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March 4, 2022

Commodity Conversations News Monitor

Russia’s invasion of Ukraine has created “the shock of a lifetime” in global commodity markets, with the fastest increase in prices since the 1960s or 1970s. Wheat (at the time of writing) is up 40 per cent on the week. One analyst called it “the modern-day equivalent to the 1974 Great Grain Robbery.”

Russian forces have closed off Black Sea shipments, leaving buyers scrambling for alternative supplies. Canada can’t help because drought reduced its grain inventories by 38 per cent from a year earlier. However, India could export a record 7 million tonnes of wheat in 2021-22.

The US Agriculture Secretary said it’s premature to project what will happen to agricultural exports from the Black Sea, but “the biggest areas of concern would be the Middle East and North Africa that do need those products to be able to feed their people.”

Chinese buyers bought about 20 cargoes of American soybeans and about ten cargoes of corn this week after the Chinese government encouraged state-owned companies to search for oil and gas, iron ore, barley, and corn.

The FT has written about “the weaponization of commodity trading.” A former US official told the newspaper, “Commodities have been weaponized for a long, long time. It was always a question of when does a state pull the trigger.”

Farmers worldwide are scrambling to lock in fertilizer supplies as prices once again head higher. Canada’s Nutrien, the world’s biggest fertilizer producer, said that the war could result in prolonged disruptions to the global supply of potash and nitrogen crop nutrients. India, meanwhile, has set up a rupee-clearing account to pay for urea imports from Iran.

Palm oil prices have also shot up as markets scramble to find alternatives to shipments of sunflower oil stuck in Black Sea ports. India has asked Indonesia to increase palm oil shipments to compensate for the loss of sunflower oil supplies. Meanwhile, Palm oil has become the most expensive of the four major edible oils for the first time.

Since last December, the USDA has progressively lowered its forecast for soybean production in Brazil, Argentina and Paraguay by more than 18 million tonnes. It now expects the smallest crop since 2018/19. However, heavy rains in Argentina’s farm belt – and expectations of more to come – are alleviating fears about a prolonged drought. There is even concern that there may be too much rain.

Societe Generale and Credit Suisse have stopped financing commodities trading from Russia. (The two banks are key financiers to commodity trade houses.) Commodity trading companies have told Reuters that Russian commodity flows will remain severely disrupted until clarity is established over what is sanctioned and what is exempted.

Nestlé has reopened its factories and warehouses in central and western Ukraine to ensure essential food and drink deliveries. The Swiss-based group has three factories and around 5,000 employees in Ukraine.

Although sanctions don’t yet target Russian energy exports or (non-military) containerized goods, many tanker owners and container liner operators are pre-emptively pulling out of Russia. Moller-Maersk, Ocean Network Express, MSC, and Hapag Lloyd have temporarily halted all container shipping to and from Russia.

Shipping lines are likely to come under increased scrutiny from the US Department of Transportation and the US Department of Justice over rising rates. However, the Federal Maritime Commission said that, for now, there is no evidence of wrongdoing.

Progress is being made to build the world´s first large-scale commercial e-Methanol production facility in time for the delivery of Maersk’s large dual-fuel methanol ready containerships in the second half of 2023.

Chevron has agreed to buy green diesel producer Renewable Energy Group for $3.1 billion. Renewable is a large producer of biodiesel and renewable diesel. Meanwhile, Marathon Petroleum Corp will form a joint venture with Finnish refiner Neste for its Martinez renewable fuels project in California. Neste will contribute $1 billion to the project.

Trade associations representing the world’s major trading firms have warned the European Commission that their plan to prevent commodities linked to deforestation from entering the EU market is “technically and effectively not feasible.”

A study published in Nature Sustainability shows that carbon loss from tropical deforestation in the last two decades has doubled and continues to rise, mainly driven by agricultural expansion.

Brazil’s cattle ranchers are trying to reduce methane emissions through “intensification” – keeping 15 animals per hectare, instead of fewer than one – and slaughtering the animals at 18 rather than 30 months.

Finally, in a special report on sustainable agriculture, the FT writes about the adverse effects of climate change and higher temperatures on farmworkers.

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March 3, 2022March 2, 2022

A Conversation with Devashish Chaubey

Good morning, Devashish. Could you please briefly describe your career so far and your current role within Olam?

I am head of rice and speciality grains within Olam. When I say speciality grains, I mean superfoods like quinoa, chia, and sorghum.

How significant a business is rice for Olam?

Rice currently employs roughly 2,000 people, and we rank second in terms of global volumes traded.

We operate a large rice farm in Nigeria – and we are a significant player in Nigeria’s domestic rice market.

In geographies such as Vietnam, we operate mills but also buy rice from millers. In origins where we don’t have mills, we buy rice from millers and then upgrade/reprocess the rice to our customers’ specifications. We have reprocessing facilities in Thailand and India that upgrade milled rice.

We sell to importers in various geographies, and in some we import ourselves and distribute the rice through the general trade and modern retailers.

What are the biggest challenges that you face as a rice trader?

Counterparty risk is the biggest challenge for rice traders generally. The challenge is to build a deep sense of reliability and faith with your customers.

Managing price volatility is our second challenge, especially with climate change. In 2008, there was a drought-induced production shortfall in SE Asia and this severely impacted world trade flows and price. Any production shortfall in a major producer can have a significant impact on price. One example is Australia. The country swings from an excellent crop to a small crop primarily depending on water supply.

Climate change exacerbates the situation. Up until 2018, Thailand used to produce 10-11 million tonnes of exportable rice. This year, Thailand will export maybe 5-6 million tonnes. Thailand’s water reserves available for irrigation have lately not been enough, and they have experienced a rainfall shortage for the past few years. It has affected global supply and driven prices higher.

What are the main sustainability issues in rice?

Rice has more sustainability issues than most other staple crops, ranging across environmental and social issues. When you consider that one-quarter of all the farmers in the world grow rice, you realise how important it is to address these sustainability issues correctly.

Smallholder farmers account for nearly all the rice production in SE Asia. Most are in poor areas, which means a high correlation between rice farming and poverty. There is also a 65 per cent correlation between rice and malnourishment in regions where rice is either the main staple or the largest consumed crop. Rice has significant social issues.

If you take environmental issues, rice is the second-largest man-made emitter of methane after livestock. Rice emits about 12 per cent of all man-made methane and about 2.5 per cent of all man-made GHG emissions. That is significant from an environmental standpoint.

Methane emissions are high because rice is farmed in most areas through flood irrigation. Farmers flood the rice fields to stop weeds from growing. It leads to high methane emissions and freshwater use.

Rice uses about one-third of the world’s freshwater availability each year. You need on average 2,500-3,000 litres of water to produce one kilo of rice. Although that sounds alarming, some other field crops have similar figures. But even so, moving away from flood irrigation would not only reduce methane emissions but would also reduce water withdrawals.

Tell me a little about your farm in Nigeria.

At one time, Nigeria was the world’s second-largest rice importer after China, buying between 3 and 4 million tonnes a year – spending a lot of precious foreign exchange in the process. Nigeria has the climatic conditions, the land, the people, and the water resources it needs to grow rice.

About ten years back, the Nigerian government encouraged their population to take up rice farming, giving them incentives to do it. The government also encouraged corporate investors to begin rice farming, giving out tax incentives and providing them with tracks of land with adequate water resources.

Olam now manages 13,000 hectares of contiguous land in Nasarawa State in central Nigeria, of which we farm 4,500 hectares. We keep some in preserved lands, forests, wetlands etc., to encourage biodiversity.

We realised that the only way we could farm 4,500 hectares would be to have it fully mechanised. Our farm is probably one of the most modern rice farms that exist. It is fully mechanised and integrated. We have a rice mill at the farm where we mill the paddy. We seed, apply fertiliser, pest and weed care aerially. All our harvesting is mechanised.

We run a large seed development unit on the farm. Historically, there has been insufficient investment into developing high-yielding seed varieties suitable for Africa. When we tried the rice varieties that grow in Asia, we found that they were often not suitable. The soil and the agroclimatic conditions are not the same. So, we set up a research and development centre and a plant breeding station. While the varieties we currently grow on the farm are bred by research agencies in Asia and Africa, we should have in-house varieties over the next few years.

Has the project helped the local community?

Although fully mechanised, our farm has brought employment to a rural area where little existed before. We have also built schools and clinics.

But that is the minor part of what we do. The more significant element is the out-growers programmes that we run for about 32,000 growers. We share developments that take place on our farm, whether in varietals, nutrition or pest and disease management.

Wageningen University has studied our out-growers programme in Nigeria. Our out-growers programme raised incomes, got more women and young people involved, and improved environmental sustainability. Farmers are now conscious and more concerned about the environment than they were before. Furthermore, our interventions are reducing food loss in the value chain which, for our farmers, is 30 per cent.

Thank you, Devashish, for your time and input!

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

© Commodity Conversations ® 2022

February 26, 2022

Commodity Conversations News Monitor

“In war, truth is the first casualty.” So wrote Aeschylus, a Greek tragic dramatist, in the 5^th century BCE. His words are as valid now as they were then. In the western world, we are fortunate to have strong independent media. We should never take it for granted.

Commodity exports from the Black Sea have been thrown into chaos after Russia’s invasion forced ports and railways to close. Ships loading in Ukraine have been told they will be allowed to leave, but those waiting to berth can’t dock. A missile hit a vessel in Ukrainian waters but sailed into Rumanian waters unaided. At least one other ship has suffered damage.

Bunge and ADM have suspended operations in Ukraine following the invasion, and some European banks have imposed restrictions on commodity-trade finance linked to Russia and Ukraine. At least two of China’s largest state-owned banks are also restricting financing for Chinese purchases of Russian commodities.

Chicago corn and wheat prices surged following the invasion, and analysts worry that the sky is now the limit for food inflation. Unsurprisingly, investors are pumping more money into commodity funds than at any time in the last decade.

China confirmed that it had lifted restrictions on the imports of Russian wheat, a decision taken before the winter Olympics in Beijing.

Russia is a significant fertiliser exporter, and prices for nitrogen fertiliser in New Orleans surged 25 per cent following the invasion. Fertiliser shortages may hit the US growing season, and the US Agriculture Secretary warned fertiliser companies against taking an “unfair advantage” of the Ukraine conflict.

A backlog of vessels waiting to load soybeans from some Brazilian ports is stretching to near-record lengths, with some ships waiting for more than 40 days, significantly longer than the seven to 15 days that’s typical. Meanwhile, ADM has shipped a record (for the port) 84,802 tonnes of soybeans in a single vessel from the Ponta da Montanha Grain Terminal (TGPM) in the northern Brazilian city of Barcarena.

The Loadstar has a well-written piece that asks whether the container shipping crisis is coming to an end. The US Transportation Department is awarding $450 million in grants for US port-related projects to bolster capacity and improve the movement of goods. Platts hosts a discussion on potential applications for ammonia as a maritime fuel.

The Buenos Aires Grain Exchange has warned that Argentina’s crop yields for corn and soybeans could continue to fall owing to a lack of rain. Paraguay’s oilseed processors are lobbying the government to allow duty-free soybean imports for the first time to keep their mills running as a drought slashes local production.

Bunge has signed a definitive agreement with Chevron to create a 50/50 joint venture to produce renewable fuels and develop lower carbon intensity feedstocks. The financial terms of the transaction, first announced in September 2021, were not disclosed.

The US EPA has told Reuters that it is committed to increasing the use of biofuels, but the industry is still anxiously awaiting the administration to finalise specific blending goals.

Hydrous ethanol sales in the Center-South region of Brazil rose 22 per cent in the first half of February compared with the same period a month earlier, a trend that may continue with energy prices rising.

Beyond Meat is not real meat, but it bleeds cash. The company’s stock dropped 11 per cent after it reported losses of $80.4 million in the last three months of 2021 — more than triple the loss of a year before. The company blamed weak US retail sales, increased discounts, and a loss of market share. An analyst from J.P. Morgan called Beyond Meat “the worst performer in our universe in the last year.”

Draft new rules (seen by Bloomberg) would allow victims to sue for compensation in a proposed EU crackdown on human rights abuses and environmental breaches in supply chains. Right on cue, the World Economic Forum writes that mandatory human rights and environmental due diligence are now essential for any business.

Ivory Coast’s cocoa regulator, Le Conseil du Cafe-Cacao, plans to start a pilot program in April to trace cocoa from plantation to ports. For years, agronomists have told cocoa and coffee farmers in West Africa to uproot trees from their fields. This video (in French) argues that advice is misguided and explains how trees fertilise and protect surrounding crops.

The Inter-American Development Bank has shelved a plan to lead a $200 million syndicated loan for Marfrig Global Foods amid growing concern over deforestation in the Amazon.

The US and the UAE are seeking an additional $4 billion investment for the Agriculture Innovation Mission for Climate (AIM for Climate) on top of the $4 billion that they agreed when they launched the initiative last November.

The sustainability charity Wrap has asked supermarkets to stop selling fresh produce in plastic packaging. They argue that it does not make them last longer and adds to pollution and food waste. Next week, world governments will gather in Nairobi to discuss a global treaty to combat plastic waste.

The UK’s National Farming Union President has warned that farmers in England and Wales ‘face toughest times in a generation’. She said that government ministers “have no understanding of how food production works” and have introduced “completely contradictory policies” through the lack of a post-Brexit plan for UK farming.

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February 23, 2022February 21, 2022

A conversation with Jean-Luc Bohbot

Good morning, Jean-Luc. What is Wilmar’s position now in the sugar business?

We are the only global, fully integrated sugar company involved all along the supply chain. We produce sugar from both cane and beet. We are refiners, traders, distributors, and we have our brands.

We have 24 mills worldwide: eight in Australia, seven in India, seven in Morocco, and two in Myanmar. We process about 21 million tonnes of cane and 6 million tonnes of beet globally per year. All that adds up to an annual sugar production of approximately 3.5 million tonnes.

In addition to our cane and beet mills, we also have nine refineries: two in Indonesia; two in Australia; one in New Zealand; two in India; one in Saudi Arabia; one in Morocco – in total, about six million tonnes of refining capacity.

Without double-counting, we have an annual trading volume of around 16 million tonnes. In terms of distribution, retail and the food industry, we do about 3.5 million tonnes. We manage various consumer brands, for example, Chelsea in New Zealand, CSA in Australia, Madhur in India, Gazelle, and others in Morocco.

Our business model is to have our assets and trading fully integrated, where trading contributes to the asset performance using the assets’ ‘captive’ volumes.

Which countries have the most significant impact on the sugar price?

Two countries drive the price on the supply side. Brazil is the first, with about 60 per cent of the world export market. India is the second, with big swings in production and exports and a hefty dose of politics. India always has the potential to destabilize market equilibrium in one direction or another.

China drives the price on the demand side. It is the world’s biggest importer of sugar, and domestic demand continues to grow. It’s not just sugar. China is a major importer of grains and soybeans. These commodities, along with sugar, are of strategic importance to the country. China operates a system of strategic reserves. It often makes it difficult to predict whether they will meet domestic demand, or part of domestic demand, by running down stocks or through imports.

What are the other price drivers?

The world is going through an energy revolution of decarbonization, transiting from fossil to renewable fuels. We are just at the beginning of this revolution.

Developing countries face a more significant challenge than developed countries. Not only do they have to manage existing demand, but they must also manage two-digit growth in energy demand. It is an important issue for them. To reduce GHG emissions, they must react strongly and quickly. Bioenergy could play a growing role in the range of options offered to control footprint emissions.

Today, sugar is highly correlated to energy – particularly crude oil – due to the link in Brazil and, increasingly, in India. Brazil can swing 30 to 70 per cent of the sugar or ethanol ratio production – that’s a lot of sugar! Ethanol can also play a key role in hydrogen as an energy source. It could also be used in jet fuel.

This energy revolution will impact all agricultural commodities, and there will be increasing convergence between agriculture and energy – green energy.

At the same time, climate change is making the weather increasingly unstable and unpredictable. This year, we have drought across the Americas, frosts in Southern Brazil and floods in Europe. I can’t say for sure that climate change is producing these dramatic weather shocks, but I feel that they are a foretaste of what is to come.

Agricultural commodities, whether sugar or soybeans, depend too heavily on a few countries to produce them; weather shocks in these few countries have a multiplier effect on production and price.

Are you worried that electric vehicles (EVs) might negatively impact ethanol demand?

Not really.

Leaving aside deforestation, Brazil is one of the least polluting countries globally, thanks to hydroelectric power, ethanol, and bagasse. Ethanol produces 70 per cent less CO2 than gasoline. Brazil is a world leader in terms of GHG emissions from transport. Why would Brazil change its energy matrix to include EVs, considering the investment they would need to build the charging infrastructure?

EVs are a solution for Europe and the US – countries that can afford to invest massively in the necessary charging infrastructure or for local cars in highly polluted big cities like in China. Many countries don’t have the capital to build the required charging infrastructure. It will lead to a backlash against EVs and a slowdown in demand growth. EVs are great for people in rich countries who don’t drive long distances or remain within a specific range of their homes or offices.

Ecologists like EVs, but the GHG footprint of EVs depends on how you produce the electricity. India produces over 70 per cent of its electricity from coal. About 20 per cent of the lifetime GHG footprint of an electric car occurs during its manufacture. When, on top of that, you use coal electricity, your final GHG footprint is not a positive contribution. It is no surprise that India is making a significant move towards ethanol.

In China, coal provides most of the electricity. It is fossil fuel electricity, not green electricity. EVs won’t help China or India significantly transition from fossil fuels; instead, they will keep them in place. Natural gas is 50 per cent less polluting than coal but is still 20 to 30 per cent more polluting than ethanol. The transition in developing countries will be towards a mix of solutions, but with ethanol playing a more prominent role.

There is also a question of how long it will take to replace the existing fleet with EVs. The average car in India is 15 years old. It will take years for the country to move to EVs, and the world can’t wait that long. We need an urgent solution. Ethanol is a cheap and immediate option for developing countries to reduce their CO2 emissions from road transport.

Thank you, Jean-Luc, for your time and input.

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

© Commodity Conversations ® 2022

February 19, 2022

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.

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February 17, 2022February 15, 2022

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

February 13, 2022February 13, 2022

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.

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February 9, 2022February 7, 2022

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.

February 6, 2022

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.

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February 3, 2022

‘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.