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Commodity Conversations News Monitor

The head of Cargill’s World Trading Group has said that soybean prices could hit all-time highs. Cargill estimates US carryout stocks are “significantly lower” than USDA’s figures and feels that 27 to 28 million mt of S. American soybean production have been lost.

Dry weather and little hope of significant rains in Argentina’s soy belt are igniting fears of a repeat of 2018 when drought drove the harvest to below 38 million mt. The current forecast is for 40.5 million mt.

Chinese importers have washed out about ten cargoes of Brazilian beans in the past week as several soybean crushing plants in China have suspended operations due to poor/negative margins.

After a fire broke out, Louis Dreyfus briefly suspended operations at its Claypool, Indiana, soybean processing and biodiesel plant. No employees were injured, and the fire was quickly extinguished.

The first two months of 2022 are the driest January and February in Californian history, prompting state officials to warn of dire water shortages. The drought in the western US is the worst in at least 1,200 years

California is looking to reduce methane emissions by cutting food waste. It accounts for 20 per cent of the state’s methane emissions, third behind dairy manure and cow burbs. Meanwhile, European farmers are increasingly looking at opportunities to use their soils as carbon sinks as various startups enter the sector.

The USDA has restarted its avocado inspection program in Mexico, and avocado exports to the US have resumed. The USDA had earlier suspended imports after a US plant safety inspector received a threat. Activists claim that Mexico’s avocado producers must pay protection money to drug cartels.

India will extend a reduction in customs duty on edible oils to the end of September. India has also cut its tax on crude palm oil imports to 5 per cent from 7.5 per cent. The FT has a nice article on the Nigerian government’s plans to boost domestic agriculture and palm oil production.

HMM, a South Korean shipping company, has reported a $4.4 billion net profit for 2021, compared with just $100 million in 2020, as sales more than doubled to $11.5 billion. The carrier returned to the black in Q3 2020 after being on the brink of bankruptcy.

The European Association for Forwarding, Transport, Logistics and Customs Services (CLECAT) has sent a letter to the EU Commission, asking for an investigation into the container shipping sector, alleging unfair and discriminatory practices.

A new study estimates that the world spends at least $1.8 trillion a year on subsidies that contribute to ecosystem destruction and species extinction. Of that amount, $520 billion goes to agriculture and $155 billion to forestry. The Guardian asks why the world is still funding the destruction of nature through misdirected and unthought out farm subsidies.

Another new study argues that ethanol is 24 per cent more carbon-intensive than gasoline due to emissions from land-use changes, along with processing and combustion. The US RFA said the study was “completely fictional and erroneous” and the authors used “worst-case assumptions [and] cherry-picked data.”

US biofuel producers have asked Congress for tax credits under the Build Back Better program to help boost the production of sustainable aviation fuel (SAF).

After surging 53 per cent in 2020, sales of plant-based meats increased only 1 per cent in 2021. Bloomberg looks at how the sector is reacting by collaborating with processed food producers.

Bayer has declared force majeure on sales of glyphosate to industrial customers after a critical supplier ran into manufacturing problems. Repairs at the supplier could take about three months.

Bloomberg Green has an interesting article on Chinese gene-edited seawater rice. It’s more resistant to saline and alkali than standard rice varieties – and has a slightly higher yield. Meanwhile, researchers have developed gene-edited wheat resistant to powdery mildew, one of the most damaging pathogens for wheat farmers.

Nestlé has reported its strongest growth in developed markets in a decade. Sales rose 7.5 per cent, with a 2-percentage point rise coming from price increases. Coffee was the most significant contributor to growth. The company said profitability might decline in 2022, warning that raw material and shipping costs will probably increase.  The CEO said the company would be “open to do a big deal” after selling $10 billion of shares in L’Oréal.

The Daily Beast has a long read on how organic food could doom the future of farming – something that I have been pondering for a while.

© Commodity Conversations ® 2022

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A Conversation with Alex Sanfeliu

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

I joined Cargill in Barcelona in 1995 as a junior trader and moved to Geneva in 2000 as a wheat trader for Europe and the Black Sea. In 2003, I transferred to the bean desk, eventually becoming soybean meal desk head by 2007. In 2010, I moved to corn as desk head, and, in 2014, I became the Business Group Leader in our World Trading Group (WTG).

The WTG sits at the centre of Cargill in terms of agricultural commodity trading. From here, we manage and lead the whole organisation for all our trading in wheat, corn, beans, meal, vegetable oils, palm, and softs. I am effectively the trading manager for Cargill in the agricultural space.

 Which of your roles have been the most fun and which have been the most stressful?

Trading is my passion, so I have enjoyed all my roles. I had the most fun as a desk-head, a job which is 120 per cent focused on trading. Wheat is my favourite commodity because of the different countries and qualities involved and because it switches quickly between deficit and surplus. You must be agile to trade wheat. It usually has the highest volatility of all Agri commodities, which means it gives you plenty of opportunities throughout the year. My second favourite is vegetable oil, again because of its optionality and trading opportunities.

Physical defaults are the most stressful part of my job. The most difficult ones to predict are usually politically driven, like when there is regime change in a country or a financial or forex turmoil that results in commodity defaults. The stressful part is that our jobs turn into limiting losses instead of capturing opportunities; it is like playing to tie instead of to win.

The agricultural supply chains have shown resilience during the recent pandemic. How do you explain that resilience?

Agricultural supply chains are efficient and flexible. Our business is not a high margin one, and we constantly strive to keep costs down. We must be efficient to be successful and adapt to changing environments. COVID was unique, but we have had other unusual events over my career and had to adapt quickly to changing circumstances.

The second point is that our sector is not labour intensive – crushing plants and feed mills do not require a large labour force to operate. Many agricultural workers spend most of their time outside, whether on a farm or an elevator; they do not work in offices where people sit close together. As for our offices, we operated from home right from the beginning of the pandemic. At one point, we had 60,000 Cargill people working from home, and things went perfectly.

We tend to say that Cargill shines when things get tough. It happened in 2008, and it happened again in 2020. Challenges drive us. Resilience is in our DNA.

Agricultural commodity pricing has become more transparent, but Cargill has continued to operate profitably. What is the secret?

I must be careful not to reveal all our secrets, but part of our success results from our ability to reinvent ourselves constantly. Being a private company makes this easier. It allows us to have more of a long-term view than some of our competitors and to pay less attention to short-term results.

Agricultural commodity prices are cyclical. Trading companies tend to downsize in quiet times, reducing investments in data, analytics, and infrastructure. We do the opposite. Margins shrunk in the flat markets from 2014 to 2018, and it was tough to make money as a trader in low volatile and oversupplied markets. We used that period to invest in data, analytics, systems, and people. When the tide changed, we were ready to take advantage of the opportunities that appeared. There is only a narrow spread between excellence and doing average in quiet markets. When things get more exciting and volatile, that spread widens considerably.

We have three further advantages when it comes to trading.

First, Cargill is present in most geographies and is all along the food supply chain. We have data that goes from the farm to the fork. Second, we have long experience successfully developing trading talent and knowledge of agricultural markets. Third, we have invested heavily in new technologies such as Artificial Intelligence or Machine Learning. Combining those three elements – data, top trading talent, and technology – gives you a winning combination.

Do you envisage a day when agricultural supply chains no longer need intermediaries?

I don’t like the word intermediary. We are not intermediaries. We don’t just buy something and try to sell it at a profit. We originate, transport and process agricultural commodities. We operate silos, warehouses, port elevators, ships, and factories, and we add value at every stage of the supply chain.

What advice would you give to someone starting in the business?

First, I would ask them to enjoy what they do. They need to be true to themselves. Do you love the job or not? There is no middle pathway in trading. Trading attracts people because of the excitement and the financial rewards, but you quickly discover whether you love it or hate it once you are there. You need to love it. It is an intense and challenging job, so you better enjoy it!

Second, I would advise a recruit never to stop learning! You will be quickly left behind if you stop learning. You can quickly go from excellence to obsolescence.

Third, I would tell a recruit to stay humble. A big ego is the enemy of many traders. There is nothing to gain from having a big ego. The best traders that I have seen in my career have been humble.

Thank you, Alex, for your time and comments!

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

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Commodity Conversations News Monitor

Russia has reportedly pulled back on the idea of a naval blockade of Ukrainian ports in the Sea of Azov, although naval exercises in the Black Sea continue to impact grain shipments. However, the situation remains uncertain and could stay that way for a while. Russia and Ukraine account for more than 25 per cent of global wheat shipments, and markets moved higher last week on invasion fears. The FT writes that food and fertilizer will become the next friction point between Russia and the EU.

Canadian police are slowly removing protestors blocking the Ambassador Bridge, one of the main border crossings into the US. Some companies are turning to air transport to avoid the blockade.

The USDA has launched its Partnerships for Climate-Smart Commodities program and will invest $1 billion to promote farming, ranching and forestry practices that cut greenhouse gas emissions or capture and store carbon.

One in three people across America has detectable levels of a toxic herbicide 2,4-D. The herbicide was developed in the 1940s, but its popularity dipped in favour of Roundup (glyphosate). It has seen a resurgence since the spread of Roundup-resistant weeds.

In their latest Land of Plenty Report, the UK WWF has called for the UK government to invest more in regenerative agriculture, arguing that it could slash emissions equivalent to taking 900,000 cars off the roads.

Deforestation in Brazil’s Amazon totalled 430 square kilometres in January, five times more than January 2021. New clearing in January was still less than half of what is common during the peak months from June to September.

In Colombia’s Amazon region, fires suggest rising deforestation for ranching and illegal mining. The burning is occurring in Caqueta, Meta and Guaviare provinces, where it creeps into national parks and parts of the Amazon rainforest.

More than 1,000 sq km of Amazon rainforest has been felled to grow soya in the Brazilian state of Mato Grosso since the Amazon soy moratorium was signed in 2006. However, degradation in the Amazon Forest was responsible for more carbon loss than deforestation between 2010 and 2019.

The Chinese government’s recently released guidelines of gene-edited crops should boost research into new wheat varieties. Meanwhile, China wants to become a world leader in sustainable agriculture.

Recent data shows China missed its commitments to purchase an additional $200 billion worth of US farm and manufactured goods, energy and services under the Phase 1 trade deal agreed with President Trump

Tyson Foods uses as much as 10 million acres of farmland to produce corn and soybeans to feed the more than 2 billion animals it processes every year in the US alone, according to a new study by the Union of Concerned Scientists (UCS).

Bunge reported a 17.1 per cent jump in quarterly profit as large oilseed crops in North America and Europe and strong demand for processed meal and oil bolstered its core agribusiness unit. The company forecast that the strength would carry into 2022 but warned that it would likely not match last year’s record performance.

Indonesia has expanded the scope of a January ruling, which required suppliers to declare their export plans of crude palm oil olein and used cooking oil, to include all palm oil products.

The soaring cost of vegetable oils makes it harder for India to bring inflation under control. Palm oil prices have jumped 15 per cent this year, while soybean oil has gained 12 per cent. India’s consumer food price index rose in December at the fastest pace in six months. The Indian government has tried to rein in domestic vegoil prices by reducing import taxes, imposing stockpile limits and suspending futures trading in edible oils and oilseeds.

Bloomberg feels that the rise in vegoil prices is a sure sign that food inflation could go higher, although palm oil prices saw some profit-taking last week.

The UN FAO has warned that the overexploitation of fish in West Africa by the growing global fishmeal and fish oil industry is having a “considerably negative impact” on food security, undermining the ability of local communities to feed themselves.

Exchange certified stocks of arabica coffee beans have fallen to their lowest level since February 2000, mainly because it’s more attractive for Brazilian producers to sell into the domestic market rather than pay high shipping costs to deliver the commodity at the exchange.

Jordan wants to kick start domestic agriculture and regain food sovereignty by planting wheat on abandoned farmland.

The price of lumber has risen nearly 30 per cent so far in February, hitting $1,204.90 per thousand board feet. Still, lumber is 30 per cent below its record high of $1,711 reached in May 2021.

A fight is brewing in Mexico over corn imports. In December 2020, the Mexican president issued a decree banning the import of GM corn for human consumption by 2024. The US argues that the ban will violate the USMCA free trade deal.

The World Shipping Council has published what it believes are the regulatory and economic steps that the International Maritime Organization must take for the shipping industry to achieve zero carbon emissions.

Shipping lines added a record 7.2m teu, or 14 per cent, to the global container equipment fleet last year, taking it to 50.5m teu.

Reuters finds signs that the global supply chain crisis could finally start to unwind towards the end of this year. However, trade channels have become so clogged up it could be well into next year before the worst-hit industries see business remotely as usual.

Central banks are also worried that supply chain problems will continue through 2022 and that the container line’s record profits will translate into higher inflation. Although some suggest that US port congestion may have peaked, Maersk CEO’s has said that supply chain issues are not getting much better.

Maersk has acquired US-based forwarder Pilot Freight Services for $1.8 billion, the latest in a string of acquisitions transforming the company into a global logistics outfit.

The container shipping company Danaos reported a sevenfold increase in net income in 2021 at $1.05 billion. Danaos was on the verge of bankruptcy in 2018.

The shipping companies’ massive profits are fuelling resentment and criticism of the sector’s concentration and alliances.

Shares in European food delivery firms have fallen sharply, with investors losing patience with continual losses and rising costs.

The UK government has announced a review of the pig industry supply chain in response to a worsening crisis in the sector where an estimated 200,000 pigs are backed up on farms, unable to be taken to slaughter.

© Commodity Conversations ® 2022

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A conversation with Dave Whitcomb

Good morning, Dave. Could you tell me a little about yourself and your background in commodity trading?

In 2004, I joined Cargill’s pension fund management team at their headquarters in Minneapolis, Minnesota. In 2010, I moved to Cargill’s grain trading group in Geneva to help build what they called their Non-Fundamental Analysis (NFA) group.

I founded Peak Trading & Research in 2018 as a quantitative agricultural research and trading company, where I’m currently the Head of Research.

How do non-fundamentals affect the markets?

The contract price will always converge with the cash (physical commodity) price when a futures contract expires. However, as a percentage of market participation, the number of players who use futures to source or deliver cash is decreasing. At the same time, the total number of players trading non-fundamental inputs has increased.

Until they expire, futures contracts will often make significant moves based on non-fundamental factors such as macroeconomic data and momentum trader flows.

You may be bearish based on your S&D balance sheet. Still, the macro-economic environment may be bullish – it’s challenging to stay short if crude oil is going up, the dollar is down, and inflation expectations are rising. You also need to take seasonal factors into account. Is it a time of year when prices typically move higher? You must also look at momentum; is it pointing upwards?

What does every fundamental trader need on their non-fundamental dashboard?

We refer to the non-fundamental price drivers in agriculture markets are the “Four Ms”: Monthly seasonality, Macro, Momentum, and Market Structure.

Agricultural markets have strong seasonal price patterns. Every commodity is different, but we see predictable and consistent seasonal patterns across most grains, oilseeds, meats, and softs.

Macro-flows are critical for agricultural markets: macroeconomic data, central bank policies, currencies, and energy, particularly crude oil.

Momentum is our third M. Many hedge funds focus on momentum as a reason to get into or out of markets. They try to catch the big moves, especially at the front edge of the futures curve. Momentum traders try to stick to the most liquid part of the curve.

Market structure is our fourth M. Fundamental traders must be aware of the Commitment of Traders (COT) reports showing how market players like hedge and index funds are positioned. Are they over-extended, either long or short? How vulnerable are those positions, given what prices are currently doing? Will we see a long liquidation, or, if they are short, will we see a short squeeze?

Can a fundamental trader be successful now just trading fundamentals?

It isn’t easy. Markets see cash convergence at expiry, but in the meantime, futures are increasingly following non-fundamental inputs. Traders who trade non-fundamentals continue to attract capital and are having more impact on our markets.

There’s a lot of focus on inflation right now – how is that affecting the markets?

The easy money is probably behind us. The Fed has announced that it will start tapering, winding down its Quantitative Easing (QE) purchases. We could have hikes in interest rates in the middle of 2022. Central banks are now actively working against inflation. It doesn’t mean that inflation can’t continue. One year ago, central banks were trying to manufacture inflation. They are now slowly shifting to capping inflation. Over time it will take some wind out of the sails of this supercycle story.

What would you put on a macroeconomic dashboard for agriculture traders?

Every trader should watch the US dollar and Crude Oil.

For the US dollar, we often say, ‘US dollar up = Ags down.’ Most of our markets are dollar-denominated, and changes in the dollar can impact the competitiveness of US products. A strong dollar encourages origin selling and acreage expansion while making US products less competitive.

Crude oil also matters for the ag markets. Strong energy markets ripple through the ags in many ways: higher fertiliser prices, production costs, transportation costs, etc. Then there are the secondary impacts like hedge funds buying futures because crude oil is going up. Energy market strength lifts ag futures prices in many different ways.

Beyond crude oil and the dollar, it’s essential to watch US and Chinese stock markets, commodity currencies like the Canadian and Australian dollar and the Russian rouble, bond and inflation markets.

What you have on your dashboard depends on the market you trade. Every commodity has its unique set of macro indicators.

And these macro indicators change over time. You must look at correlations and see which macro indicators move which market. Soybean traders currently watch fertiliser prices, propane, and natural gas. Five years ago, they watched Chinese rebar prices as a good proxy for Chinese growth expectations and soybean import demand.

Do physical traders still have an advantage?

Physical traders have a massive advantage if they work in trading houses where they can trade the various arbitrages available to them. They are beginning to understand how these new market participants operate and are learning to complement their views with non-fundamental inputs. It is absolutely a move in the right direction.

If they haven’t done so, every trader should build out a dashboard of non-fundamental trading inputs that matter for their market. Every market is different. Sugar has strong seasonality. Lean hogs are an excellent breakout market. Cocoa is mean-reverting. Bean oil trades all these macro flows. Work out which non-fundamental factors are essential in your commodity, and then follow them like a hawk!

Thank you, Dave, for your time and comments.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

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Commodity Conversations News Monitor

The UN FAO Food Price Index hit eleven-year highs in January, led by gains in vegetable oils and dairy prices, partially offset by a decline in sugar prices. Meat and cereal prices remained essentially unchanged. The NY Times worries that high food prices could lead to social unrest, while Bloomberg is concerned about the cost of meat, soybeans, coffee, and avocados.

China has removed restrictions on wheat and barley imports. The countries plan to reach a similar deal next year on peas. Leading wheat exporters to China, such as France, Canada, and Australia, may see their share of the China market fall. Russia has expanded in several other wheat markets in recent months, gaining a more significant stake in Saudi Arabia and Algeria.

Egypt may replace a bread subsidy with cash payments for the poor in the face of soaring wheat prices. Nearly two-thirds of the population get five loaves of bread per day for 50 cents a month, little changed since the 1970’s “bread riots”.

National Geographic reports on a new study on how climate change and agronomy improve US corn yields more than genetics. The New York Times invites us to meet the lobbyists who protect the farmers who are killing the planet while Fee reveals the ‘dark truth about America’s agricultural system.’

The CEO of plant-based protein company Impossible Foods made the headlines last week when he estimated in a report that eliminating animal agriculture over the next 15 years would essentially halt the increase of greenhouse gases for the next 30 years. Although the report was published in the peer-reviewed journal PLoS Climate, other scientists called it extreme, implausible, and unrealistic.

But is it plausible for plant-based meat to reach price-parity with real meat by 2023? The Good Food Institute (GFI) believes it can.

Even so, all-meat companies remain popular among short-sellers, with some analysts predicting further falls in their stock prices.

Britain’s pig industry says it faces collapse due to a shortage of butchers and a backlog in slaughtering more than 170,000 pigs. The sector also faces declining demand as more consumers move to plant-based diets.

Vox argues that billions of animals are slaughtered each year just to be wasted, citing statistics from the EPA report (published last November) entitled ‘From Farm to Kitchen- the Environmental Impacts of US Food Waste’.

Meatpacking company JBS has agreed to a $52.5 million settlement in a beef price-fixing lawsuit. Colorado-based JBS didn’t admit any wrongdoing as part of the settlement,

Environmental groups have petitioned the California Air Resources Board (CARB) to exclude dairy farmers from the state’s Low Carbon Fuel Standard (LCFS). They argue that paying farmers for methane encourages them to produce more.

Recently, there has been much in the press about feeding seaweed to cattle to reduce their methane emissions, but there has been little research on how seaweed farming might damage marine environments. Seaweed is also difficult and expensive to process and distribute.

In what could be one of the biggest explosions ever to occur in the US, a massive fire broke out at a North Carolina fertilizer plant containing roughly 600 tons of ammonium nitrate.

The Indian government is negotiating with Russia for the long-term supply of fertilizers. India aims to lock in 1 million tonnes a year each of di-ammonium phosphate (DAP) and potash, and about 800,000 tonnes a year of a mix of nitrogen, phosphorus, potassium (NPK).

Meanwhile, research continues into using microbes and seaweed as replacements for synthetic fertilizers.

In company news, Nestle will acquire a majority stake in Orgain, a maker of plant-based protein powders and other products. Financial details weren’t disclosed. Nestle has the option to fully acquire Orgain in 2024.

Tugboats have freed one of the world’s biggest container ships, the Mumbai Maersk, which had run aground off the German island of Wangerooge in the North Sea. The ship was on its way from Rotterdam to Bremerhaven.

Container shipping companies had their best quarter ever and expect to report extraordinary profits through 2022. Although port congestion is curtailing volumes, rates have risen so much that carrier profits keep escalating. As a result, shipping firms are paying their workers bonuses up to three years’ salary.

The world’s largest mozzarella maker also expects shipping disruptions to hinder agricultural exporters throughout 2022.

The USDA is helping to fund a new container yard for agricultural exports at California’s Port of Oakland to ease port congestion. The project is set to open in March.

However, a slowdown in China’s steel production is curbing demand for bulk ships to transport iron ore, driving a steady decline in bulk freight rates. The Baltic Exchange’s Dry Index has fallen 75 per cent in the past four months.

© Commodity Conversations ® 2022

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‘Going where no one else would go’ in the digital age

 

by Wouter Jacobs – Erasmus University

In their book, The World for Sale, published in 2021, Bloomberg reporters Jack Farchy and Javier Blas documented in rich detail the evolution of global commodity markets during the late twentieth century. They made explicit the modern-day commodity trading firm and the practices of their top-dog traders and executives. The crux of their analysis is that traders “go where no one else would go”. It is a trait that resonates with the characteristics of the merchant trader from an earlier era. Still, it remains a critical human-based skill in our current period dominated by Big Tech, Big Data, and Artificial Intelligence (AI)-based machine learning.

However, the ongoing financialisation of commodity markets, digitalisation, the quest for sustainability and inclusion, the emergence of decentralised and alternative forms of finance, the decommodification of supply chains and when or how to navigate the geopolitical and macro-economic restructuring of the world economy are all changes that require commodity trading firms (CTFs) to integrate new skills and mindsets.

CTFs need more analytics and more analysts to synthesise the increased amount of data points to inform decision making and trading strategies.

CTFs need to install compliance, due diligence, and Know Your Client (KYC) protocols to meet the demands of regulators, financiers, and the public. These protocols can be expensive, and they can constrain the intrinsic capability of a company’s traders to go where no one else would go.

CTFs need to take the time, effort, and leadership to incorporate sustainability into their company’s DNA. It requires specific skillsets to monitor and report on Sustainable Development Goals (SDGs) with nitty-gritty detail, such as the amount of water used per plantation or the carbon exposures of a particular trade. It may require a public relations office protocol and narrative to deal with any criticisms. It may require strategies to maintain a local license to operate and a moral compass.

Finally, CTFs need to digitalise their operations to synthesise complex information. Adopting information technology has been critical for commodity trading, but CTFs are not leaders in the space. Some struggle to define and optimise their digitisation needs to adapt to the rapid emergence of decentralised platforms for exchange, finance, and post-trade execution.  

Given all these changes and the specific demands for skillsets, CTFs need to develop what Berkeley university professor and business guru David Teece has referred to as dynamic capabilities. Dynamic capabilities refer to the ability to sense, seize, and transform.

Sensing refers to scanning the business environment and identifying new opportunities that emerge from new technology. CTFs must seize any opportunities and translate them into their business model and adapt it accordingly. CTFs can encourage sensing through scenario planning and actively scouting for opportunities.

Seizing is more complicated. It requires clever re-combinations of existing competencies, such as rapidly prototyping new technologies into the workflows. An example of this was when some CTFs first ran in-house pilot projects on blockchain before joining a platform. Another (digital) seizing strategy is to consider lean start-up methodologies.  An example is Farmer Connect, founded by Sucafina’s head of trading, David Behrends.

Transforming is the most complex. It sometimes requires a wholescale redesign of its business model, asset portfolio, routines and competencies while insourcing entirely new or related skillsets. Internal shaping might involve – as Olam has recently done – an organisational separation of business lines. External shaping might include investing in universities’ education and training programmes or B2B platforms and digital ecosystems.

The Covantis platform, in which the ABCDs, Viterra and Cofco took the lead, is an example of the latter. Its scale and incumbent support can capture ‘network effects’ and dominate the market quickly, similar to other platforms (e.g., Netflix, Uber, Airbnb) in different markets and industries. While Covantis is now about trade execution, it may evolve into something more commercial. Be that as it may, it is not unthinkable that new platforms might even displace many of the intermediacy benefits of individual CTFs.

Finally, dynamic capabilities require managers to overcome company-internal barriers to novelty while designing governance structures and a business culture that enables adaption or business transformation. Often periods of crisis, low profitability or the risk of a hostile takeover can act as wake-up calls and remove internal barriers to change.

The archetypical successful trader goes where no one else would go. This risk appetite, combined with an intermediate position that captures value from information asymmetry within global supply chains, still defines a CTF’s business model.

But the amount of information upon which to act has increased exponentially. CTFs have increased their analytics teams accordingly. The larger companies have invested in technical analysis and quant-based trading modelling and strategies, predictive analytics, etc., while internally optimising their data systems. They have added new skill sets to the company, which do not involve ‘going where no one else would go’ in the traditional sense.

However, ‘going where no one else would go’ still matters in a world defined by digital apps and algorithmic machine learning.  It may matter even more in the future, although with a smaller physical presence than in the past. Understanding and appreciating local circumstances, cultural conventions, and languages is necessary for building trust and relationships.

‘Going where no one else would go can give you an informational edge that no algo (still) could grasp’.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

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Commodity Conversations News Monitor

Viterra has announced it will acquire the Gavilon grains and ingredients (but not its fertiliser) business from Marubeni for $1.13 billion plus working capital. Marubeni bought Gavilon for $2.7 billion in 2013 expects to get as much as $3.51 billion from the sale. The FT wonders whether it will lead Viterra to IPO while Javier Blas gives his take on the acquisition here.

Agricultural commodity traders are worried about a Russian invasion of Ukraine. Agweb has a couple of articles on what conflict might mean for world markets. Bloomberg looks at how Russia’s past actions have impacted trade flows and how an invasion might restrict trade. It also looks at how India is diversifying sunflower oil imports away from Ukraine, their biggest supplier. Meanwhile, Ukrainian corn has been going as far afield as Indonesia.

Agricensus looks at what might happen to Russia’s grain exports if the world cuts the country off from the SWIFT payment system. Any disruptions to Russian exports could prove a boon for French wheat exporters who have been losing export share to Russia.

There are no signs that India’s vegoil appetite will fall anytime soon. Domestic consumption should climb by as much as 17 per cent over the next four years.

Conflict could lead to higher food prices. A researcher at Mintec tells Bloomberg she sees agricultural commodity prices beginning to peak and likely retreating into the second half of 2022. Still, it could take until at least 2023 before consumers feel the benefit. Reuters also thinks we may have to wait for 2023 for prices to ease.

Insurance payments to US farmers due to drought rose more than 400 per cent between 1995 and 2020 to $1.65 billion, while payments due to excess moisture rose nearly 300 per cent to $2.61 billion. The federal government pays about 60 per cent of the nation’s crop insurance premiums through taxpayer subsidies.

Brazil’s Parana State estimates its 2021/22 soybean crop at 12.83 million tonnes, down 35 per cent from 2020/21 and below a previous projection of 18.4 million tonnes, due to low rainfall and high temperatures provoked by La Nina. The weather phenomenon has also led South Africa’s farmers to plant less acreage after record rainfall curtailed sowings.

Farmers in Brazil, Argentina and the US are holding back crop sales in expectation of higher prices. The three countries account for more than three-quarters of global corn and soybean exports.

But it is not just food prices that are soaring. Cotton has hit new ten-year highs for the fourth time in five months.

CNN worries that rising food prices are hurting those that can least afford them and calls for the US Fed to raise interest rates to dampen inflation expectations.

Higher interest rates won’t solve the labour shortage in Malaysia’s palm oil sector, where output has fallen to a five-year low. Foreign workers make up around 85 per cent of the labour force on plantations.

Thailand’s government is concerned about the impact that higher palm oil prices will have on the country’s consumers while recognising the benefits accruing to farmers. Higher palm oil prices may spur the search for alternatives.

China Dialogue has a well-presented feature on palm oil sustainability, focusing on Wilmar and the RSPO. Reuters has a long-read on sustainable palm oil in Malaysia’s eastern state of Sabah. Swiss researchers have published the results of the OPAL Project, a six-year study into sustainable palm oil. The study focused on three oil palm growing countries: Cameroon, Colombia, and Indonesia.

Fox News worries that high US fertiliser prices will reduce production this season. They write that a fertiliser bag that cost $11 in 2021 now sells for about $20. However, US wholesale fertiliser prices have fallen to levels last seen last October. Things could change quickly if the world imposes sanctions on Russia, a significant nitrogen, phosphorus, and potash exporter.

India will allocate about 3 trillion rupees ($40 billion) on food and fertiliser subsidies in its budget for 2022/23, roughly the same amount as in the fiscal year 2021/22 ending March.

Kula Bio, a Boston-based start-up, has raised $50 million to accelerate production for their next-generation nitrogen fertiliser that uses bacteria to remove nitrogen from the air and deposit it in soil.

In little-reported news, Sri Lanka’s government will give about $200 million in compensation to the country’s rice farmers whose crops failed under a botched scheme to establish the world’s first 100-per cent organic farming nation. The government last year banned imports of agricultural chemicals leading to about a third of Sri Lanka’s agricultural land being left dormant. The government reversed the ban last October.

Canada’s cattle ranchers continue to struggle to feed their herds due to the country’s recent drought-reduced grain crop, Covid-related restrictions on US truck shipments and capacity restraints on rail movements.

There was another flurry of anti-meat articles last week, with this one summarising the environmental arguments for going vegan.

A new report in the Journal of Ecological Society argues that animal agriculture is responsible for at least 87 per cent of greenhouse gas emissions. It says that earlier studies have underestimated the environmental impact of livestock farming and have failed to include the negative impact of forests lost to animal agriculture.

Greenpeace Brazil reports that up to 80 per cent of deforestation in the Amazon rainforest is due to cattle ranching. Storebrand, a $120bn Nordic asset manager, has placed ADM and Bunge on its “observation list” for moving too slowly to eliminate deforestation risk from their supply chains.

Human Rights Watch has written an open letter asking the EU Commission to include land rights in their upcoming regulations restricting imports of any commodities that have contributed to deforestation.

The Economist posted a video on LinkedIn about alternative meat, but the FT wonders whether the demand for alt-meat has peaked. After a 46 per cent rise in 2020, US sales of plant-based meat fell 0.5 per cent in 2021.

The Chinese government has released its official Five-Year Agricultural Plan (in mandarin). It mentions cultivated meat for the first time and suggests that producing it is in the national interest.

The EU has implemented a ban on giving antibiotics to healthy animals. The Guardian is upset that the UK has not done the same.

A new study finds that climate change will make it harder for farmers to grow coffee, cashew, and avocado. CNN is particularly concerned about what that might mean for coffee lovers. You can find the BBC’s take on the report here.

China has published draft rules for gene-edited plants. It could now take only a year or two to get approval for a gene-edited plant compared with around six years for GM ones. Last November, Beijing passed new regulations for genetically modified (GM)crops.

Nestlé has announced a major – perhaps game-changing – initiative in cocoa sourcing. The company will triple its cocoa sustainability funding to $1.4 billion over eight years, including direct pay-outs to African cocoa farmers to remove child labour from its supply chain.

ADM reported a record fourth-quarter profit and said it would continue to benefit from solid demand for crops and biofuel in 2022. ADM’s net earnings rose to $782 million in the quarter ended Dec. 31, up from $687 million a year earlier. (You can access the earnings call deck here.)

Walmart is investing in the vertical farming start-up Plenty and will start carrying its leafy greens in all California stores this year. The investment is part of a $400 million funding round.

In shipping news, MSC, the world’s largest container-shipping company, is looking to buy ITA Airways, the successor to the defunct Alitalia. The transaction would have a value of between 1.2 and 1.5 billion euros. Lufthansa would act as an industrial partner.

Maersk has announced plans to launch an offshore vessel-charging company to support the maritime industry’s decarbonisation efforts by eliminating idle emissions. A project for decarbonised shipping is gearing up to introduce the world’s first ammonia-powered ship.

Lastly, if you are reading this before taking an afternoon nap, have a coffee first.

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A Conversation with Michiel Hendriksz

Good morning, Michiel. Could you please tell me how you got involved in the cocoa business?

After leaving Cranfield, I worked for a Dutch company exporting agricultural products, mainly frozen vegetables, to Spain and Portugal. I stayed in food marketing and distribution, working in the UK, Spain, and France before accepting a position with ADM, marketing their cocoa products into Southern Europe. I already knew all the buyers and understood food systems, so it was a great fit. Technically speaking, cocoa powder, cocoa butter and liquor are all food ingredients with specific attributes.

In 2007, I migrated from sales to trading and became director of trading and manager West Africa.  Trading cocoa was increasingly about what we now call sustainability, and I worked closely with the Sustainability Director until he left in 2011. I took over his role, shedding my previous trading responsibilities, but remained in contact with clients on sustainability issues. I represented ADM Cocoa in many initiatives, steering committees and working groups.

Why did you found FarmStrong?

ADM decided to get out of cocoa; it didn’t fit well with their other commodity trading businesses at that time. It took time to find buyers. Cargill eventually bought the chocolate assets, while Olam bought the cocoa processing, grinding, and pressing.

In 2015, I left ADM and started FarmStrong to have the independence to advise trading companies looking to make their supply chains more sustainable. The French commodity trading company Sucden was an early customer and supporter.

What does FarmStrong do?

We design sustainability programmes for most of the significant international chocolate manufacturers and some smaller family businesses. We also currently run two programmes partly financed by the Swiss government. We do some work with UN agencies, developing and scaling up their environmental interventions. We also receive UN support to scale our programmes. We are a non-for-profit recognised by the Swiss federal government for its work in the public interest.

Our programmes include training in good agricultural practices, but agriculture is not necessarily the most significant problem farmers face. The cocoa tree is not the problem. The most important issues that farmers, families, communities face are health, nutrition, education, security, and poor infrastructure.

Why have the chocolate companies failed to eradicate child labour from their supply chains?

The NGOs put pressure on the chocolate companies to eradicate child labour, but independent research has shown that it hasn’t worked even in their narrow supply chains. Chocolate companies can do more, but they can’t solve the problem on their own.

The fact that child labour exists in West Africa has nothing to do with cocoa. Child labour is still widespread regardless of the crop that the farmers are growing. It is a correlation, not causation.

One of the biggest problems is that many children in the Ivory Coast do not officially exist. They don’t have birth certificates or registration documents. Their (grand) parents immigrated and never went through any registration process. A child cannot go to school in Ivory Coast without a birth certificate, and they can’t get a birth certificate if their parents don’t have an ID. It is difficult to get an ID if you don’t have a birth certificate or are not registered.

Sometimes local schools allow unregistered children to attend classes, but as soon as they are twelve years old, they must take an exam to move on to secondary school. They can’t take the exam unless they show they have a birth certificate or are officially registered. So, their schooling ends at 12 years old, and they work on their parents’ farms. Sitting at home is not an option.

The sector is facing enormous challenges. What is to be done?

Chocolate companies, trade houses, governments and the public are putting massive amounts of money into cocoa, channelling it at a high cost into aid agency programmes. These programmes are well-intentioned but largely ineffective. Independent research shows that they had little impact for the last 20 years.

If you want to improve cocoa farmers’ livelihoods, don’t help them grow more cocoa.  Encourage them instead to grow more food crops that they can either eat or sell locally. And acknowledge their issues around health, nutrition, education, registration of births and land.

Thank you, Michiel, for your time and input. 

© Commodity Conversations ® 2022

This is a short extract from my next book Commodity Crops & The Merchants Who Trade Them – available now on Amazon.

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Commodity Conversations News Monitor

CNN asks whether governments should fix prices to control food inflation – a policy last used in the 1970s – but concludes that it will only result in shortages.

The New York Post writes that citrus greening disease has decimated Florida’s orange crop, resulting in the lowest production in 75 years. Orange juice prices are up 50 per cent on the 10-year lows seen in February 2020.

Palm oil prices have hit a record high on concerns over supplies. Malaysian producers face an acute labour shortage, while Indonesia may impose limits on palm oil exports to encourage producers to prioritise the domestic market. Indian consumers are likely to switch to cheaper soy and sunflower oils.

After the Canadian and US governments introduced vaccination requirements for truckers crossing their borders, Canadians are paying more for their fruit and vegetable. The cost of transporting fruit from California and Arizona to Canada climbed 25 per cent last week. Only 50 to 60 per cent of US truckers are vaccinated. The US restrictions also apply to border traffic with Mexico.

The new rules are also negatively impacting the cross-border shipments of Canadian pigs to US abattoirs. Exporters have cancelled truck shipments of US soybean meal to Manitoba when producers are relying on the imports to feed their animals after drought hit domestic production.  Capacity constraints make it challenging to transfer to rail shipments, and some Canadian feedlot operators expect to run out of animal feed “within days.

Bloomberg writes that the $150 billion that the shipping industry made last year from higher freight rates contributed to food inflation.

It is not just the shipping companies seeing higher profits after years of depressed markets. Margarita Louis-Dreyfus, whose holding company, Akira BV, is the main shareholder in Louis Dreyfus Company, received $457 million in dividends in 2021, increasing her net worth to $3.3 billion.

China imported 28.35 million tonnes of corn in 2021, up 152 per cent from the previous annual record of 11.3 million in 2020. Chinese wheat imports also hit a record at 9.77 million tonnes, up 16.6 per cent from 2020. Wheat imports have mainly increased for animal feed, but the country’s growing demand for bread may continue the upward trend.

California Air Resources Board (CARB) has found that recent truck engines emit more NOx when running on renewable diesel than conventional diesel. Earlier studies on older engines had found that renewable diesel reduced NOx emissions by 10 per cent. The new research could affect how regulators revise the Low Carbon Fuel Standard (LCFS), which has spurred recent investment in renewable diesel.

Due to policy and feedstock constraints, the US will likely produce less than half the renewable diesel production projected by the US government for 2025. The EIA estimates US renewable diesel production capacity could increase to more than 5 billion gallons per year, but a new study estimates production will reach approximately 2 billion gallons.

There were various anti-meat stories this week. Euronews featured a Bafta-winning short film about a UK farmer who donated his beef cattle herd to an animal sanctuary. Bloomberg Green has a long read on how cattle farming destroys the Amazon rainforest.

The Guardian writes about the US’s manure problem and worries that the growing use of anaerobic digesters to produce biomethane will encourage farmers to increase herds. And in a separate article, the newspaper writes about the European culture wars over meat-eating. The EU expects per capita meat consumption to drop only slightly, from 69.8 kg in 2018 to 67 kg by 2031, too little to impact global warming.

Wired magazine questions whether there is such a thing as ‘low carbon beef’. Under a USDA scheme, producers who can prove they raise their cattle in a way that emits 10 per cent fewer greenhouse gases than an industry baseline can qualify for the certification.

The food technology start-up, Mosa Meat, has developed a way to grow meat in a laboratory without using fetal bovine serum (FBS, blood taken from foetuses in pregnant cows during the slaughter process. Musa believes that it can reduce production costs by 80 per cent and has published details in Nature.

For a second straight year, the French government has ordered poultry farmers in the country’s Southwest to cull their birds in the face of bird flu. A severe outbreak between autumn 2020 and spring 2021 claimed about 3.5 million poultry, mainly ducks.

The EU is celebrating the 60th anniversary of the founding of its Common Agricultural Policy. You will find its history and associated articles here.

NASA is offering $1 million in prize money for innovations around sustainable food production. NASA wants to develop food systems that can feed a team of four astronauts on a long-haul space mission of up to three years. They also hope it will result in food innovation to help feed more people on earth.

And talking of feeding the planet, the plant enset, an Ethiopian staple, could be a new superfood and a lifesaver in the face of climate change. The banana-like crop could feed more than 100 million people in a warming world.

The fourfold increase in fertiliser prices over the past year will hit European farmers badly. For example, fertiliser use in Hungary could drop 30-40 per cent this season, making crops more susceptible to drought. The world’s biggest vertical farm, under construction in Pennsylvania, hopes to get around high fertiliser prices by using fish poop.

Looking forward, the world’s farmers will have to switch to ‘green’ fertilisers produced from renewable fuel if they want to decarbonise food production. It will be challenging, but this article is optimistic that it will happen.

The UK government has allowed the country’s sugar beet farmers to use the chemical pesticide thiamethoxam to deal with yellow virus disease. The EU and UK banned its use in 2018 because of the damage the chemical could cause to bees. meanwhile, New Atlas looks at the remarkable properties of sugar-based plastics.

Italy has applied for UNESCO world heritage status for espresso coffee, claiming it is “much more than a simple drink”. Finally, to let your mind wander to sunny climes, the BBC has a lovely piece on Trieste, the coffee capital of Italy.

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A conversation with Paul Hickman

Good morning, Paul. Could you first tell me how you ended up in Singapore trading palm oil?

I worked for Cargill until 2013 when I joined Golden Agri-Resources (GAR), where I am now head of global vegetable oil and oilseeds.

How significant is GAR in palm oil?

 Palm oil differs from other commodities in that the top traders are also producers. Why is that?

Several things differentiate palm from many of the competing food crops. First, you must wait four years before the trees get to an age where they bear fruit. It’s a substantial upfront cash investment with no returns for those early years.

Second, there are no government subsidies, unlike the significant taxpayer-funded contributions paid to European and American farmers.

Third, once the trees are mature, harvesting takes place every two to three weeks.

Given the size of the upstream investment and the need to ensure a home for the product year-round, many producers felt the need to control their destiny by vertically integrating into processing, trading, and distribution.

How important are physical assets in trading palm oil?

You don’t need physical assets to trade palm oil. There is plenty of liquidity in the Dalian futures market in China and the BMD in Malaysia. However, assets are a necessity if you want to be involved in the physical movement of palm oil. End users are increasingly demanding. They insist, rightly so, that their suppliers control their supply chain at every step of the process. It is not just about sustainability but also about food quality.

 People talk about palm oil plantations, but what percentage of world supply is produced by smallholders versus large companies?

At least three million smallholders worldwide make a living (or part of a living) from oil palm; they produce more than 41 per cent of the world’s palm oil. Even though smallholders are a vital part of the palm supply chain, they are frequently ignored in the palm story. The focus is inevitably on the more prominent actors like us. The reality is our business relies on smallholders producing more and better-quality palm oil in line with sustainability requirements. It’s in our interests to help them get there.

The average income for palm oil farmers in Indonesia is $2,500 per hectare per year compared to only $250 per hectare for rice. Palm oil contributes up to 60 per cent of income in rural areas in Indonesia. The palm oil sector has lifted millions of Indonesians out of poverty and has had a substantial impact on the welfare of rural communities through the provision of schools and clinics. Palm oil companies also provide and maintain critical infrastructure like roads, increasing connectivity and ease of access to previously remote rural areas

How do you react when people blame palm oil for deforestation?

Given the persistent negative stories and images linked to palm oil production, it’s easy to get defensive. Many of those images are highly emotive – orangutans fighting bulldozers comes to mind. In most cases, these are images from the past. They do not reflect the amount of work that the sector has done and continues to do to address deforestation.

Facts are on our side, but truth generally loses in a battle of reality versus emotive imagery.

But I’ll give you the facts. The most important one is that, worldwide, cattle farming causes the most deforestation. The World Resources Institute (WRI) has analysed satellite data and found that, from 2000-2015, cattle farming resulted in 45.1 million hectares of deforestation. During the same period, palm oil was a long way behind, responsible for 10.5 million hectares of deforestation.

Just for comparison, soy cultivation led to 8.5 million hectares deforested over that period. When you consider that virtually all soy goes to animal feed, meat production is responsible for 53.6 million hectares of deforestation during the period – more than five times more than palm production.

Compared to the meat industry, the palm oil sector has taken significant steps to combat deforestation. A combination of corporate and government policies has led to a decrease in deforestation in the palm oil supply chain, especially in the last five years.

What challenges does palm oil face in the future?

I would say there are three main challenges:

First, trade barriers effectively ban palm oil in specific markets – in Europe, the US, and elsewhere, where sustainability is used as a barrier to market access rather than an incentive for change. The palm sector faces regulatory barriers and shifting rules of engagement even though it has demonstrably done more than any other deforestation-linked commodity to address the issue. The EU’s REDII rules that take palm oil out of biofuels, along with ongoing due diligence regulation developments in critical markets, could have a chilling effect on the progress made. It’s absolutely the opposite of what the industry needs.

The second challenge is a lack of manpower. It will get harder to recruit palm oil workers as younger people do not want to work on the land. Palm oil remains an incredibly labour-intensive industry. The manual nature of harvesting is hard work and less attractive to young people.

Third, climate change and extreme weather will increasingly impact palm oil production. Any agribusiness needs to factor in not only the reduction of its carbon emissions but also carbon adaptation strategies.

Thank you, Paul, for your time and comments

© Commodity Conversations ® 2022

This is a brief excerpt from my new book, Commodity Crops & The Merchants Who Trade Them available now on Amazon