Author: jonkingsman

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!

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!

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”.

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.

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!