuters screens or iPhones with instantaneous price discovery. Digital disruption, for want of a better expression, is a reality. Both consumers and producers are far better informed, and more rapidly informed, than ever before.

But the traditional trading companies still have an edge in their deep understanding of production and consumption economics, the value chain and the associated timing. Detailed supply and demand analysis still works. Price convergence in over- and under-supply markets still creates the traditional responses, whether it is on the flat price, in the time spreads or physical premiums. Market price moves to constrain supply and stimulate consumption in over-supplied markets, and vice versa. However, the path to that convergence has become ever more volatile.

Markets now arbitrage information instantaneously. Market price always reflects consensus. If there is a divergence between that consensus and what we consider to be reality then the question we have now to ask is, what route will the market take to achieve that convergence?

This is made harder by the fact that the discretionary capital in the futures markets has declined relative to non-discretionary capital. We now have a dominance of long only products, of high frequency traders, of macro-capital—which to be fair can be discretionary—that creates a distorting effect. If the fair value is x but the money flow pushes price to x+10 or x-10 it amplifies the convergence requirement. This forces—and I think the markets are still in an evolutionary process here—a rethink of traditional risk management techniques. The old school “we are right and we will wait to be proven right”—well, it just doesn’t work anymore.

What do you think is the biggest change in the business since you joined?

We have already talked about the digital revolution: how that applies to price; how it doesn’t change the opportunities but changes the methodologies that traders need to employ.

More important than that is the way in which the traditional role of the intermediary in the commodity markets has largely disappeared—or at least materially changed. A significant disintermediation has taken place. This has many different, but already widely discussed, drivers.

In the past, most trading houses have had an origination focus –and some of the new entrants into the business are still origination-centric. We at LDC see our role as value-chain managers; we are mandatory value-chain participants. To succeed today a trade house needs to be integrated along the value-chain, and to become less of a trader in the conventional sense.

And you think that LDC can still be relevant…can still add value to the supply chain?

Very much so. Take protein for example. It is a well-known story that the primary growth of protein consumption is in Asia; in particular, the rate of growth in China of meat demand exceeds China’s ability to produce the raw materials necessary to produce it. The rationale for this is well documented: a combination of GDP and population growth; urbanization; and a dietary shift towards more western diets. The reality is that as people get wealthier they eat more. This creates a systemic and material growth in protein consumption leading to a protein gap.

It is very easy in the west to have a preconceived view of China, but when you become immersed in the country you realize that China is jumping over many Western developmental steps. There is a clear desire to ensure that food can be traced—that consumers can be confident that it is safe. There have been a number of examples of food contamination as a result of the lead-time between the production and the consumption of the food. Many emerging countries are not used to the western supply chain model. If your food is coming through a semi-industrialised chain people need to be certain that what they are eating is safe.

When you visit some of the more innovative retail outlets in China it is astonishing to see the level of technology that they are using to ensure that the consumer has confidence in their food safety.

As a global commodity participant LDC can supply complete traceability where appropriate, or close to complete traceability where it is more difficult. In some cases we are ourselves the producers, and in other cases we are the direct link to the first producer. We not only handle the logistics but in some cases we are the industrial transformer.

It is different sector by sector within the agri-supply chain, but for a trading company to succeed it needs to have that integration. The margin is to be found in integrating the whole supply chain, not in any particular section of the supply chain. It is hard to make the statement today that the money is in originating beans or in trading beans. The margin is in the full value chain. It sits within the value chain. This move up and downstream is not something that is discretionary. It is mandatory. To fail to do that risks disappearance.

But when you have a traceable supply chain you lose flexibility and tradability.

Not necessarily. Once you have built the conduits for traceability that traceability is transferable.

But we not only have to make sure our commodities are traceable; we have to ensure that they are produced sustainably. This is something we take very seriously. The rate of adoption by the end user of the dual concepts of traceability and sustainability has been really rapid. It has become mainstream. To fail to do that results in marginalisation.

So once you put in place the conduits that ensure that your commodity is both traceable and sustainable the flexibility is still there. For example if you are selling Brazilian sugar into Indonesia and freight rates change you can flip that cargo to another destination while maintaining both sustainability and traceability. If a company is well structured you can then transfer that traceability – it isn’t lost.

It is this multi-geographic footprint that is important. One of the things that trading companies are realizing is that size really does matter. A trade house’s geographic footprint matters. I think trade houses with insufficient geographic footprint lose that flexibility.

Looking at your competitors, Glencore Agriculture says that 85 percent of their profits come from distribution and logistics and only 15 percent from trading. Cargill is making a big move into protein, and ADM into ingredients and higher value foodstuffs. Olam has done a successful move into what were once considered niche areas, but on such a large scale that they are no longer niche. Has LDC identified a particular focus area?

Yes, very much so. There are four pillars to our strategy.

The first is to build on and improve our traditional merchandising function. We recognize that traditional merchandising has changed, and we need to ensure that we have the correct geographical footprint and the correct information base to understand price evolution in order to maintain the flexibility that has always been a core element of profitability. That means maintaining the origination base. It also means increasing our consumptive footprint where appropriate. This can mean getting closer to the consumers in the case of coffee or sugar, or going further downstream in the case of oilseeds and grains. That plays into the logistics element.

The second is to recognize that disintermediation is real and that we either need to be closer to the consumer in an integrated value chain, or be a consumer ourselves. We see vertical integration and particularly vertical downstream integration as a core to our activities. An example of that is the new crushing plant that we have opened in Tianjin in China. This takes us down the animal protein route. It may mean going even further downstream, into bottled edible oils, or other branded products, or whatever is appropriate.

The third pillar, which follows on from that, is to move more into ingredients as an active participant in the food sector. We are already in that business, for example we produce glycerine and lecithin as an adjunct to the soya business, or citrus oils and essences from our orange juice business. These were traditionally considered as by-products. Clearly there is an opportunity here to identify cross commodity areas.

Our fourth pillar is innovation, not necessarily in technology, but in food. We are looking at the future of food, at alternative proteins and ingredients and working to be ahead of the curve in supplying consumer needs.

So we know where we are going. In five years time LDC will be more of a diversified food and nutrition company in addition to being a traditional commodity merchant. We have the strategy and the roadmap is clear. It is my task now to successfully implement that strategy.

What is LDC’s USP (Unique Selling Point)?

 LDC is differentiated by its long family heritage, the diversity and geographic spread of its agricultural product portfolio and the degree of integration across its value chain. Together, these factors give the company a unique identity and ability to leverage opportunities and mitigate risk over time.

 It is interesting to see the way that the different trade houses are evolving, the different paths they are taking. 

People tend to lump the ABCDs, as well as Glencore, COFCO, Olam and Wilmar into the same basket. But commodity companies now have different focuses; direct comparisons are no longer valid. The acronyms are no longer valid.

Part Two to be published next Monday

The full conversation will be published in the new Commodity Conversations book “Alphabet Soup” due out in autumn 2019.  

Farming comes full circle

I grew up on a farm; well more of a smallholding really, in the county of Kent, in southern England. My father had moved there after leaving the army at the end of the Second World War, and had borrowed some money to buy a small bakery and teashop in Canterbury. The teashop was one of the few buildings that were left standing in the city after Hitler had tried to destroy British morale by bombing Canterbury Cathedral, the home of Britain’s Anglican religion. His bombs missed the cathedral, but destroyed pretty much everything else in the city.

My father expanded the teashop, buying some old army buildings to open a restaurant and an outside catering business. However food was in short supply and his only solution was to grow his own. He borrowed money from the bank to buy some land on the outskirts of the city. He started farming it, and eventually built on it the family home where I grew up.

At the beginning, the farm was geared exclusively to produce fruit and vegetables for the restaurant. He planted fruit trees on some of the land; the rest of the farm was given over to potatoes and other root crops like turnips, parsnips and swedes, as well as cabbages, beans, brussel sprouts – all of which made up the standard British diet at that time. (It was only later that he branched out into strawberries, and even later into asparagus.)

In addition to growing fruit and vegetables, he also kept some chickens to produce the eggs for the restaurant, and pigs to eat the waste food from the bakery and the restaurant. The chickens and the pigs also produced the manure that served as natural fertiliser for growing the vegetables. It really was a circular, sustainable agricultural operation that grew what we would now call “organic” food—all with zero waste!

The farm also provided me with a very happy childhood where I learned how to drive a tractor at eight and how to plough a field at ten. I regularly helped out on the farm after school, and during the long school vacations.

As Britain slowly recovered from the war, food production picked up and prices fell. It began to make more sense for my father to buy the food he needed for his catering business, rather than to grow it himself. But he still wanted the pigs to consume the waste food from the restaurant and the unsold bread from the bakery. He abandoned vegetables (except for an acre or so to supply our family), and planted barley as feed for the pigs. He also bought more pigs, started a breeding programme, and within a few years had a small industrial farm, raising and breeding pigs.

Despite his hard work the operation was never a success.

One problem was what to do with all the effluent from the pigs. It was something that my father never found an effective solution to, but which—because of the smell—made us very unpopular with our neighbours in what had slowly become a residential area.

Another problem was the difficulty in keeping the pigs healthy; they were kept in such close confinement that they were constantly ill—and needed a constant supply of antibiotics to keep them free of disease. The veterinary bills soaked up the meagre profits that the operation was making.

The biggest problem, however, was one of scale. The farm was simply too small to compete with other bigger units both in the UK and continental Europe. At the time, UK pork prices were low with cheaper imports coming in from Holland’s bigger and more efficient pig farms.

My father tried to tackle the health problem by giving up barley production, and using the land to let the pigs roam freely in the open air. The pigs were healthier (and arguably happier), and the vet bills went down. On the negative side, the pigs gained weight more slowly. In addition, my father had to now buy in all the barley and the grain that he needed to feed the pigs. The economics of the operation just didn’t work.

My father died at the age of 102 and the family gave up farming, selling the land to the local hockey club. It was just part of the UK’s move from farming (and industry) to services.

However I am sure that if my father were alive today he would still be farming, and would have taken his small farm full circle, back to producing organic food with zero waste, and selling his produce at the local markets. Whether he would be able to make a living out of it, however, would be another question.

This is an extract from my upcoming book on the agricultural merchandising business.

Images from pixabay.com

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Artificial market intelligence

Trading on the international futures markets has often been compared to the game of chess. There are so many inputs to consider in futures trading, and so many possible moves, it has even been likened to three-dimensional chess. As in chess, you are never actually trading the various inputs; you are actually trying to second-guess how other market participants–or your opponent–will react to those inputs.

As Keynes so aptly put it, “Successful investing is anticipating the anticipations of others.”

In his latest book, “21 Lessons for the 21st Century”, Yuval Noah Harari describes how artificial intelligence (AI) has transformed the world of chess. He writes,

“On 7 December 2017 a critical milestone was reached, not when a computer defeated a human at chess—that’s old news—but when Google’s AlphaZero program defeated the Stockfish 8 program. Stockfish 8 was the world’s computer chess champion for 2016. It had access to centuries of accumulated human experience in chess, as well as to decades of human experience. It was able to calculate 70 million chess positions per second. In contrast, AlphaZero performed only 80,000 such calculations per second, and its human creators never taught it any chess strategies—not even standard openings. Rather AlphaZero used the latest machine learning principles to self-learn chess by playing against itself. …

Can you guess how long it took AlphaZero to learn chess from scratch, prepare for the match against Stockfish, and develop its genius instincts? Four hours. That’s not a typo. For centuries chess was considered one of the crowning glories of human intelligence. AlphaZero went from utter ignorance to creative mastery in four hours, without the help of any human guide”.

Human chess players have sidestepped the problem (for them) of artificial intelligence by banning computers from human chess tournaments. Mr Harari writes,

“In human-only chess tournaments, judges are constantly on the lookout for players who try to cheat by secretly getting help from computers. One of the ways to catch cheats is to monitor the level of originality players display. If they play an exceptionally creative move, the judges will often suspect that this cannot possibly be a human move—it must be a computer move”.

As in chess, computers are now better than humans at trading futures. Fortunately—or unfortunately—futures markets cannot—or will not—ban computers from trading. This presents something of a problem for the physical trading houses, which have always relied on profits from trading futures to bolster/offset the tiny/negative margins that they make on trading physicals. As yet, the trade houses have failed to find a replacement for those missing profits.

But apart from the difficulties faced by the trading houses, what does it matter if computers now trade better than humans?

Futures markets have two roles to play: the first is to set a price (price discovery); the second is to provide a hedging medium. If computers are better at setting a price than humans, and if they provide lots of liquidity for physical hedging, then surely the world is better off.

As Mr Harari warns however, the difficulty arises when algorithms understand humans better than we understand ourselves. Once they do, computers can manipulate humans. This may already have happened in recent elections. If algorithms can nudge us into how to vote in elections, they can also nudge us into actions (such as selling at the bottom or buying at the top) in the futures markets.

Once futures market algorithms start to take money from physical hedgers, hedging becomes more expensive. When that happens, value is taken from producers and consumers of the physical commodity. Farmers are worse off, as too are consumers.

Some might argue that in any case trade houses always took value from the supply chain when they made profits from futures trading, already making farmers and consumers worse off. In that sense the owners of the algorithms have merely taken their place; the profits now go to the computers rather than the trade houses.

However, trade houses added value back into the process by efficiently moving physical commodities around the world. Apart from setting prices, it is hard to see what value algorithms return to the supply chain.

There is no obvious solution to this. Algorithms continue to get smarter while traditional physical trade houses continue to search for alternative business models. As Mr Harari writes,

“Already today, computers have made the financial system so complicated that few humans can understand it. As AI improves, we might soon reach a point where no human can make sense of it.”

Images under creative commons from pixabay.com

Trade Wars

In Imperial Twilight: The Opium War and the End of China’s Last Golden Age Stephen Platt, a professor of history at the University of Massachusetts, takes a long look at the events leading up to the Opium War that Britain fought with China from 1839 to 1842.

I found the book rather long, and it only seems to get moving in the last chapter when the war finally begins. However it is an easy read, and exceptionally well written and researched. It is therefore worth the effort, particularly as the book has relevance to current events, namely the trade war between the US and China, as well as the US’s current opiate epidemic.

In the late 18th century, Qing China was among the richest and most powerful empires in the world. However decline set in with a series of internal rebellions, increasing corruption, and (arguably) a rise in opium use by China’s ruling classes. The opium was grown in British India by, among others, the East India Company, and sold from British (and American) ships to Chinese traffickers who brought it into China, paid off customs officials, and distributed it domestically.

At that time China was the sole supplier of tea to the world, and demand was rising fast with Britain’s industrialisation. China was also a major exporter of silk, some of which travelled overland on the Silk Roads. The tea was mainly exported by sea, and trade was limited to Canton; Westerners were not allowed to trade from any of China’s other ports. This suited the East India Company, which had a monopoly on the trade to Britain, but was a bone of contention to the “free traders” such as Jardine and Matheson.

The British and Americans exported Indian opium to China in exchange for the silk and tea that China exported. Opium was illegal in China but the ban was only loosely enforced, at least until the late 1830s when the Chinese decided to enforce the ban, confiscating heroin from the Western traders and briefly holding them hostage in Canton.

Twenty years earlier, in July 1817, when Napoleon (Bonaparte) was living in exile on Saint Helena, his Irish physician Barry O’Meara (who had accompanied Napoleon in exile) told him that it didn’t matter if the British had the friendship of the Chinese because they had the Royal Navy. Platt quotes Napoleon’s response to his physician,

It would be the worst thing you have done for a number of years, to go to war with an immense empire like China…You would doubtless, at first succeed, but you would teach them their own strength. They would be compelled to adopt measures to defend themselves against you… they would build a fleet and in the course of time, defeat you.”

But twenty-two years later Britain did go to war with China. After intense lobbying from free traders, the British government agreed that the Chinese had to be punished for their treatment of the British traders and be taught to respect British superiority, to no longer have Canton as the only trade port, and to open further ports for trade. But behind it all perhaps the real motivation for the war was to force the Chinese to pay compensation for the opium that they had confiscated and destroyed, and to lift their domestic ban on opium, allowing the trade to once again flourish.

The young British politician William Gladstone—later to become four-time prime minister—said at the time, “a war more unjust in its origin, a war more calculated in its progress to cover this country in permanent disgrace, I do not know, and have not heard of.”

The war lasted for three years and ended with a British “victory” that was enshrined in the Treaty of Nanning, signed on 29th August 1842. Platt writes that it “was the first of what would come to be known as China’s “unequal treaties.” There would be many to join it over the course of the nineteenth century, for it marked a watershed in the Western discovery that one could get what one wanted from China through violence.”

He writes that the treaty “opened five of China’s port cities to British trade and residence, including Canton, Ningbo and, most importantly, Shanghai. The treaty gave Hong Kong to the British as a permanent colony.”

The Chinese regard the treaty as a major landmark in what they call their “century of humiliation” (1839-1945). However, Platt disagrees with their interpretation. He argues,

Only after the fall of the Qing dynasty in 1912 did historians in China begin to call this war “The Opium War” in Chinese, and only in the 1920s would republican propagandists finally transform it into its current incarnation as the bedrock of Chinese nationalism—the war in which the British forced opium down China’s throat, the shattering start to China’s century of victimhood, the fuel of vengeance for building a new Chinese future in the face of Western imperialism, Year Zero of the modern age.” 

He adds,

“The Opium War was not part of some long-term British imperial plan for China but rather a sudden departure from decades, if not centuries, of generally peaceful and respectful precedent. Neither did it result from some inevitable clash of civilizations.”

The debate will continue for some time as to whether the war was about British pride, or about finding an outlet for opium, one of British India’s most profitable export, or about forcing China to open up to foreign trade. Whichever of those three alternatives you chose, however, none are particularly glorious.

The first question that comes to mind is whether Britain, the world’s leading military power at the time, had the moral right to force their terms of trade on China? That question may have relevance today in the current trade war between China and the USA.

The second question is whether the US’s current opiate epidemic can be compared to the opium epidemic that contributed to China’s decline.

I am not qualified to answer either question and I will leave the final word to the review of the book from the New York Times:

Stephen Platt has written an enthralling account of the run-up to war between Britain and China during a century in which wealth and power were shifting inexorably from East to West. But if this history holds a lesson today — as wealth and power shift equally inexorably back from West to East — it is surely the same one that Karl Marx identified just a decade after the Opium War, that men make their own history, but they do not make it as they please.

Images from Pixabay under creative commons