Cornucopia

Farming looks mighty easy when your plough is a pencil and you’re a thousand miles from the cornfield.  – Dwight Eisenhower

Corn is an awkward crop. Because of its shallow roots, it is susceptible to droughts, intolerant of nutrient-deficient soils, and prone to being uprooted by high winds. Corn reproduces sexually each year, randomly selecting half the genes from a given plant to propagate to the next generation. Corn breeding in prehistory led to larger plants and larger ears. Modern breeding began in the 19th century and, in the past 75 years, both conventional cross-breeding and genetic modification have succeeded in making corn less awkward, increasing output and reducing the impact of droughts and pests.

Many of the corn varieties grown in the US and Canada today are hybrids; over 90 per cent are the result of genetic modification. Grown commercially since 1997, GM corn now accounts for about one-third of the corn grown in the world, most of which has been genetically modified to tolerate glyphosate, or to provide protection against natural pests. Glyphosate, sold as Roundup, is a relatively inexpensive herbicide that kills all plants except those with genetic tolerance, which pretty much means all of them.

Monsanto released glyphosate-resistant soybeans under the name Roundup Ready Soybeans in 1996 and within ten years 80 per cent of all soybeans grown in the US were Roundup Ready.

Roundup Ready corn received FDA approval in 1997 and it was commercially released in 1998. It used much the same technology as in soybeans but also had built-in insect protection in the form of a Bt protein, a naturally occurring bacterium that lives in the soil and is toxic to insects.

Scientists also modified corn genes to make the crop more drought tolerance. The USDA approved drought-tolerant GM corn in 2011 and it was first commercialized in 2013.

Over the past twenty years, GM technology has revolutionised farming and transformed the seed and agricultural input business. Previously, much of a farm’s cost of production was in purchasing chemicals, fertilizer, herbicides and pesticides. Chemical companies made their money selling these inputs. Now the cost is in the development of the seeds. The result has been a merging of chemical and seed businesses with large chemical companies buying up the seed businesses.

Although GM technology has revolutionised the industry, its effect on yields is sometimes overstated.  By one estimate, about 50 per cent of yield increases since the 1920s have been the result of breeding, including genetic modification, while the other 50 per cent has come from improved farming practices. Better farming techniques have been just as important as genetics.

The USDA first began to publish corn yield estimates in 1866. Yields of open-pollinated corn varieties in the US remained fairly stagnant, averaging about 1.6 tonnes per hectare, for 70 years until about 1936. There was no significant change in productivity during that entire time period, even though farmers’ seed-saving practices represented a form of plant breeding.

Agricultural yields began to lift off with the adoption of hybrid corn in the late 1930s, but the most significant improvement in the annual rate of yield gain began in the mid-1950s in response to continued improvement in crop genetics, increasing adoption of nitrogen fertilizer and chemical pesticides, as well as agricultural mechanization. Since 1955, corn grain yields in the U.S. have increased at a fairly constant 1.9 bushels per acre per year, sustained primarily by continued improvements in genetics and crop production technologies.

The increase in global corn production in the last forty years has been more than impressive. In 1979, farmers in the US harvested 201 million tonnes of corn; in 2019 they harvested 366 million tonnes. In that same forty-year period, world corn production has increased from 425 million tonnes to 1.122 billion tonnes. Total world trade has increased by 100 million tonnes, from 70 to 170 million tonnes. However, in the same period, corn acreage has increased only 13 per cent, from 29 to 33 million hectares.

In his book More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources―and What Happens Next the bestselling author Andrew McAfee writes:

‘Farms of less than one hundred acres grow 15 per cent less corn per acre than farms with more than a thousand acres. And bigger farms get better faster. Between 1982 and 2012 farms under one hundred acres grew their total factor productivity by 15 per cent, whereas farms over a thousand acres grew theirs by 51 per cent.’

And as for the environmental costs of large-scale farming, Andrew McAfee writes:

A comprehensive review published in Nature Sustainability in 2018 concluded: “The data does not suggest that environmental costs are generally larger for high yield farming systems. If anything, positive associations – in which high yield, land efficient systems also have lower costs in other dimensions – appear more common.”

In other words – and contrary to popular belief –  large farms are generally more environmentally-friendly than small farms.

But I am getting ahead of myself here. More on this in later posts.

© Commodity Conversations ® 2021

This is an extract from my next book: ‘Commodity Crops – and the merchants who trade them.’

More on the economics of cocoa

Readers have posed some interesting questions following my blog last week on cocoa.

One asked me to explain why I said a minimum sales price becomes a ceiling on the market. The answer is that if the price can’t go up, it will go down. If traders and manufacturers know that they can buy at a specific price, they have little risk in being short below that price. If the price rises, they can cover their shorts at a predictable loss. Minimum prices skew the risk/reward ratio and encourage people to sell short.

On a broader level, one commented that, because Ghana and Ivory Coast account for 60 per cent of world cocoa, they have the market power to set cocoa prices. He suggested that cocoa producers should get together to form COPEC, cocoa’s equivalent of OPEC.

Unfortunately, cocoa is not the same as oil. Oil producers can reduce supply by turning off a tap; they can leave it in the ground. It doesn’t deteriorate. Cocoa producers can’t turn off a tree. The trees keep producing, cocoa builds up at the ports, rots in the warehouses, and loses some, or all, of its value. In the meantime, farmers are left unpaid – with all the dire consequences that entail.

Cocoa is a front-loading crop: grinders and chocolate manufacturers tend to hold large stocks that they can run down if producers hold off new sales. Cocoa buyers are more affluent and better financed than producers – and they probably have better infrastructure.

One reader argued that the market is almost as concentrated on the buy-side as it is on the sales side. I very much doubt that cocoa buyers work together in the same way that cocoa producers do. Still, I would guess the balance weighs in the buyer’s favour in terms of market power.

A couple of readers pointed out that as growers only receive around 5 per cent of a chocolate bar’s cost, increasing the cocoa cost by $400 per tonne would only increase the bar’s price by one or two per cent. They have a point. Besides, Cargill recently conducted a survey that showed consumers would be willing to pay more if they thought that the farmer would benefit. ‘Surely,’ asked one reader, ‘consumers would pay 2 per cent more for their chocolate if they thought that it helped the farmers?’

The answer is that it would, but, increasing the price that farmers receive would encourage them to produce more, adding further pressure on prices.

Expressing this problem differently, another reader said that producing and consuming countries should cooperate in setting a fair price for cocoa.

In the past, the United Nations has done that by setting up commodity organisations to ‘manage’ the markets; cocoa, coffee, or sugar were three such examples. These commodity organisations tried to use stock management to bring supply and demand into balance at a price that gave a decent return to growers and a reasonable price for consumers.

When world prices fell, the various commodity bodies set to work by either purchasing (in the case of cocoa) physical cocoa to hold off the market or asking (in the case of coffee and sugar) producers to build stocks and limit exports. When prices rose again, they released these stocks.

These noble efforts, sadly, failed. When prices fell, coffee producers continued to export; they desperately needed the money to feed themselves. In the case of cocoa, the ICCO ran out of funding. In the case of sugar, producers failed to build the stocks they were supposed to. (Brazil famously said that their inventories were in the cane in the fields.)

As a consequence, when prices rose, either the stocks weren’t there or were insufficient to stem the prices’ rise.

As we saw earlier, market participants will tend to sell short ahead of a stock release price level; if stocks aren’t there, then the price explodes as shorts run for cover. It means that not only do international price agreements not work, they also actually increase market volatility. They are like communism: a great idea in theory, but a disaster in practice.

It is true even if the producers are in rich, developed countries.

The EU used to fix minimum prices for many agricultural products, maintaining them through a mix of quotas, stock management and subsidised exports. Over the years, production costs dropped as farmers became more efficient. Still, the EU continued increasing their minimum prices in line with general inflation. In the end, sugar prices were so profitable that French farmers used to call sugar beet quotas’ white gold’. Butter mountains and wine lakes built up. So did subsidise exports – to the detriment of farmers in importing countries.

The EU has gradually wound down their market management schemes (sugar and milk were the last to go), along with, thank goodness, subsidised exports. The EU has replaced them with direct income support. Agriculture is still the largest item in the EU’s budget at 38 per cent, but down from 73 per cent in 1985.

Finally, one, rather astute, reader argued that the Ivory Coast should have thanked Hershey for taking delivery of the December futures market. By doing so, Hershey pushed the world cocoa price higher, taking some of the old crop cocoa (that had been weighing on prices) off the market. He may have a point.

Instead of manipulating the world price, what should Ghana and Ivory Coast do to help their impoverished growers? I posed that question this week to the head of one of the leading NGOs in the sector. I will publish his replies shortly.

© Commodity Conversations ® 2021

Cocoa economics

 

Cocoa farmers in Ivory Coast went on strike last week in protest against the low prices they are currently being offered for their crop. They have also threatened to block port warehouses where more than 100,000 tonnes of cocoa have backed up due to a lack of demand. A farmers’ representative told Bloomberg that farmers are only being paid 800 CFA francs per kilo against the state-guaranteed minimum price of 1,000 CFA francs, roughly $1.85/kg.

Covid19 is partly to blame for the lack of demand. The FT (subscription required) reports that the virus has disrupted ‘sales of chocolate at airports, hotels, restaurants and speciality boutiques’. As a result, world cocoa demand fell 2-3 per cent last year, prompting processors and chocolate manufacturers to delay shipments on quantities that they have already bought, and hold off on new purchases. This drop in demand has hit the Ivory Coast particularly hard. Together with Ghana, the country produces 60 per cent of the world’s cocoa.

Ghana and Ivory Coast work together more closely than in the past, setting similar ex-farm prices and reducing smuggling across their borders. In 2019, they looked at ways to increase farmers’ incomes and discussed setting a minimum export price. They eventually rejected the idea and instead introduced a ‘Living Income Differential’ (LID), a $400 per tonne premium that buyers had to pay over the world price, starting with the 2020/21 season.

The $400 per tonne LID was not just a premium over the futures; it was also in addition to the country differentials.

Country differentials (premia and discounts relative to the futures) fluctuate widely; they often depend on the cocoa that the market expects to be delivered against the futures. Processors prefer new crop cocoa to old crop, and the futures can be depressed, for example, if old crop is expected to be delivered.  For the 19/20 season, exporters probably paid an average premium of about £75 for Ivory Coast and £125 for Ghana, as these purchases were made starting in September/October 2018.

The larger cocoa processors – particularly the ones with factories in Ivory Coast – have paid LID on their 2020/21 purchases, but they have had difficulty passing it on to their buyers. Unlike Fairtrade or the Rainforest Alliance, LID doesn’t come with a certificate that can be handed on to the chocolate manufacturers. Without a certificate, manufacturers can’t put a label on their retail packaging, nor ask their customers to pay more.

Rather than pay LID, Hershey was reported last month to have taken delivery from the December futures contract: a mixture of the old crop cocoa from West African, Ecuador and Sulawesi.

In response, Ivory Coast and Ghana launched an unprecedented media campaign against Hershey. They also threatened to suspend the company’s sustainability programmes in the two countries. It is not clear what arrangement Hershey made with Ivory Coast and Ghana, but it has been reported that Hershey has agreed to pay the Living Income Differential. Still, as Hershey does not buy directly from the Ivory Coast, it is unclear how that works.

It is also unclear how Ghana and the Ivory Coast expected LID to work in the first place.

By asking their customers to pay $400 per tonne more for Ghanaian or Ivory Coast than for other cocoa, chocolate manufacturers had a strong incentive to buy alternative origins. Ghana and Ivory Coast have tried to stop this by putting media – and local – pressure on the big chocolate companies. Still, the big companies account for less than half of the world’s chocolate production and an even smaller percentage of beans.

The cocoa market is looking at a surplus this year of up to 300,000 tonnes. Because of LID, this surplus is now primarily made up of cocoa from Ivory Coast and Ghana. At this time of the year, the Ivory Coast would have customarily sold all of this crop, most of their mid-crop and a significant chunk of the following main crop. Instead, they still have an estimated 500,000 tonnes to sell from the 2020/21 season and a similar quantity from the 2021/22 crop. They have not sold anything yet for 2022/23.

Cocoa is what is known as a ‘front-loading’ commodity. The harvest runs from October through March, with shipments concentrated during this period; processors then store the cocoa and use it throughout the year. With storage costs at around £12 per month, it is not surprising that buyers have been delaying purchases, aggravating the build-up at the origin. Time is on the side of the buyers; they can afford to wait.

The inevitable has happened: both Ghana and Ivory Coast have reduced prices to tempt buyers. Country differentials have fallen to a discount of £150 – 200 per tonne. Unfortunately, they have little success even at those prices; buyers have either already bought elsewhere or are waiting for prices to fall even further.

But isn’t this just bad luck on the part of Ghana and Ivory Coast? Wouldn’t LID have worked if the balance sheet had been in deficit rather than surplus? Unfortunately, the answer to both questions is ‘no’.

If there had been a deficit, the outright cocoa price would indeed have risen. Unfortunately, neither Ghana nor Ivory Coast would have been able to sell if they had continued to ask for a premium of $400 per tonne over the market. The world price could have gone to the moon, but they would still have asked for $400 per tonne more. To move their crop, the country differentials would have been reduced – probably to levels similar to where they are today. As with all farmers, it is the outright price that matters, not the differentials.

So, what is to be done? With hindsight, the obvious answer would have been to go with the two countries’ original idea and set a minimum price, not a differential. Even then, with a market in surplus, the world price would have fallen below the minimum price; Ivory Coast and Ghana still wouldn’t have sold. The minimum price would have become a maximum price with the market only buying it when it was needed.

It is sad to say, but cocoa economics are the same as everyone’s else’s economics: the only cure for low prices is low prices.

© Commodity Conversations ® 2021

Rising food prices

With grain and soybean prices reaching levels not seen since 2014, I expect that the media will soon be writing about global food shortages. There will be accompanying calls for governments to intervene to cap domestic food prices. There will also be calls to control the markets and ‘punish’ speculators.

Last week already, a group of scientists warned that the world was ‘facing a ghastly future of mass extinction’ and that the continued growth in world population is driving soil degradation and biodiversity loss. The scientists included Prof Paul Ehrlich from Stanford University, author of The Population Bomb, published in 1968. In that book, Prof Ehrlich warned that the population explosion would lead to hundreds of millions of people starving to death (in the 1970s).

In an interview in 2018, Prof Ehrlich commented that although ‘details and timings of his predictions were wrong, his book was correct overall’. He said: ‘Population growth, along with over-consumption per capita, is driving civilisation over the edge: billions of people are now hungry, or micronutrient malnourished, and climate disruption is killing people.’ He still believes that the world will run out of food and that millions will starve.

He is not the first to think this. In 1798, the English clergyman Reverend Robert Malthus wrote his famous Essay on the Principle of Population in which he predicted that the world’s population would be checked by famine. Malthus argued that the world’s food supply grew arithmetically, while the world’s population grew geometrically.  He wrote: ‘The power of population is indefinitely greater than the power in the earth to produce subsistence for man.’

Malthus believed that God had made it that way to teach humanity ‘virtuous’ behaviour. He believed that humankind should lead a subsistence life, and he predicted a future of ‘misery and vice’.

When Malthus wrote his essay, there were about one billion of us humans on our planet. Since then, the world population has increased more than eight-fold. Agricultural production has more than kept pace, so much so that the world is now struggling with obesity, not starvation.

Population growth is not currently driving grain prices higher. Rather, it is a mixture of bad weather, poor crops, well-intentioned, but inappropriate, government intervention, and a rush of imports into China as the country rebuilds both its stocks and its pig herd. To that heady mix, you have to add financial factors: inflation fears and a weakening dollar.

Nor will population growth drive grain prices higher in the future. The growth in agricultural production – largely through yield increases – continues to outpace population growth. This correlation contains an important causality: the growth in agricultural yields has permitted the growth in world population. There is no reason why this should suddenly change.

But what about temporary shortages – how can we deal with them?

The growth in yields over the past seventy years has led to such a huge increase in agricultural production that roughly 40 per cent of US corn production – and 50 per cent of European rapeseed production – is now used to fuel cars rather than humans.

Could crops currently used for fuel be diverted back to food in times of high food prices? This already happens on a huge scale with sugar in Brazil. When sugar shortages develop and sugar prices rise, millers produce more sugar and less ethanol.  Western countries have even less flexibility in corn or rapeseed, largely because of government-set ethanol and biodiesel mandates.

Not only has agricultural production increased enough to feed the population and fuel our cars, but it has also allowed us to eat more meat. A staggering 98 per cent of the world’s soybean production – and 36 per cent of US corn production – is fed to animals to produce meat and dairy. Animals are rather inefficient in converting grain and beans into meat. It takes 25 kg of feed for a cow to produce one kilo of edible meat and it takes 15 kg of feed for a sheep to produce one kg of lamb. (The figures for pork and chicken are 6.4 kg and 3.3 kg respectively.)

Could some of that animal feed be diverted back to direct human consumption? In theory, yes. In practice, it would take a large increase in meat prices to reduce meat consumption, and then only with a relatively long time lag. It wouldn’t happen quick enough to solve a temporary grain shortage.

Increased agricultural production and low food prices have also encouraged waste. It is often said that 30 per cent of food is wasted. Waste occurs in developing countries through unharvested crops, poor storage and a lack of refrigeration. Food waste in rich countries occurs in supermarkets, restaurants, and the kitchen. I am not sure that 30 per cent figure is correct, but even if it is, it is doubtful that much can be done about it in the short to medium term.

All this means that the short-term solution to high grain prices lies on the supply side. High prices will encourage farmers to plant more for the next season while at the same time encourage the whole supply chain – from the farm silo to the supermarket – to draw down stocks.

Modern-day markets have become so efficient that prices now rise in advance of shortages. Futures markets trade the future; they solve the problem before it occurs. Anything that interferes with – or delays – these price signals (such as government intervention) will in the end only makes matters worse.

© Commodity Conversations ®

This is part of a series of ‘long reads’ called ‘Why food doesn’t have to cost the earth’.

How we got here

Our planet is roughly 4.5 billion years old. Our human ancestors appeared on Earth around 66 million years ago. Still, as we know ourselves today, humans have only existed for the last 2 million years, the vast majority of that time as hunter-gatherers.

Humans may have begun to grow crops on the Sea of Galilee’s shores about 23,000 years ago. However, agriculture proper did not start to develop until 12,000 years ago when hunter-gatherers in the ‘Fertile Crescent’ began growing wild varieties of crops like peas, lentils and barley. They also herded wild animals like goats and oxen in the region.

Historians disagree as to why our ancestors made the structural shift from hunting and gathering to farming. Some argue that a changing climate left them no alternative but to seek alternative sources of foods. Some suggest the transition was more a result of our perpetual drive to improve our condition. Others even suggest that a love of beer drove them to give up their nomadic lifestyles. Archaeologists estimate that 40 per cent of early wheat production went to make beer—the oldest barley beer dates to 3400 BC.

In broad-brush terms, historians divide agricultural progress into three stages. The First Agricultural Revolution defines the move from hunting-gathering to farming that occurred 7-10,000 years ago. The Second Agricultural Revolution refers to the mineral fertilisers and the industrialisation of farming and farm processing in the 19th century. We are still living through the Third Agricultural Revolution, or the ‘Green Revolution’, that began in the middle of the 20th century. It involved improved crop yields through breeding and the introduction of agricultural inputs such as fertiliser and pesticides.

Farming changed little during the first 10,000 years of human history. Farmers regularly left fields fallow, and animal manure was the sole fertiliser. In the early 1800s, scientists began to understand that inorganic minerals such as nitrogen, potassium, lime, and phosphoric acid could replenish depleted soils.

The search for fertiliser led merchants and scientists to the dry seabird islands off the South American and South African coasts, where immense deposits of bird droppings, rich in nitrogen and phosphorus, had accumulated over centuries. Guano mining became a profitable business. Between 1840 and 1880, guano nitrogen made a vast difference to European agriculture, but the best deposits were soon exhausted. However, miners found rich mineral nitrate deposits in Chile, and nitrates gradually replaced guano in the late 19th century.

In The Omnivore’s Dilemma, Michael Pollan writes that the great turning point in the modern history of agriculture can be dated to the day in 1947 when a munitions plant in Alabama switched away from making explosives to make chemical fertiliser instead. He explains that at the end of World War II, the US government found itself with a surplus of ammonium nitrate, the principal ingredient in making explosives. Ammonium nitrate is an excellent source of nitrogen for plants. Chemical fertilisers and pesticides were the product of the US government’s effort to convert its war machine to peacetime purposes.

Even though the Earth’s atmosphere is about 80 per cent nitrogen, nitrogen atoms have to be split and joined to hydrogen atoms (‘fixed’) to make fertiliser or bombs. A German Jewish chemist named Fritz Haber worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on Earth had to be fixed by soil bacteria or electrical lightning, which breaks down nitrogen bonds in the atmosphere.

In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that ‘there is no way to grow crops and human bodies without nitrogen’. Without Haber’s invention, the small amount of nitrogen that bacteria and lightning alone could release would have limited the number of people that agriculture could support.

In his book, Mr Smil argues that the Haber-Bosch process for fixing nitrogen (Bosch commercialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 per cent of the people on Earth today would not be alive without Haber’s invention. Without synthetic fertiliser, billions of people would never have been born.

Fritz Haber won the Nobel Prize in 1918 for ‘improving the standards of agriculture and the well-being of mankind’, but, since then, he has largely been airbrushed out of history. During the First World War, he helped the German war effort by making bombs from synthetic nitrate. Worse, he also developed poison gases, including Zyklon B, used in the Nazi concentration camps.

The Haber-Bosch process works by combining nitrogen and hydrogen gases under immense heat and pressure, supplied by electricity. The hydrogen is provided by oil, coal or, most commonly today, natural gas. As such, Michael Pollan argues that once humanity had acquired the power to fix nitrogen, the basis of soil fertility shifted from a total reliance on the energy of the sun to a new dependence on fossil fuel.

Farming, which had historically always been a process of converting sunlight into food, has become a process of converting fossil fuels into food. More than half of the world’s supply of usable nitrogen is now human-made—and farmers use more than half of all the synthetic nitrogen made today to grow just one crop: corn.

Some excess nitrogen evaporates into the air, acidifying the rain and contributing to global warming. Some seep down to the water table and the rivers. Mr Pollan writes:

‘The ultimate fate of the nitrates spread in Iowa or Indiana is to flow down the Mississippi into the Gulf of Mexico, where their deadly fertility poisons the marine ecosystem. The nitrogen tide stimulates the wild growth of algae, and the algae smother the fish, creating a ‘hypoxic’, or dead, zone as big as New Jersey–and still growing. By fertilising the world, we alter the planet’s composition of species and shrink its biodiversity.’

He is right, of course. The world would be a very different place if it were not for the advances in agriculture and agricultural technology that occurred over the past century. Admittedly it would probably be less polluted, and we might eat better, but two out of five of us probably wouldn’t be here. And of the remaining three, at least one would go to bed hungry every night.

Some might argue that the world would be a better place if there were 40 per cent fewer of us on the planet. But, personally, I am happy to be here.

© Commodity Conversations ®

This is an extract from my next book: ‘Commodity Crops and the Merchants who Trade them.’

Image from Pixabay

The History of Coffee

No matter what historians claimed, BC really stood for ‘Before Coffee’.― Cherise Sinclair

The first reference to coffee as we know it today was in the early 15th century when the Arab mystic al-Dhabhani saw Ethiopians drinking ‘qahwa’, now the Arab word for coffee. The Ethiopians, however, call coffee ‘buna’, which also means bean.

As coffee gained popularity throughout the Arab world, it began to be used less as a religious drink and more as a social stimulant. In 1511, Khair-Beg, the governor of Mecca, ruled that coffee was like wine and hence banned by the Koran. He ordered the city’s coffee houses to be closed, only to have the ban overturned by his boss, the Sultan of Cairo.

Despite its growing popularity, coffee production was slow to pick up; it was only after the Ottomans occupied Yemen in 1536 that they began to extensively cultivate the crop in the country. The Ottomans exported the coffee from the port of Mocha, and it became known as ‘mocha’.

When the first English sailor reached the port in 1606, he wrote that there were over thirty-five merchant ships, some from as far away as India, waiting to load the precious green beans.

Some of the coffee was shipped to Alexandria in Egypt and then on to Venice. Still, mostly it stayed within the Ottoman empire, reaching Damascus and Istanbul by the middle of the century. By then, coffee was no longer considered just a religious drink, but also a social one. By the end of the 16th century, there were over 600 coffee shops operating in Istanbul.

The way of brewing coffee changed as it travelled. Arabic coffee (qahwa) is a light-coloured liquid made by lightly toasting the beans, crushing them with various spices such as cardamom, and then boiling them in water. Turkish coffee (kahve) is made with more darkly roasted beans and brought to the boil at least twice but without spices.

For a time, the Ottomans successfully prevented coffee cultivation from spreading outside the area of Mocha; they refused to let berries leave the country unless they were first boiled in water to prevent their germination. However, exports had grown to such a level that it was impossible to stop some un-boiled beans from getting through. As Muslim pilgrims returned to their homes, they took coffee beans with them.

One such pilgrim, Buba Budan, is credited in 1600 with smuggling out some beans by taping seven of them to his stomach. He took them back to India and planted the beans next to his hut at Chickmaglur in the mountains of Mysore. Buba Budan is now (rightly) revered as a saint, but it was not until 1840 that the English began the commercial cultivation of coffee in India; the plantations extend now from the extreme north of Mysore down to Tuticorin.

In 1614, Dutch traders brought a coffee plant from Mocha to Amsterdam, and by mid-century, they had taken plants to Ceylon (now Sri Lanka) and Dutch Malaba (now Cochin), where they started small plantations. From there, in 1696, the Dutch took cuttings from the plants to their colonial island of Java. A flood washed away the early seedlings, but the Dutch tried again three years later, this time successfully. In 1706, the first Java coffee had reached Amsterdam; some coffee plants were grown successfully in Amsterdam’s botanical gardens.

During the 17th century, ‘Mocha’ and ‘Java’ became synonyms for coffee; they are still so today.

© Commodity Conversations ®

This is a short extract from my book Crop to Cup – Conversations over Coffee now available on Amazon.

A Conversation with Andrey Sizov

Good morning, Andrey. Could you tell me a little bit about yourself and your company?

After leaving university, I worked for ExportKleb, which at one time was the largest importer of grain into the Soviet Union. My father, Andrey Sizov Sr, founded Sovecon in 1991, and I joined in 1998.

Sovecon is the oldest established firm in the Black Sea analysing and closely following agricultural markets – mainly wheat, corn, some barley and oilseeds. In addition to our regular reports included in sizov.report service, we also do multi-client studies. We are a small company – about five people in total.

What is the biggest issue in the Black Sea grain markets today?

Officials in both Russia and Ukraine have little faith in free markets. They don’t believe that price can balance supply and demand. They want to take administrative control of their domestic grain markets, primarily by limiting exports.

A few weeks ago, the Russian Ministry of Agriculture published a proposal that, if accepted, would limit total grain exports, including wheat, corn and barley, to 15 million mt for the current season. That tonnage was in line with expectations, and the market did not react.

Russian domestic grain consumers – flour millers, farmers and animal feed manufacturers – argue that export quotas won’t be enough to stop an increase in domestic prices.  They have written to the Prime Minister to ask instead for a tax on grain exports. They have requested the government set a threshold price in roubles, with a 50 per cent tax on anything above that threshold price.

I believe that both proposals are bad, but the second one will be tough to manage because of the currency risk between the threshold price in roubles and the export price in dollars.

How likely is it that the government will impose one or other of these restrictions?

There is a third possibility – that the government doesn’t do anything. I would rate the probability of export quotas at 60 per cent, export taxes at 30 per cent, and of the government doing neither, and perhaps proving some subsidies to local grain consumers, at 10 per cent.

The market is expecting export quotas; they are already in the price.  The market is not expecting export taxes; they are not on the radar. If the government introduced them, it would catch the market on the wrong foot; we could see a market reaction.

What about Ukraine?

Local consumers are also not happy with domestic grain prices and have written to the government to ask them to limit corn exports. The government has already imposed soft limits on wheat exports, but there are no set penalties if you over-export. If the Ukrainian government imposed rigid limits on corn exports, it would come as a shock to the market.

Exports have been the primary driver of the growth in the Russian and Ukrainian grain sector over the past 20 years, and I am afraid that restrictions on exports would be detrimental to further expansion. They could be harmful in the long term for everyone in the supply chain, farmers, traders and firms investing in sea terminals.

Going back to Russia, couldn’t traders get around the proposed system by declaring lower prices on their export contracts?

I believe that would be impossible given the transparency of prices all along the supply chain. However, it may mean that traders make sales basis FAS (Free Alongside Ship) rather than FOB (Free on Board), or that they ship more from the lower-draught ports in the Sea of Azov, which trade at a discount due to higher shipping costs.

When do you think any changes might come into effect?

The government may try to publish the necessary decrees by the end of this year for validity in 2021.

Isn’t this all part of the Russian government looking to take control of every aspect of grain exports? The state-owned bank VTB is already a significant terminal and port operator.

You shouldn’t confuse the two issues. VTB is majority state-owned, but it is in their interest is to maximise export flows through their infrastructure. The government may want, for domestic political reasons, to reduce exports. The two forces are opposing, not complementary.

Do you see Black Sea exports continuing to grow in the medium to long term?

Ukraine does not have much land on which to expand its grain area, but the country does have plenty of room to improve yields. Average wheat yields are around 4 mt/ha; this compares with 6-7 mt/ha in the EU. Wheat yields in Ukraine could improve to 5-6 mt/ha. As for corn, average yields are currently around 6-7 mt/ha; this compares to 10-11 mt/ha in North America.

Russia also has considerable room to increase yields. Global warming has been beneficial to Russian agriculture. Milder winters have meant that farmers could plant more area under winter, as opposed to spring, wheat. Average winter wheat yields are around 4 mt/ha compared to 2 mt/ha for spring wheat.

Russia also has a lot of area that they could bring back into production. Potentially, farmers could bring in an additional 300,000 to one million hectares into production every year. It will mostly be in the Volga Valley region, which has relatively easy access to the Caspian Sea. It will facilitate Russia’s exports to Iran, a significant wheat and corn importer.

There is also some potential for Russia to expand corn and soybean areas in the Far East of the country; Russia could become a significant competitor in Asia for Northern and Southern American farmers.

How much do you expect Russia and Ukraine to export in ten years?

We estimate that Russia, including Crimea, will produce 85.5 million mt of wheat this season. Our figure for Ukraine is 25 million mt. Aggregated production is 110 million mt. We could see that increasing to 150 million mt in ten years.

We estimate the total corn crop in 2020 at around 45 million mt (31 million mt in Ukraine and 14 million mt in Russia). In ten years, this number could increase to 60 million mt.

That additional production is likely to result in a substantial increase in exports. We expect local consumption to grow at a slower pace, something around 0.5-0.7 per cent annually.

There are two significant obstacles to this. The first one is the governments’ actions – we hope to see more freedom and less export control in both countries. Our industry doesn’t need subsidies, nor does it require state investment. All we need is the freedom to grow and remain competitive.

The second one is global warming – so far it has been beneficial for the region, but medium-long term things could start to change. It could put the southern areas of Ukraine and Russia in a risk zone with a higher probability of drought and crop failure.

We are possibly already seeing this. The 2020 crop was a disaster for many farmers in Odesa (southern Ukraine) and Kuban (south Russia) because of a lack of precipitation. The outlook for 2021 is rather grim again for Russian South after another dry autumn. This issue could be addressed by the rapid introduction of new drought-resistance varieties. Still, these new varieties are being developed with gene-editing methods which are officially forbidden in both countries.

Thank you, Andrey, for your time and inputs.

© Commodity Conversations ®

Jonathan’s book, ‘Out of the Shadows – The New Merchants of Grain’ is available on Amazon.

 

The Art of Growing Coffee

Coffee should be black as hell, strong as death and sweet as love. – Turkish Proverb

Coffee grows in tropical regions between the tropics of Cancer and Capricorn in what is known as the ‘bean belt’. Arabica generally likes higher altitudes of 550 to 1,950 metres (1,800 to 6,300 feet); anything above 1200 metres is ideal. Coffee grown below about 1,000 metres may be of inferior quality, although Hawaii is an exception. Robusta varieties prefer a lower elevation of 180 to 750 metres (600 to 2,400 feet) with warmer temperatures. Within those ranges, the altitude profoundly impacts the coffee. High elevation coffee will produce more acidic, aromatic and flavourful coffee; lower elevation coffee tends to have less acidity and a more muted character.

Coffee plants are evergreen shrubs that can grow up to 4-6 metres tall with broad, glossy leaves and white flowers. Older varietals take 3 to 4 years to bear fruit while recent varietals will bear their first crop two years after being planted out.

The fruit, the coffee cherry, ripens around eight months after the emergence of the flower. The cherries are harvested once they have changed colour from green to deep red. In most coffee-growing countries, there is one major harvest a year. A few countries, including Colombia, have a primary and secondary crop: the main harvest is from April to June and the smaller one from November to December.

Just as there are two main kinds of coffee, arabica and robusta, there are two main methods of coffee cultivation: sun-grown and shade-grown. Shade-grown coffee is the more traditional approach that mimics the natural way coffee trees grow in the wild, underneath a forest canopy. Farmers, particularly in Brazil, began growing coffee in full sun in the 1970s to increase yields and production.

Coffee trees growing in the shade of a forest maintain the forest’s biodiversity, particularly its wildlife, and shade-grown coffee often trades at a premium to full-sun coffee. However, the thick forest cover – combined with the steep mountain slopes where coffee grows – makes harvesting more difficult and costlier. It is much cheaper to produce coffee on open flat land, especially if it is mechanically harvested.

There are different degrees of shade-grown coffee production. Rustic shade-grown coffee is where the trees are planted in an existing forest with only the lowest levels of the original forest removed. Once planted, the coffee trees require little care and often no pesticides or herbicides. It is the least capital-intensive method of coffee production. It suffers from a low yield and is quite rare except in India and some of the western coffee areas of Ethiopia.

Traditional polyculture involves planting other (usually food-bearing) trees alongside the coffee trees under a natural forest’s canopy. Commercial polyculture consists of removing or pruning much of the native forest trees to allow sunlight to pass and to give space for the coffee and other crops to grow. The shaded monoculture system is where farmers plant and then prune a single species of tree to provide shade for the coffee trees, allowing them to be grown more densely.

Over the past half-century, growers have developed new sun-tolerant coffee trees and shrubs to combat disease (particularly rust-leaf disease) and provide higher yields. As a result, the percentage of coffee that is shade-grown has been steadily falling. The increase in global production over the past twenty years has almost all been full-sun coffee.  Shade-grown coffee fell from 43 per cent of the total cultivated area in 1996 to 24 per cent in 2014. It has almost certainly continued to fall since then.

Coffee is picked by hand in most countries. In Brazil, where the landscape is relatively flat and the coffee fields immense, the process has been mechanised. Mechanical harvesters strip-pick all the cherries from the trees in one go, whether they are unripe (green), ripe (red) or overripe (purple/black). Mechanical harvesting can stress and damage the trees, reducing the yield the following year.

Coffee is sometimes also strip-picked by hand, particularly the lower quality arabica or robusta varieties. Better quality coffees tend to be selectively picked by hand. The pickers rotate among the trees every eight to ten days, choosing only the cherries which are at the peak of ripeness.

Selective hand picking is more labour intensive and more costly; it is used primarily to harvest the higher quality arabica beans. Red berries, with their higher aromatic oil and lower organic acid content, are more fragrant, smooth and mellow. As such, coffee picking is one of the most critical stages of coffee production.

© Commodity Conversations ®

This is an extract from my book Crop to Cup – Conversations over Coffee now available on Amazon.

A Conversation with Michelle Deugd

Good morning Michelle, could you please tell us a little about yourself and how you ended up in coffee with the Rainforest Alliance?

I joined the Rainforest Alliance in 2008 and, throughout the years, I have managed a range of coffee projects in Latin America, Asia and Africa, focusing on the development of the Rainforest Alliance Certified coffee supply at the origin.  I am now the organisation’s sector lead for coffee.

Rainforest Alliance has merged with UTZ. Why?

Having a single certification programme will simplify certification for farmers and help companies to build more responsible supply chains and drive innovation more efficiently. Creating a single auditing process and streaming the certification process will not only help the more than 400,000 coffee farmers currently certified under both standards, but it will also help new farmers to certify.

It will also help to expand our advocacy efforts.

I understand you have a new strategy called ‘Reimagining Certification’.

‘Reimagining Certification’ is our long-term vision for the future of certification. It is part of our broader strategy at the Rainforest Alliance to drive change.

Certification has had a significant impact, but it must continue to evolve to drive further improvement for people and nature and provide more value for farmers and companies.

We are moving away from the idea that certification is a series of pass/fail requirements. Instead, we are adopting a continuous improvement approach that drives change from a set of core criteria.

What does this mean in practice? It means first ensuring that all workers receive a minimum wage – but continuing to drive improvements towards a living wage. It means working to stop deforestation–and then going beyond that, towards reforestation or regenerative agriculture.

Could you please explain the economic elements in the new criteria?

Our 2020 Sustainable Agriculture Standard outlines two financial requirements for the buyers of Rainforest Alliance Certified commodities: The Sustainability Differential (SD) and Sustainability Investments (SI).

The Sustainability Differential is a mandatory additional cash payment made to certified producers over and above the market price of the commodity. We don’t set the Sustainability Differential in the coffee sector; the grower and the first buyer will negotiate it between them.

The Sustainability Investments are mandatory cash or in-kind investments from buyers of Rainforest Alliance certified products to certified producers for the specific purpose of helping them meet the farm requirements of our Sustainable Agriculture Standard. The investments must go towards the needs identified by producers in their investment plans, and buyers must report the investments they make.

Besides these new criteria related to shared responsibility, our 2020 Sustainable Agriculture Standard also enhances practices which promote improved efficiency and farm-based profitability as the basis for an improved farm income.

How has the Rainforest Alliance changed its approach to child and forced labour?

Child labour, forced labour, discrimination, and workplace violence and harassment have never been – and will never be – tolerated by the Rainforest Alliance. However, what we have learned through many years of experience is that merely prohibiting these human rights violations in our standard is insufficient. Automatic decertification as the response to any incident of child labour is more likely to drive the problem underground, making it harder to detect and address. That’s why our new certification programme promotes an ‘Assess-and-Address’ approach to tackling these human rights issues.

The ‘Assess-and-Address’ approach puts the interest of children and workers at its centre. Without solving the root causes of child labour, forced labour, discrimination, and workplace violence or harassment, the problems will not go away. That’s why the Rainforest Alliance promotes collaboration between certified farms, governments, civil society and supply chain partners to solve these issues together.

How can you increase the demand for certified coffee?

Our market team works with brands, roasters and retailers to develop demand, and they have been successful in their work in the sense that both of our certification programmes have continued to grow since the merger. It has even been the case in 2020 in the context of the COVID-19 pandemic.

Besides that, you need to look beyond the data of one single certification system to get to the full understanding of supply-demand data. Many farms are double- or sometimes triple-certified. If they sell their coffee through one certification system, it is not available to sell through another certification system.

Last question: what is your favourite coffee, and how do you prepare it?

My favourite coffee comes from a sustainably managed small farm in the Tarrazú mountains of Costa Rica, at 1,700 meters above sea level. A young family manage the whole process from cherry to roasted bean, selling the coffee at the local market of the village where I live. I prepare it with a Chemex coffee maker to obtain the full flavour!

Thank you, Michelle, for your time and input!

You are welcome. Thank you for your interest in the Rainforest Alliance!

© Commodity Conversations ® 2020

This is an extract from my new book ‘Crop to Cup – Conversations over Coffee’ to be published shortly.

A Conversation with Soren Schroder

Good morning Soren. Could you please tell us what you have been doing since you left Bunge?

I left Bunge in June 2019 after six years as CEO, and after 36 years in traditional agricultural trading and processing with Continental, Cargill and Bunge.

Over the past year, I have been trying to use my experience to help emerging companies across the full spectrum of the agricultural value chain. I have provided advice, directorship and, in some cases, capital to support these new companies in plugging into the existing food chain, to avoid mistakes, and to develop their thinking and their products.

I started with a blank page, but my premise was that food and health are inseparable and that agriculture should not only be sustainable but regenerative.

Where did you start?

I started with Vindara, a company that produces seeds for indoor agriculture. It is a sector that is snowballing. For example, Singapore has a project called ‘30 / 30’ whereby the city-state aims to grow 30 per cent of their nation’s food by 2030. They can only do this through investment in vertical agriculture.

The technology in the indoor sector is changing rapidly. For example, Vidara has reduced the breeding cycle for new seeds from 5-7 years to 18 months and can essentially tailor-make seeds to suit a specific outcome.

What other companies have you become involved in, either as an investor, director, or external advisor?

I am an advisor to Gro Intelligence, a company that curates and assembles global digital data around agriculture and food and provides sophisticated analytical tools to help draw supply chain conclusions. It is my ‘go-to source’ for market intelligence and analytics. The company is also developing various indices relating to climate disruption.

I am on the board of Kultivat, a company that has developed the technology to extract high-quality latex – natural rubber – from dandelion roots. It is a sustainable and economically competitive alternative to synthetic and plantation-grown rubber. Remember, synthetic rubber is produced from fossil fuels, while natural rubber is currently grown on plantations in South East Asia; it has the same environmental challenges as palm oil. Dandelion is an excellent alternative crop for farmers.

I have worked closely with Locus Agriculture Solutions, a company that makes micro-biological products that improve yields, reduce the need for inputs, and increase the ability of plants to capture carbon. They recently completed the first circular deal in carbon capture in row crops. The $250,000 sale was between a prominent Iowa farmer and Shopify, a Canadian-based technology firm. They did the deal in partnership with the Nori Carbon Removal Marketplace.

I’m on the board of  Telesense, a company that has developed low-cost, remote sensor equipment that monitors grain quality. It uses data and AI to predict how grain quality will evolve during storage, helping to reduce spoilage. It also allows you to optimise merchandising decisions and improve processing yields for a range of raw materials from malting barley to oilseeds.

You have several diverse but complimentary themes here. What other arrows do you have in your quiver?

The one thing that all these companies have in common is that they are about optimising existing agriculture using modern technology.

Tilray, where I am on the board, is a publicly listed Canadian company that grows, processes, and distributes hemp and cannabis products.  I learned about the efficacy of medical cannabis through close friends who have been able to improve their quality of life through the use of medical cannabis. The applications are wide-ranging – from pain management to epilepsy. It has had a significant impact on me.

The Hemp plant, which is in the same family as cannabis, produces seeds and what are called “hemp hearts”, protein-rich superfoods in the same category as chia, flaxseed or chickpeas. The world is moving quickly towards plant-based proteins and healthy oils. Hemp is right on-trend.

Tilray is a pioneer in Cannabis and Hemp. It is still ‘day one’ for the industry, but the company is well-positioned for the significant growth which lies ahead.

Many trade houses have been investing in start-ups in high-growth areas, while at the same time running their legacy trading businesses. Does starting with a blank page give you an advantage?

Yes, although it has been a massive advantage having the understanding and appreciation of traditional agriculture and food. Those traditional value chains will still dominate the way we produce and consume food for many years. These other areas will initially develop in parallel, but they will eventually converge.

Do publicly quoted trading companies have more of an incentive than private companies to seek growth in new areas?

Public companies have to balance short-term results with long term strategy and investment. There can be a conflict between these two goals, whatever sector you are in. The cyclicality in agriculture and food can amplify this pressure, which is why many try to diversify into more added value activities.

Being public does have its advantages. You can access capital in a way that you can’t when you are private. As long as your investors understand what you are about, and they know the industry, being public does not have to be negative.

I am concerned that investors are looking to ‘revolutionise’ agriculture without realising that agriculture has been in a state of continual revolution for the past 75 years. Won’t investors in these new sectors ultimately be disappointed?

Over the past 75 years, the focus has been on increasing agricultural yields, while at the same time reducing costs. It has been about growing enough calories.

We still want to grow enough calories, but we now want to develop the right kind of calories in a way that doesn’t harm the environment, repairs the soil and produces nutrient-dense food.

It is a new revolution: using technology to find ways to improve existing production techniques and to regenerate soils. If you haven’t already read it, I recommend the book An Agricultural Testament by Howard Albert. It was first published in 1940 and explained the power of regenerative practices known already then. Imagine those ideas powered with current technology. The goal is to harness the power of ‘Production Ag’ without all the adverse side effects.

Will farmers buy into this?

Yes. Farmers love what they do, and they love their land.  Contrary to popular opinion, farmers are open to change. When you present them with a suitable alternative, they will go for it. The Locus-Nori deal is an example of that.

Up until now, many farmers have not had many other choices than improving yields and lowering costs. There is a way forward where farmers can get the results they need while consumers get the quality of calories they want. It is about producing sustainable, nutrient-dense products.

That’s one side of it. The other side is that investors are looking at the interface between food and health – the notion that you are only as healthy as the food that you eat.

The 15 to 35 age bracket is driving this movement; they will ultimately dictate the future of agriculture. There is a lot still to be done. There is room for a lot of investment, and the future is full of promise.

Thank you, Soren, for your time and inputs! And good luck with your presentation to the Geneva Grain Conference!

© Commodity Conversations ®