The ebbs and flows of sugar trading

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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