Things are better than you think

In his book Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, Hans Rosling argues that although the world is far from perfect, real progress is being made. Things are bad, but they are getting better.

He writes,

“None of us has enough mental capacity to consume all the information out there. The question is, what part are we processing and how did it get selected? And what part are we ignoring?”

We all know that keeping mankind fed is one of the main causes of environmental degradation, and it is commonly accepted that the situation will only get worse as the world’s population increases.

However, although the first part of that statement is true (things are bad), genuine progress is being made in making it less so (things are getting better). That change is occurring within the supply chain, led by companies that are making a genuine impact in how your food is produced, and how it arrives on your plate.

So in case you screened out some of the good news, here are a couple of positive articles that have been published in the past week.

The first, published by Food Navigator, is entitled, “Why Mars thinks the commodities era is over. It is an interview with Barry Parkin, the chief procurement and sustainability officer at Mars. The very fact that the head of procurement for Mars is also head of sustainability is good news in itself – and should give a clue as to where our business is heading (but more on that later).

Mars is at the forefront of change in terms of sustainable procurement and has mapped the origin of 23 different raw materials used in their products. The company buys either directly or indirectly from around one million farmers, half of which are smallholders. Parkin tells Food Navigator,

“We are in a transparency race. As a company we had better find out where our materials are coming from, and under what social and environmental conditions they are being produced. We need to get working on fixing it before somebody else tells us what is going on. I want to be on the front foot in this race. I want to win this race.”

Palm oil is one of the hottest issues in food production at the moment with a wide supply base. Mars buys only 0.2% of the world’s palm oil supply but is connected to “half” the palm oil mills in the world, more than 1,500 mills. The company has realized that they cannot “be on top of all the conditions in all those mills, each of which is probably connected to 20 plantations” and realizes that it needs to simplify its supply chain if it wants to really know what is going on.

Wilmar International Limited, the world’s biggest processor and merchandiser of palm oil, cannot simplify its supply chain, but it is in a fairly unique position (because of its market share) to influence the way palm is grown and harvested. The company aims to “to meet demand for certified sustainable palm oil by ensuring all suppliers become sustainable”. To further this goal the company has developed an online reporting tool to assess its suppliers in Malaysia, and plans to extend it to Indonesia and Latin America.

The company’s focus on sustainability is paying off not only in terms of brand protection, it is also lowering their cost of borrowing. Last week Singapore’s OCBC Bank announced that the interest rate on their existing US$200 million (S$267 million) revolving credit facility to Wilmar International will now be pegged to Wilmar’s sustainability performance.

But how will this affect the traditional agricultural trading houses? Better for some people may be worse for others. Barry Parkin warns

“You can no longer buy at arm’s length from unknown suppliers. You can no longer buy on price.”

 He adds,

“This is the end of the commodities era. Commodities were all about buying materials of unknown origin, on short-term contracts, with price being the only differentiator. What we now know is there are big differences in terms of the social and environmental impacts of what you source. It is no longer acceptable not to know where your materials are from. There are going to be very different sourcing models in the future.”

Bloomberg last week published an excellent “long read” on Cargill, and how the company is adapting to both technology and changing consumer demands. According to Bloomberg, Cargill Chief Executive Officer David MacLennan is transforming Cargill into “less of a trading operation and more of an integrated food company betting on growing global demand for proteins.”

Bloomberg continues,

“MacLennan, who became CEO in 2013, says he decided three years ago that the company could no longer rely on the occasional crop failure, export ban, or supply shortage to save the day. “I thought, Boy, if we wait for something to change without disrupting ourselves, we’ll be in trouble,” he says. “What’s that old adage? You put a frog in a pot of water and slowly turn up the heat, and the frog doesn’t notice it’s been boiled. I didn’t want to be the frog in the boiling water.”

No one wants to be the frog in boiling water, but the real question is “How do you get out of the pot once you are in it?” There is no clear answer to that question, but as Mr MacLennan realized, the most important first step is to realize that you are in hot water in the first place.

The second is to do what Wilmar is doing: map your supply chain and work to make sure that all your suppliers are sustainable. If all food were produced in a sustainable way the “tradeability versus traceability” dichotomy would go away.

So we know where we have to go. Let’s get going!

All photos sourced under creative commons from Pixabay

As old as the hills

A friend recently sent me a link to one of the UK’s earliest-recorded “Commodity Conversations” – a letter sent by a certain Octavius to his brother Candidus in around AD 100. The letter is part of the Vindolanda tablets, a rich source of information about life on the northern frontier of Roman Britain. Written on fragments of thin, postcard sized wooden leaf-tablets with carbon-based ink, the tablets date to the 1st and 2nd centuries AD (roughly contemporary with Hadrian’s Wall – photo above).

The documents record official military matters as well as personal messages to and from members of the garrison of Vindolanda (photo below), their families, and their slaves. Highlights of the tablets include an invitation to a birthday party held in about 100 AD, which is perhaps the oldest surviving document written in Latin by a woman.

In his letter, Octavius uses a variety of financial idioms and a few technical terms. The letter shows entrepreneurial initiative; the sums of money and goods mentioned are significant. The two brothers are involved in the supply of goods, mainly animal hides and grains, to the military. There is no way of knowing whether Octavius is a civilian entrepreneur and merchant, or a military officer responsible for organising supplies for the Vindolanda garrison.

The letter refers to credit arrangements, evidence for the operation of a cash economy. He writes,

“I have several times written to you that I have bought about five thousand modii of ears of grain, on account of which I need cash. Unless you send me some cash, at least five hundred denarii, the result will be that I shall lose what I have laid out as a deposit, about three hundred denarii, and I shall be embarrassed. So, I ask you, send me some cash as soon as possible.”

He instructs his brother to

“See with Tertius about the 8½ denarii which he received from Fatalis. He has not credited them to my account. Know that I have completed the 170 hides and I have 119 modii of threshed bracis. Make sure that you send me cash so that I may have ears of grain on the threshing-floor. Moreover, I have already finished threshing all that I had.

He then writes about what appears to be a customer default,

A messmate of our friend Frontius has been here. He was wanting me to allocate (?) him hides and that being so, was ready to give cash. I told him I would give him the hides by 1 March. He decided that he would come on 13 January. He did not turn up nor did he take any trouble to obtain them since he had hides. If he had given the cash, I would have given him them.

As I wrote in my book, Commodity Conversations, commodity trading is much older than the Roman Empire:

In ancient Mesopotamia, around 1750 BC, the sixth Babylonian king, Hammurabi, created one of the first legal codes: the Code of Hammurabi. The code allowed for goods and assets to be sold for an agreed price for delivery at a future date. The code required contracts to be in writing and witnessed and allowed those contracts to be sold or assigned to others. This is the first recorded incidence of derivatives, in the form of forward and futures contracts, with trading carried out in the temples.

A few years back, Greg Page, at that time the executive chairman of Cargill, spoke at the FT Commodity Conference in Lausanne. He quoted Libanius, a Greek teacher of rhetoric, from his Orations III, written in the fourth century,

God did not bestow all products on all parts of the earth, but distributed his gifts over the different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so he called commerce in to being, that all men might be able to have common enjoyment of the fruits of earth, no matter where produced.

Greg continued with his own view of the commodity business,

“Trading, or exchanging goods, has long underpinned human progress, and the interdependence that comes from trading creates the real capacity to raise living standards. Trading across national boundaries is a necessity, not a luxury, if the world wants to better serve the needs of its citizens. And as we face a global population reaching nine billion by midcentury, an even greater proportion of the world’s food will need to move across oceans to feed the people. National self-sufficiency in food will not suffice. Trading has always been important and will always continue to be so.”

There is not much I can add to that!

One Belt One Road

I participated last Sunday in the Vogalonga in Venice. The 30km race was restricted to human-powered boats, of which there were about 3,900, with around 8,000 rowers and paddlers. It was quite a spectacle!

As we were rowing through the canal in Murano we stopped at a (random) landing stage to change our crew around. The owner of the landing stage (and house) appeared with a bottle of sparkling wine and invited us into his garden for lunch. We gratefully accepted, spent over an hour with him and his wife, and gave up any hope of winning the race—not that we had any hope of doing so anyway!

As I rediscovered Venice during the rest of the weekend I was reminded how oriental the city is; at times I felt that I could have been in Bukhara in Uzbekistan or Isfahan in Iran. The city’s architecture, and its immense wealth, came from the fact that it was at the end of the Silk Road.

A Chinese TV crew interviewed us as we launched our boats before the race, and I was struck by the number of Asian tourists in the town. One local told us that the city was “flooded” now not by the sea but by a wave of Chinese tourists who were “travelling the new silk road” to Venice.

China is indeed building a new silk road: they call it “One Belt, One Road”. It is really two projects: The Silk Road Economic Belt and the 21st-century Maritime Silk Road.

Costing as much as $8 trillion and affecting 65 countries, it will stretch from the edge of East Asia all the way to East Africa and Central Europe by the time of it’s estimated completion in 2049.

The Chinese government calls the initiative “a bid to enhance regional connectivity and embrace a brighter future,” while one speaker at the recent FT Commodity Conference in Lausanne described it as “the most important thing that is going on in the world that everyone is ignoring”.

The Washington Post recently criticised the initiative, suggesting that it might be a big mistake.  They wrote that the initiative “evokes romantic comparisons to the ancient Silk Road, but there is a more recent chapter of history that urges caution. More than a century and a half ago, the United States was a rising power racing westward, building transcontinental railways that delivered limited benefits and exacted a high cost from society.”

The first time I became aware of the One Belt One Road initiative was when I saw this sign a couple of years back above some road construction work in Central Asia,

This is a better map., originally from The Wall Street Journal, that shows the Maritime Belt stretching to Mombasa in Kenya and and the road/rail line to Rotterdam in Europe.

You can also find an excellent infographic here.

As we left our lunch hosts and headed back across the lagoon to Venice we were caught in an hour-long traffic jam as literally thousands of boats tried to enter the Canal Regio, the narrow but stunningly beautiful waterway that leads to the Grand Canal–and the end of our race in St Mark’s Square. As we inched our way forward through a tangle-mangle of dragon boats, rowing boats, canoes and pedalos, I couldn’t help thinking that if the Chinese had had anything to do with it they would have widened the Canal Regio years ago!

Truth in nutrition

An article in New Food Economy this week warns that almost 40% of peer-reviewed dietary research is wrong, and that “we stop treating new nutrition studies like they contain the truth”. The online magazine argues that “Food research has some big problems: questionable data, untrustworthy results, and pervasive bias”.

In my book The Sugar Casino, I dedicated a chapter to nutrition and told the story of how two enterprising German journalists carried out a “scientific” study that “proved” that eating chocolate will help you to lose weight. They managed to get the study published in a scientific journal and sent out press releases to all the media. Within a week it was on the front page of all the newspapers. None of those newspapers verified the story or checked on how vigorous and exhaustive the study was; they based their stories entirely on the press release.

I wrote at the time,

 Nutrition is an inexact science. It is not possible to isolate the different elements or to establish the causality of any correlation. One test group may lose weight when they eat bananas, but that does not mean that they lose weight because they eat bananas. They could, because they were taking part in the study, have focused more than usual on their health and taken more exercise. Another point is that in the German study the test group that ate chocolate did lose more weight, but the sample size (4 people) was too small to be significant.”

As the New Food Economy wrote in their article, “it is not surprising if you are confused whether coffee causes cancer, or whether butter’s good for you or bad”.

Or whether sugar is a poison that should be regulated like nicotine, or just a calorie that can be part of a healthy diet. (A drunk at a cocktail party recently told me “sugar is toxic”. Sugar isn’t toxic, but alcohol is.)

Aeschylus, the founder of Greek tragedy, wrote “In war, truth is the first casualty.” Perhaps if he were alive today he would replace “war” with “nutrition”.

Julian Baggini touches on nutritional studies, and in particular on the sugar versus fat debate, in his book, A Short History of Truth: Consolations for a Post-Truth World.

He writes,

Hence in the early twenty-first century we find ourselves in a position where we know some truths are hidden by powerful groups to protect their own interests, we are not usually competent enough judges to know which claims about esoteric truths are correct, and we don’t have much confidence in experts to make those judgments for us.

When I read his book last year I found it flawed as I felt the author confused “truth” and “belief”. However I am now not so sure: what may be true for one individual may not be true for another. God may exist for some people, but not for others. Some people believe that the earth is flat or that NASA faked the moon landings.

And on a more mundane level, I may find that when I eat chocolate I lose weight—an individual truth—even though I screen out the fact that I at the same time I start to walk to and from work rather than take the bus. And I may not be able to be convinced otherwise. As Mr Baggini writes,

Reason works best in a blend, which includes not just logic but experience, evidence, judgment, subtlety of thought, and sensibility to ambiguity.

He adds,

“Despite the fact that intelligent people evidently disagree, we are inclined to think that what we believe really is rational and that those who disagree are being blinded by prejudices, ignorance or plain stupidity.”

Perhaps, rather sadly, he is right when he writes,

The relativist argues that there are no bare facts only interpretations of facts, mediated through culture. Nothing is true, period; it is only true for certain people, in certain contexts, or in certain senses. Truth has become personalized, with the individual sovereign over their own interpretation of reality.

So what should we do; who should we believe? In The Sugar Casino I wrote,

There is an old joke about a man who went to see his doctor and asked him what he should do to live to one hundred years old. The doctor replied that he should give up sex, sugar and alcohol and only eat fibrous vegetables mixed with unsweetened porridge.

“If I do that,” asked the man, “will I live to be one hundred?”

“No”, replied the doctor, “but it will seem like it”.

Oscar Wilde once famously said, Everything in moderation, including moderation.” My grandmother used to say, “A little bit of what you fancy does you good” – and that is my first rule of healthy eating. So eat healthily, enjoy your food and don’t beat yourself up over that occasional slice of cheesecake.

Merchants of Grain

I am enjoying (re) reading Merchants of Grain, written by Dan Morgan and published in 1979. Many of the comments and observations in the book are still relevant today. Perhaps the most important one is this:

“..the (trading) companies managed to stay in the shadows most of the time. Perhaps it was the ancient nightmare of the middleman-merchant that made them so aloof and secretive—the old fear that in moments of scarcity or famine, the people would blame them for all misfortunes, march upon their granaries, drag them into the town square and confiscate their stocks.”

Government intervention has always been a threat. Socrates once wrote, “No man qualifies as a statesman who is entirely ignorant of the problems of wheat”, while Lenin is credited with saying “Grain is the currencies of currencies”.

Describing the beginning of the US wheat trade in the 1850s, Dan Morgan writes:

“…margins of profit had to be extracted “upstream”—along the railway lines and at the storage terminals in the interior. In the struggle among farmers, merchants, millers, and exporters for their share of the wheat price that was determined in world markets, the advantage always went to those who controlled the storage and transportation of grain.”

But even, or perhaps especially, back then, technology was changing the way food was produced and distributed. Dan Morgan writes, “In 1837, it took 148 man-hours to plant, cultivate, and harvest an acre of wheat; in 1890 it was down to only 37 hours”. As for distribution, “In 1890, the four-masted Shenandoah, driven by a spread of two acres of canvas, left san Francisco with 5200 tons of wheat, the largest grain cargo on record up to that time.” One hundred years later it is now commonplace to ship cargoes of ten times that amount.

Profit margins have also changed in the past one hundred years. Dan Morgan writes, “Between 1883 and 1889, two large terminals in Minneapolis (Empire Grain and Minnesota and Northern Grain) averaged annual returns on capital investment of 40 percent and 30 percent respectively.” And in the 1920s a Federal Trade Commission study showed that US wheat exporters were making returns of more than 20 per cent on their funds deployed.

However, the good times were not to last forever. In the late 1940s a grain surplus “made for dull markets and extremely thin margins, and the zip went out of the business. It was a time when traders had to fight for a quarter of a cent a bushel, and this situation indelibly stamped and indeed altered the essential character of the companies…The grain trade was becoming not much more than a service business, which eked out a living on costs plus commissions”.

And as a reminder to those who forget the cyclical nature of our business, margins picked up with Russian imports in the 1960s and hit a zenith in the “Great Grain Robbery” of 1972 when millions of tons of grains were exported to Russia, restoring the fortunes of some traders and making the fortunes of others.

Dan Morgan describes the events of 1972 as “one of those economic events that, like the OPEC oil embargo the following year or the repeal of the Corn Laws more than a century earlier, can be truly to be said to have changed the world”. (He couldn’t get everything right!)

But most of his observations are still valid today. On the subject of farm surpluses, Dan Morgan writes, “Farm surpluses tended to occur in rich, industrial nations where had powerful, well-organised lobbies, rather than in developing countries where farmers were usually weak and underrepresented.”

And on the strength of character of the Russians. “If anything characterized the Soviet Union since the Revolution, it was its economic isolation and its determination to survive on its own. It was a Yugoslav Communist politician…who had told American officials in Washington in the late 1940s that his countrymen would rather eat grass than accept help from the West with strings attached.” (President Putin said the same thing last year.)

In 1912 Leopold Louis-Dreyfus wrote, “Our business fills a great human and economic need”. It did then, and it does now.

But I would like to leave the final word to Dan Morgan who sums it all up with, “Study grain long enough and the world shrinks”.

Of dinosaurs and conferences

In a Linkedin post this week Hartwig Fuchs, the ex-CEO of Nordzucker (one of the world’s biggest sugar producers), warned that time is running out for the world’s big agricultural trading companies, or as he called them, “the dinosaurs of the international ag trade”. He wrote, “Unless they redefine their business, and focus on true function that benefits their customers, they might have to go”.

He argued that producers no longer need trade houses to intermediate between them and their final buyers, to book fobbing capacity and freight, or to make the destination sales. He wrote,

“So, looking at those companies today, question is: who really needs them? Where do they generate genuine added value for their customers – and for themselves? Who really likes them and wants them around? What´s their purpose?”

Although none of these arguments are new, it is worrying to see them expressed by so significant a personality in the commodity trade. (Mr Fuchs was also at one time Chairman of Toepfer.)

We have already written extensively on the issues that the trading houses are facing, and discussed various alternative business models. As a reminder, take a look at these two interviews: one with Abercore, a trader that has become an advisor, and another with Solaris, a trader that has found a successful niche in the Black Sea grain trade.

It is interesting that Mr Fuchs refers to the trade houses as “dinosaurs”.

“Evolution or Extinction” was to be the theme of the Commodity Conversations ® event that we had been organising at the Natural History Museum in June. Unfortunately we had to cancel the event due to a lack of interest from both sponsors and attendees. This lack of interest was perhaps a sign that the sector is really in difficulty.

Or perhaps it was that the evening cocktail party was due to be held in the museum’s Earth Hall under the watchful eyes of the most intact fossil skeleton ever found. At three metres tall and almost six metres long, the Stegosaurus was perhaps too big a presence for the cocktail party attendees!

I have recently begun to (re) read Merchants of Grain, written by Dan Morgan and published in 1979, almost forty years ago. The book describes the five trading companies that dominated the world’s grain trade: André, Bunge, Cargill, Continental Grain, and Louis Dreyfus.

Mr Morgan wrote that the trade houses

“had made themselves indispensible because of their control of the distribution systems, the processing plants, the technology, the capital and the communications with buyers and sellers…The companies run their own intelligence services all over the planet—private news agencies that never print a word.”

He added,

“The grain merchant houses are private, centralized oligopolies that do not publish financial statements. There are no public stockholders, which greatly limits the obligation to disclose information. Ownership of the companies is vested in the hands of seven of the world’s richest and most uncommunicative families, and the same families also have operating control of the companies.”

However, that was already beginning to change by the time the book hit the shelves. Cargill had already begun to publish a monthly newsletter, starting an “opening-up” that continued for the next forty years—and still continues today. The big trading companies, even the privately held ones, have long realized that they have a responsibility to account to the public, to disclose and explain what they do, and how they do it.

Two of the five companies cited in Merchants of Grain no longer exist, and a third is a candidate for takeover. However, Even so, I am not sure that the agricultural trading sector has been subject to more change than other sectors.

A recent study showed that the lifespan of large, successful companies has never been shorter. In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years. It’s forecast to shrink to 14 years by 2026. If this trend continues, about 50 percent of the S&P 500 will be replaced over the next 10 years.

Commodity trading companies have significantly changed their business models in the past forty years and this evolution will continue. Those that do not evolve will become extinct, but this process is not restricted to agricultural commodity trading.

Finally, I do not agree with Mr Fuchs’ argument that agricultural trading companies add no value. When prices and price volatility are low it is relatively easy for buyers and sellers to connect directly. Wait until prices turn or there is a major harvest failure somewhere. It will be then that the skills and value of the trading houses (big and small) will once again be appreciated.

But it is still a shame that we had to cancel the conference planned for June. It would have been an interesting discussion.

New York conversations

The family at the next table were stocking up enough food from the hotel breakfast buffet to last them for weeks. Admittedly it was a big family, three generations of them, but there wasn’t a square inch of space on their table that wasn’t covered in food. Every time a plate was emptied, the grandmother went back to the buffet to get a refill. None of the family members was overweight, and there was no way that they were going to eat all of the food they had piled onto their table. I guessed that at least half would be thrown away, if not more.

As I finished my coffee a businessman sat down at the table on the other side of me and started to tuck into a plate piled high with fruit: melons, pineapples, huge red strawberries and grapes. I estimated that he had more than a kilo of fruit on his plate. He saw me looking at him and smiled. “I am on a diet,” he explained. “I only have fruit for breakfast now.” I thought about telling him that fruit were carbohydrates and heavy in calories but he had already got up to fetch a pint glass of apple juice.

The grandmother walked past my table again with what could only be described as a bucket of scrambled eggs. She piled some of them onto her grandchildren’s plates, but they were more interested in the chocolate brownies that she had amassed earlier. The grandmother wasn’t eating anything; she was just making sure that her grandchildren were well looked after. I realised that she was expressing her love through food—and I thought once again how complex our relationship with food really is. Food is life and love, but it is also guilt and self-depravation.

The previous day I had dropped in to meet the editorial team at New Food Economy. The online magazine had recently run a series of articles about farmer suicides in the US. Farmers borrowed heavily the last time crop prices were high, and they had invested that money in new equipment and more land. With crop prices down again, farmers are now unable to meet their interest payments; as a result, farming now has the highest suicide rate of any profession in the US.

We discussed how low food prices mean that producers can’t cover their costs while at the same time they encourage consumers to overeat and throw away a large percentage of what they buy. While high food prices attract most attention from the media, the social and environmental costs of low food prices are always underestimated.

The next day I was talking with a Bloomberg journalist about how low food prices were impacting farmers, but she wasn’t impressed. “Maybe food prices are low in the US”, she told me, “but what about the currency effect? Russian wheat producers are doing just fine, as too are Brazilian soybean farmers. ”

She made another good point about low prices. “Perhaps,” she suggested, “the improvements in seed technology and farming practices—drones and the like—have reduced production costs while at the same time made crops more resistant to poor weather, pests and disease.

“Is it possible,” she asked, “that bad weather and disease has less impact on production now than in the past? It is possible that technology has taken some of the volatility out of the agricultural markets? If it has, then crop prices could stay lower for longer than in the past—especially if the US dollar stays high.”

Technology and innovation were the main subjects of conversation when I met a friend for lunch, but this time we focused on AI—artificial intelligence—and the way that the algorithmic funds (according to him) now dominate the futures markets.

“They are so secretive,” he told me, “none of my contacts know how they work. We all try to guess how they are programmed, and how they might react to, or to create, market moves, but it is impossible. Perhaps they change their trading strategies too quickly, or perhaps they have many variants of a particular trading strategy.”

“What about market fundamentals,” I asked him, “don’t they impact the markets?”

“Yes they do,” he replied. “Supply and demand will always drive medium and long term trends. But there currently aren’t any trends in these range-bound and over-supplied markets. For the moment I am just trying to survive. I call it “death by a thousand cuts”—all these tiny short-term moves just pick away at my equity. Algorithmic funds love these markets. And to be honest, they will probably also love trending markets. Perhaps computers are just better at trading than humans.”

My final business conversation of the trip was with another old friend in the business. I told him about the pessimism that I had encountered and he laughed. “It’s just that phase in the cycle,” he reassured me. “Cycles turn and when this one does farmers and traders will be able to make money again. It will then be the consumers’ turn to complain. The last time food prices increased, everyone blamed traders and speculators; no one blamed the poor weather or the preceding period of low prices that had driven farmers off their fields.

“Give it two years,” he laughed. “Traders and producers will once again be making money—and everyone will hate us. It’s been like that since the beginning of time, so you might as well get used to it!”

Ten Questions for the Agtrade

Agricultural commodity traders are asking themselves key questions about the future of their businesses. Here are ten that we heard recently (with tentative, perhaps controversial, answers).

1/ How can we improve profitability in the supply chain?

At present the only way is to cut costs. This can be done by reducing headcount and by introducing new technologies and processes. Increasing traded volumes and the general scale of operations can also help. However, when everyone fights for increased market share competition gets tougher and margins suffer.

2/ Why is consolidation in the sector happening so slowly?

The main players are looking to increase scale to reduce their costs and diversify their risks. However once you get to a certain size you run into issues with the competition authorities. Consolidation is happening in the middle tiers. COFCO bought both Nidera and Noble Agri, but those two acquisitions show how tough it can be to integrate a business once you have bought it. Most M&A deals destroy rather than create value—and not just in the agtrade.

3/ Where is the value in the agricultural supply chain?

In recent years the value has seeped out of the agricultural supply chain as market power has shifted from producer to trader to consumer. This has resulted in lower food prices at the expense of farm incomes and traders’ margins. If people want to eat, that pendulum will have to swing back, at least partially.

4/ Is a sustainable supply chain a less profitable one?

No. To be sustainable a supply chain has to be profitable. If it isn’t profitable then it isn’t sustainable. Traders will have to be paid for what they do or they will stop doing it.

5/ Does increased traceability mean less tradability?

Maybe. Traders need optionality to be able to respond to price signals (for example changing freight rates) in order to supply their customers at the cheapest price. If one origin can’t be swapped for another then the supply chain becomes less flexible and more costly. However technological progress should soon mean that all commodities are traceable back to where they were produced. Traceability and tradability will then become co-dependent.

 6/ Is efficiency the key to a sustainable supply chain?

Yes, along with improved traceability. Increased efficiency should result in reduced crop loss and and fewer GHG emissions. A more efficient supply chain should also raise farm incomes and help local communities reduce environmental degradation caused by agricultural expansion.

7/ Is there still a role for speculation in agricultural supply?

Speculators absorb price risk. Risk has a cost. By transferring price risk to speculators the other actors in the supply chain (producers, consumers and traders) can lower their costs. This raises farm incomes and lowers food prices. Speculators also ensure that price signals are transmitted quickly, leading to faster supply responses.

8/ How will technology impact the agtrade?

In many ways, but most significantly, blockchain and a wider use of electronic shipping documents should make the whole supply chain more efficient and lower costs.

9/ Does the agricultural commodity trade have a future?

Absolutely. The world’s demand for calories continues to increase and the only way to meet that demand in an efficient and environmentally sustainable way is through trade. Someone will have to move these huge crops around the world—and to be paid to do so. The future for the sector as a whole is bright.

10/ Which companies will win and which will lose?

The winners will be those that embrace change, responding quickly to process innovation and technology. As Charles Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

Innovation and the Agtrade

The agricultural commodity trade is as old as the hills and one of the earliest professions. It has experienced constant change over the centuries and that change has accelerated over recent decades. Technological change and process innovation will continue to accelerate; we as a sector must continue to evolve and embrace these changes.

What have been the major innovations so far, and how will innovation and new technology further disrupt the sector?

Here are five ways in which the sector has already been disrupted:

  1. Social media has transferred market power from producers to traders and now to consumers, giving consumers a mass voice to start or reinforce trends, blacklist and shame some brands or products and promote others.
  2. Communication has become instant and virtually free. In the past trade houses invested huge sums of money in, and prided themselves on, their private in-house communication networks. These have now become redundant.
  3. Information has become widespread and democratic. This has eroded the price differentials that previously existed between surplus and deficit areas. It has also eroded the “information edge” that traders once had regarding future price movements.
  4. Satellites have improved crop forecasting, giving us better information regarding harvests and weather problems. Bigger and cheaper computers have made weather modelling and forecasting less of a luxury and more accessible. (Unfortunately for the trade houses, this information is now also widely available at a low or even zero cost.)
  5. Algorithmic trading systems have become so good they can be better at trading than humans. This is making it harder for traders to make a profit speculating in the futures markets, and more expensive for producers and consumers to hedge their price risks.

However, not all innovation has made things harder for traders. Here are five ways in which it has been positive—and will continue to be positive.

  1. Containerisation has undoubtedly been the biggest disruptor ever in the way that commodities are moved around the world. It has reduced shipping costs (and cargo loss) and improved traceability. There is no reason why this should not continue. Technology should continue to reduce transport and distribution costs in general.
  2. The “sharing economy” should further reduce shipping costs. Instead of trade houses owning fleets of ships or trucks, they will increasingly outsource distribution and transport to others who can better maximise capacity utilisation.
  3. Artificial intelligence will continue to reduce costs. Machine learning and artificial intelligence is already aiding or replacing some more complex roles. This is the flip side of the algorithmic trading point we saw in the earlier list. We have already seen the first successful blockchain transaction (a cargo of Canadian soybeans to China) and we expect momentum in this area to build.
  4. Technology in the form of RFID chips will soon allow traders to track commodities from the moment they leave the farm or producer until they arrive at destination. Pretty soon each bag of, say, coffee, tea and sugar will have one!
  5. Food composition itself will change. It could be simple stuff like Nestle’s new sugar, which is hollow and contains less calories. It could also be major innovations that will completely change the landscape of agriculture – like a switch to lab meat.

By definition, the biggest disruptor to the agricultural commodity trade will be the one that we don’t foresee. Take road transport. Who really predicted how improvements in battery technology would lead to the growth in electric vehicles, the sharing economy to the growth of Uber, and improvements in AI to driverless cars?

The technology companies are already targeting agriculture, whether in the form of vertical farming or retail distribution systems (think of Amazon’s purchase of Whole Foods and their cashier-free stores.)

Who knows, maybe the next Elon Musk will start out as a grain trader!


The FT Commodity Summit

The mood at this year’s FT Commodities Global Summit was more upbeat than in recent years. The summit was again mostly focused on the extractive industries, oil, gas and metals—all markets that appear to have bottomed. Indeed this year’s theme was “The Start of a New Cycle”. Excess production capacity has now been absorbed and prices are on the up.

The “electrification” of the economy was the main subject of discussion for the energy and metal guys, particularly the anticipated growth in electric vehicles (EVs). Electrification is expected to be marginally bearish for oil prices, but then only sometime in the distant future, and wildly bullish for cobalt and copper prices. Speaker after speaker took the stage to warn that there simply won’t be enough of either to meet the planned expansion in EV production.

The mood turned remarkably flat, however, when it was time for the panel on agriculture. The panellists worried about razor-thin, or even negative, margins on their physical trade flows and sadly listed all the reasons : the democratisation of data; the speed of information; greater transparency in supply chains; the advent of algorithmic funds; heavier regulation; increased traceability and reduced tradability; over-production; and an over-hang of infrastructure.

Panellists explained that agricultural trade houses have been responding to the collapse in their margins by cutting costs, particularly by reducing headcount and implementing new technology to improve efficiency. They have also been trying to increase traded volumes so as to spread their overhead cost burden more thinly. Unfortunately, this fight for market share has resulted in increased competition and even thinner margins, a vicious circle that can only be solved by consolidation.

With margins so thin it doesn’t take much of a problem somewhere along the supply chain to push a transaction, or a company, into a loss. As long as it doesn’t over stretch management, increased volume can diminish the impact any particular problem can have on the company’s finances. So increased scale can reduce risks as well as costs. The panel predicted that we would see more partnerships, such as the recently announced one between Cargill and ADM in Egypt.

However, if the sector is to thrive—or even survive—it has to do more than reduce costs or spread risks. As the President of Cargill’s Agricultural Supply Chain Enterprise so aptly put it, “We all have to reinvent ourselves one way or another to ensure that we create value within the supply chain.”

Sitting in the conference hall listening to the speakers from the energy and metals sectors it became apparent that they at least are still making money from the physical movement of their particular commodities. Yes, they all complained about declining margins; but at least they still have margins to complain about. Agricultural trade houses don’t have that luxury.

Most agricultural commodity traders gave up trying to make money from FOBS to C&F a long time back. Instead they moved up and down stream into elevators, silos, barges, port terminals, and distribution and packing plants. They also went into trade finance and risk management. (At one stage they even tried their hands at running hedge funds.) However, competition is now just as tough at both origin (from farmers) and destination (from local traders).

But wait a minute. World population is growing, as too is our demand for meat. Someone will have to move all that food (and animal feed) from where it is grown to where it is eaten. They will have to store those crops from when they are harvested to when they are consumed. And they will have to process that food into a form that can be eaten: wheat into flour, soybeans into meal etc. Governments won’t do it. So it will be left to the agricultural trade houses.

That at least is the theory. Agricultural trade houses add value to the supply chain by transforming crops in space, time and form. But they won’t do that unless they are compensated for doing it. One way or another, if the world wants to eat, traders will have to be compensated for the value they add, the work that they do and the risks that they take.

If the world wants to eat, agricultural traders will not only have to survive, they will have to thrive. And if all other avenues for revenue are closed, margins on physical flows will have to become positive.

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

Just because the sector as a whole will thrive, it does not mean that all participants in that sector will survive. The companies that do will be the most efficient ones in terms of cutting costs and spreading risks. This means either scale or agility. We could see the bigger players getting bigger; the smaller ones getting more agile (in searching out opportunistic margins where they can find them), and the medium slower moving firms, well, getting out.

But all this could take time.  Remember, the UK economist J M Keynes once famously warned, “The market can remain irrational longer than you can remain solvent”.