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January 24, 2021May 10, 2022

Cocoa economics

Cocoa farmers in Ivory Coast went on strike last week in protest against the low prices they are currently being offered for their crop. They have also threatened to block port warehouses where more than 100,000 tonnes of cocoa have backed up due to a lack of demand. A farmers’ representative told Bloomberg that farmers are only being paid 800 CFA francs per kilo against the state-guaranteed minimum price of 1,000 CFA francs, roughly $1.85/kg.

Covid19 is partly to blame for the lack of demand. The FT (subscription required) reports that the virus has disrupted ‘sales of chocolate at airports, hotels, restaurants and speciality boutiques’. As a result, world cocoa demand fell 2-3 per cent last year, prompting processors and chocolate manufacturers to delay shipments on quantities that they have already bought, and hold off on new purchases. This drop in demand has hit the Ivory Coast particularly hard. Together with Ghana, the country produces 60 per cent of the world’s cocoa.

Ghana and Ivory Coast work together more closely than in the past, setting similar ex-farm prices and reducing smuggling across their borders. In 2019, they looked at ways to increase farmers’ incomes and discussed setting a minimum export price. They eventually rejected the idea and instead introduced a ‘Living Income Differential’ (LID), a $400 per tonne premium that buyers had to pay over the world price, starting with the 2020/21 season.

The $400 per tonne LID was not just a premium over the futures; it was also in addition to the country differentials.

Country differentials (premia and discounts relative to the futures) fluctuate widely; they often depend on the cocoa that the market expects to be delivered against the futures. Processors prefer new crop cocoa to old crop, and the futures can be depressed, for example, if old crop is expected to be delivered. For the 19/20 season, exporters probably paid an average premium of about £75 for Ivory Coast and £125 for Ghana, as these purchases were made starting in September/October 2018.

The larger cocoa processors – particularly the ones with factories in Ivory Coast – have paid LID on their 2020/21 purchases, but they have had difficulty passing it on to their buyers. Unlike Fairtrade or the Rainforest Alliance, LID doesn’t come with a certificate that can be handed on to the chocolate manufacturers. Without a certificate, manufacturers can’t put a label on their retail packaging, nor ask their customers to pay more.

Rather than pay LID, Hershey was reported last month to have taken delivery from the December futures contract: a mixture of the old crop cocoa from West African, Ecuador and Sulawesi.

In response, Ivory Coast and Ghana launched an unprecedented media campaign against Hershey. They also threatened to suspend the company’s sustainability programmes in the two countries. It is not clear what arrangement Hershey made with Ivory Coast and Ghana, but it has been reported that Hershey has agreed to pay the Living Income Differential. Still, as Hershey does not buy directly from the Ivory Coast, it is unclear how that works.

It is also unclear how Ghana and the Ivory Coast expected LID to work in the first place.

By asking their customers to pay $400 per tonne more for Ghanaian or Ivory Coast than for other cocoa, chocolate manufacturers had a strong incentive to buy alternative origins. Ghana and Ivory Coast have tried to stop this by putting media – and local – pressure on the big chocolate companies. Still, the big companies account for less than half of the world’s chocolate production and an even smaller percentage of beans.

The cocoa market is looking at a surplus this year of up to 300,000 tonnes. Because of LID, this surplus is now primarily made up of cocoa from Ivory Coast and Ghana. At this time of the year, the Ivory Coast would have customarily sold all of this crop, most of their mid-crop and a significant chunk of the following main crop. Instead, they still have an estimated 500,000 tonnes to sell from the 2020/21 season and a similar quantity from the 2021/22 crop. They have not sold anything yet for 2022/23.

Cocoa is what is known as a ‘front-loading’ commodity. The harvest runs from October through March, with shipments concentrated during this period; processors then store the cocoa and use it throughout the year. With storage costs at around £12 per month, it is not surprising that buyers have been delaying purchases, aggravating the build-up at the origin. Time is on the side of the buyers; they can afford to wait.

The inevitable has happened: both Ghana and Ivory Coast have reduced prices to tempt buyers. Country differentials have fallen to a discount of £150 – 200 per tonne. Unfortunately, they have little success even at those prices; buyers have either already bought elsewhere or are waiting for prices to fall even further.

But isn’t this just bad luck on the part of Ghana and Ivory Coast? Wouldn’t LID have worked if the balance sheet had been in deficit rather than surplus? Unfortunately, the answer to both questions is ‘no’.

If there had been a deficit, the outright cocoa price would indeed have risen. Unfortunately, neither Ghana nor Ivory Coast would have been able to sell if they had continued to ask for a premium of $400 per tonne over the market. The world price could have gone to the moon, but they would still have asked for $400 per tonne more. To move their crop, the country differentials would have been reduced – probably to levels similar to where they are today. As with all farmers, it is the outright price that matters, not the differentials.

So, what is to be done? With hindsight, the obvious answer would have been to go with the two countries’ original idea and set a minimum price, not a differential. Even then, with a market in surplus, the world price would have fallen below the minimum price; Ivory Coast and Ghana still wouldn’t have sold. The minimum price would have become a maximum price with the market only buying it when it was needed.

It is sad to say, but cocoa economics are the same as everyone’s else’s economics: the only cure for low prices is low prices.

January 21, 2021

Commodity Conversations Weekly Press Summary

The pressure is increasing on major trade houses to step up their commitment to end deforestation in Brazil after three small soy traders that supply Norway’s salmon industry committed to zero deforestation in their supply chain this week. Brazil’s oilseeds crushers association Abiove, however, refused to impose a “soy moratorium” on farmers in the Cerrado, arguing that farmers own their land and should have a right to decide what to do with it. Abiove argued that downstream companies that are putting pressure on soybean farmers should instead look to work with them to find a solution.

The issue continues to hold diplomatic proportions, as France’s President said that importing soybean from Brazil would be akin to condoning the deforestation of the Amazon. But with the EU importing over 8 million mt of Brazilian soy in 2020, up 61% on year and the second biggest market after China, displacing Brazilian soybean won’t be easy. While the latest pledge will help make the EU’s salmon supply chain deforestation-free, an analyst argued that reducing our meat consumption was the only realistic way of fighting deforestation in Brazil. Until then, the EU’s food safety agency just cleared worms, saying they were safe to eat, something that the UN FAO has been saying since 2013.

Following in the footsteps of Louis Dreyfus, Cargill is looking to sell its 50% stake in sugar trading group Alvean, which would effectively signal Cargill’s exit from the world of sugar trading. This comes as the US Food and Drug Administration is under increasing pressure from consumer groups to have stricter rules for sugar content labelling. The FDA doesn’t allow the “Low Sugar” label to be used in marketing because it has not defined what the threshold is. However, a report by the New York Times shows that F&B companies are using other misleading labels, such as “lightly sweetened.” A number of these companies have faced lawsuits by consumers claiming the labels were deliberately misleading.

In a move that grabbed headlines, Coca-Cola withdrew its support from the International Life Sciences Institute, an organisation Bloomberg said was known to focus on pro-sugar lobbying and research. Coca-Cola was also among a number of other F&B giants to freeze lobbying money following the attacks on the Capitol. This is part of a wider move from major US companies increasingly wary of their image in the eyes of consumers. The country’s biggest F&B groups already slashed political donations by up to half in the 2020 Presidential campaign compared to the previous one.

Research carried out in Australia found that the type of food delivery that produced the most packaging waste was burgers, followed by Thai food. It also found that paper bag packaging produced more emissions than plastic as a result of the carbon released. The good news, though, is that Amazon announced it was banning toxic PFAS chemicals which often line cardboard and wrappers as well as limiting non-recyclable packaging for its Amazon Kitchen brands. In the same vein, McDonald’s said it would phase out PFAS in its food packaging by 2025.

Restaurants continue to resent the high commissions charged by third party delivery companies. As one podcaster put it, while UberEats doubled revenues in 2020, 17% of the US restaurants shut down. Regardless, delivery companies continue to push innovation. Grubhub, for instance, tied up with Fiat Chrysler to make it easier to order food from inside a car. Meanwhile, Walmart is testing a smart locker delivery system that would make it easier for people to order their groceries and get delivered even when they’re out. The delivery app companies also welcomed a new bill passed by the outgoing President making it easier for them to classify their workers as independent contractors instead of employees, saving the companies a lot of costs. There is a strong likelihood that the new President will overturn that rule, however, The Counter said.

Last but not least, Unilever is testing a new concept: a food factory inside a sea container. The containers would be able to produce things like bouillon, mayo, ketchup and even ice cream while being shipped around the world.

This summary was produced by ECRUU

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January 17, 2021May 10, 2022

Rising food prices

With grain and soybean prices reaching levels not seen since 2014, I expect that the media will soon be writing about global food shortages. There will be accompanying calls for governments to intervene to cap domestic food prices. There will also be calls to control the markets and ‘punish’ speculators.

Last week already, a group of scientists warned that the world was ‘facing a ghastly future of mass extinction’ and that the continued growth in world population is driving soil degradation and biodiversity loss. The scientists included Prof Paul Ehrlich from Stanford University, author of The Population Bomb, published in 1968. In that book, Prof Ehrlich warned that the population explosion would lead to hundreds of millions of people starving to death (in the 1970s).

In an interview in 2018, Prof Ehrlich commented that although ‘details and timings of his predictions were wrong, his book was correct overall’. He said: ‘Population growth, along with over-consumption per capita, is driving civilisation over the edge: billions of people are now hungry, or micronutrient malnourished, and climate disruption is killing people.’ He still believes that the world will run out of food and that millions will starve.

He is not the first to think this. In 1798, the English clergyman Reverend Robert Malthus wrote his famous Essay on the Principle of Population in which he predicted that the world’s population would be checked by famine. Malthus argued that the world’s food supply grew arithmetically, while the world’s population grew geometrically. He wrote: ‘The power of population is indefinitely greater than the power in the earth to produce subsistence for man.’

Malthus believed that God had made it that way to teach humanity ‘virtuous’ behaviour. He believed that humankind should lead a subsistence life, and he predicted a future of ‘misery and vice’.

When Malthus wrote his essay, there were about one billion of us humans on our planet. Since then, the world population has increased more than eight-fold. Agricultural production has more than kept pace, so much so that the world is now struggling with obesity, not starvation.

Population growth is not currently driving grain prices higher. Rather, it is a mixture of bad weather, poor crops, well-intentioned, but inappropriate, government intervention, and a rush of imports into China as the country rebuilds both its stocks and its pig herd. To that heady mix, you have to add financial factors: inflation fears and a weakening dollar.

Nor will population growth drive grain prices higher in the future. The growth in agricultural production – largely through yield increases – continues to outpace population growth. This correlation contains an important causality: the growth in agricultural yields has permitted the growth in world population. There is no reason why this should suddenly change.

But what about temporary shortages – how can we deal with them?

The growth in yields over the past seventy years has led to such a huge increase in agricultural production that roughly 40 per cent of US corn production – and 50 per cent of European rapeseed production – is now used to fuel cars rather than humans.

Could crops currently used for fuel be diverted back to food in times of high food prices? This already happens on a huge scale with sugar in Brazil. When sugar shortages develop and sugar prices rise, millers produce more sugar and less ethanol. Western countries have even less flexibility in corn or rapeseed, largely because of government-set ethanol and biodiesel mandates.

Not only has agricultural production increased enough to feed the population and fuel our cars, but it has also allowed us to eat more meat. A staggering 98 per cent of the world’s soybean production – and 36 per cent of US corn production – is fed to animals to produce meat and dairy. Animals are rather inefficient in converting grain and beans into meat. It takes 25 kg of feed for a cow to produce one kilo of edible meat and it takes 15 kg of feed for a sheep to produce one kg of lamb. (The figures for pork and chicken are 6.4 kg and 3.3 kg respectively.)

Could some of that animal feed be diverted back to direct human consumption? In theory, yes. In practice, it would take a large increase in meat prices to reduce meat consumption, and then only with a relatively long time lag. It wouldn’t happen quick enough to solve a temporary grain shortage.

Increased agricultural production and low food prices have also encouraged waste. It is often said that 30 per cent of food is wasted. Waste occurs in developing countries through unharvested crops, poor storage and a lack of refrigeration. Food waste in rich countries occurs in supermarkets, restaurants, and the kitchen. I am not sure that 30 per cent figure is correct, but even if it is, it is doubtful that much can be done about it in the short to medium term.

All this means that the short-term solution to high grain prices lies on the supply side. High prices will encourage farmers to plant more for the next season while at the same time encourage the whole supply chain – from the farm silo to the supermarket – to draw down stocks.

Modern-day markets have become so efficient that prices now rise in advance of shortages. Futures markets trade the future; they solve the problem before it occurs. Anything that interferes with – or delays – these price signals (such as government intervention) will in the end only makes matters worse.

This is part of a series of ‘long reads’ called ‘Why food doesn’t have to cost the earth’.

January 14, 2021

Commodity Conversations Weekly Press Summary

The United Kingdom has already suggested that it might take a significant step away from the EU’s strict food policies as it opened a public consultation that will look at allowing gene-edited crops. The EU ruled in 2018 that gene editing should be banned along the same lines as Genetically Modified Organisms (GMO), although the former does not involve the introduction of new genetic material. Moreover, English officials said they would look to replace the EU’s subsidy system with payments linked to environmental performance.

Across the channel, the French consumers’ agency DGCCRF concluded that some authorised GMO products were sold in France but ruled that growers have generally been following the ban on planting GMO seeds. The comment comes after an investigation prompted by the discovery of an illegal GMO colza polt in 2018. The agency commented that some GMO seeds could be imported for processing but not for sowing.

The Irish protocol designed to avoid the return of a hard border in Northern Ireland after Brexit is “unworkable” in its current state, according to a letter signed by major supermarket chains, including Sainsbury, Marks and Spencer and Tesco UK. They warn that the region could face major disruption in food supplies when a grace period ends on March 31 and imports from the UK will be screened as they will effectively be entering the EU internal market. The supermarket chains argued that the government should negotiate a new arrangement with the EU. Dutch customs started enforcing the controls on meat imports and British truck drivers can no longer bring their ham sandwiches. A customs official told a surprised driver whose lunch was confiscated “Welcome to Brexit”.

Farmers in Argentina have been protesting the government’s effort to control inflation by limiting food exports. Eventually, the government cancelled its plan to ban corn exports and said it will cap daily sales instead, although the announcement was not enough to stop the strike. Russia is also worrying importers as it plans to impose an export tax on wheat, following comments by the President that food prices were too high. In response, an economist at the FAO argued that protectionist measures rarely work to lower food prices.

The Ivory Coast seems to be facing the opposite problem as it is storing 100,000mt of unsold cocoa beans. Traders explained that major chocolate buyers asked to postpone their Oct-Dec purchases to Jan-Mar in response to a fall in demand caused by the coronavirus. Similarly, sales in branded coffee shops in the US are expected to remain below pandemic levels until 2022. Some 208 stores out of 37,189 had to close last year, while the industry’s turnover in 2020 was down 24%.

The coronavirus has refocused the attention on rising obesity rates which the UN describes as a “global pandemic in its own right.” Investors are now putting pressure on food companies to address the associated health concerns of their products, which can be mitigated by reformulation, smaller packages and clearer labels. More and more governments are imposing a targeted tax, like in the UK. However, a new report is asking the UK government to disclose what it has done with the GBP 336 million (USD 459 million) raised from the tax on sugar-sweetened beverages in 2019/20 and is asking that the government fulfil its promise to spend it on children’s health and food programs.

Cargill’s marketing strategy is being challenged in the US by the Family Farm Action Alliance which argued that the claim that Cargill’s meat comes from “independent family farms” amounts to false advertising. Cargill highlights that it sources its meat through contract arrangements but the complainant argued that the farms should be considered subsidiaries. An expert commented that the situation could take years to reach a conclusion, as the US government has a clear definition of what a “family farm” is but no definition for “independent farms”. The same government agencies are also looking to define what “natural” foods should be.

Air Protein raised USD 32 million from ADM, Barclays and Google this week. The Californian firm makes proteins suitable for meat-alternative products using carbon dioxide, oxygen and nitrogen. The process requires no arable land and is fully independent of climate, soil and weather conditions. As if that wasn’t weird enough, Australia’s Vow raised USD 6 million to invest in the production of cultured exotic meat, like cultured kangaroo or alpaca meat.

When a librarian obsessed with food history passed away in 2015, no one took over her 20-year old website which documented the history of food going back as far as 17,000 BC. Researchers can now rejoice, however, as Virginia Tech University took over the project which will be revived and maintained. The website, foodtimeline.org, is currently down but the University said it should be up again in the coming weeks. For those who can’t wait and need to know what food the Roman army ate now, the Wayback Machine has you covered.

This summary was produced by ECRUU

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January 10, 2021March 29, 2021

How we got here

Our planet is roughly 4.5 billion years old. Our human ancestors appeared on Earth around 66 million years ago. Still, as we know ourselves today, humans have only existed for the last 2 million years, the vast majority of that time as hunter-gatherers.

Humans may have begun to grow crops on the Sea of Galilee’s shores about 23,000 years ago. However, agriculture proper did not start to develop until 12,000 years ago when hunter-gatherers in the ‘Fertile Crescent’ began growing wild varieties of crops like peas, lentils and barley. They also herded wild animals like goats and oxen in the region.

Historians disagree as to why our ancestors made the structural shift from hunting and gathering to farming. Some argue that a changing climate left them no alternative but to seek alternative sources of foods. Some suggest the transition was more a result of our perpetual drive to improve our condition. Others even suggest that a love of beer drove them to give up their nomadic lifestyles. Archaeologists estimate that 40 per cent of early wheat production went to make beer—the oldest barley beer dates to 3400 BC.

In broad-brush terms, historians divide agricultural progress into three stages. The First Agricultural Revolution defines the move from hunting-gathering to farming that occurred 7-10,000 years ago. The Second Agricultural Revolution refers to the mineral fertilisers and the industrialisation of farming and farm processing in the 19^th century. We are still living through the Third Agricultural Revolution, or the ‘Green Revolution’, that began in the middle of the 20^th century. It involved improved crop yields through breeding and the introduction of agricultural inputs such as fertiliser and pesticides.

Farming changed little during the first 10,000 years of human history. Farmers regularly left fields fallow, and animal manure was the sole fertiliser. In the early 1800s, scientists began to understand that inorganic minerals such as nitrogen, potassium, lime, and phosphoric acid could replenish depleted soils.

The search for fertiliser led merchants and scientists to the dry seabird islands off the South American and South African coasts, where immense deposits of bird droppings, rich in nitrogen and phosphorus, had accumulated over centuries. Guano mining became a profitable business. Between 1840 and 1880, guano nitrogen made a vast difference to European agriculture, but the best deposits were soon exhausted. However, miners found rich mineral nitrate deposits in Chile, and nitrates gradually replaced guano in the late 19th century.

In The Omnivore’s Dilemma, Michael Pollan writes that the great turning point in the modern history of agriculture can be dated to the day in 1947 when a munitions plant in Alabama switched away from making explosives to make chemical fertiliser instead. He explains that at the end of World War II, the US government found itself with a surplus of ammonium nitrate, the principal ingredient in making explosives. Ammonium nitrate is an excellent source of nitrogen for plants. Chemical fertilisers and pesticides were the product of the US government’s effort to convert its war machine to peacetime purposes.

Even though the Earth’s atmosphere is about 80 per cent nitrogen, nitrogen atoms have to be split and joined to hydrogen atoms (‘fixed’) to make fertiliser or bombs. A German Jewish chemist named Fritz Haber worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on Earth had to be fixed by soil bacteria or electrical lightning, which breaks down nitrogen bonds in the atmosphere.

In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that ‘there is no way to grow crops and human bodies without nitrogen’. Without Haber’s invention, the small amount of nitrogen that bacteria and lightning alone could release would have limited the number of people that agriculture could support.

In his book, Mr Smil argues that the Haber-Bosch process for fixing nitrogen (Bosch commercialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 per cent of the people on Earth today would not be alive without Haber’s invention. Without synthetic fertiliser, billions of people would never have been born.

Fritz Haber won the Nobel Prize in 1918 for ‘improving the standards of agriculture and the well-being of mankind’, but, since then, he has largely been airbrushed out of history. During the First World War, he helped the German war effort by making bombs from synthetic nitrate. Worse, he also developed poison gases, including Zyklon B, used in the Nazi concentration camps.

The Haber-Bosch process works by combining nitrogen and hydrogen gases under immense heat and pressure, supplied by electricity. The hydrogen is provided by oil, coal or, most commonly today, natural gas. As such, Michael Pollan argues that once humanity had acquired the power to fix nitrogen, the basis of soil fertility shifted from a total reliance on the energy of the sun to a new dependence on fossil fuel.

Farming, which had historically always been a process of converting sunlight into food, has become a process of converting fossil fuels into food. More than half of the world’s supply of usable nitrogen is now human-made—and farmers use more than half of all the synthetic nitrogen made today to grow just one crop: corn.

Some excess nitrogen evaporates into the air, acidifying the rain and contributing to global warming. Some seep down to the water table and the rivers. Mr Pollan writes:

‘The ultimate fate of the nitrates spread in Iowa or Indiana is to flow down the Mississippi into the Gulf of Mexico, where their deadly fertility poisons the marine ecosystem. The nitrogen tide stimulates the wild growth of algae, and the algae smother the fish, creating a ‘hypoxic’, or dead, zone as big as New Jersey–and still growing. By fertilising the world, we alter the planet’s composition of species and shrink its biodiversity.’

He is right, of course. The world would be a very different place if it were not for the advances in agriculture and agricultural technology that occurred over the past century. Admittedly it would probably be less polluted, and we might eat better, but two out of five of us probably wouldn’t be here. And of the remaining three, at least one would go to bed hungry every night.

Some might argue that the world would be a better place if there were 40 per cent fewer of us on the planet. But, personally, I am happy to be here.

This is an extract from my next book: ‘Commodity Crops and the Merchants who Trade them.’

Image from Pixabay

January 7, 2021

Commodity Conversations Weekly Press Summary

The world seems to have moved on from the concept of dry January to Veganuary, a pledge to only eat vegan food during the first month of the year. Leaders from major groups such as Nestle, Marks & Spencers and Bloomberg even called on their employees to join in on the pledge. In the UK, an estimated 13 million people reduced their meat intake since the start of the pandemic, according to a survey by The Vegan Society. And not to be left behind, Mondelez is reportedly about to buy the remaining stake in vegan chocolate-bar maker Hu, according to sources who spoke with Reuters.

A new study found that the meat with the lowest environmental impact was still worse than the plant with the highest impact, The Guardian reports. The research looked at organic meat and found that, as livestock grown organically takes longer to grow and ends up with less meat, it results in more manure and methane burps, a major source of livestock’s greenhouse gas emissions. If the environmental cost was factored into food prices, conventional meat should be 40% more expensive than it currently is, organic meat should be 25% more expensive but the price of plants would remain the same, the study found.

In Europe, Euractiv reported a disagreement among plant breeders as to whether the EU’s new intellectual property plan could successfully accommodate the realities of the agricultural sector. Those in favour welcomed the plan, saying it will be key to encourage investments in innovations at a time when speed is key. Critics, however, argued that the system would only lead to more expensive seeds, market concentration and monopolies.

ADM and Bunge are among a group of companies accused of sourcing palm oil from Indonesian mills that violate human and land rights, according to a report by Global Witness. The report said that the tradehouses were failing to address the issue even though these had been reported and that they were not doing enough checks. Both companies denied the allegations but said they were looking into it.

A survey by Cargill showed that sustainability was a growing concern for customers and that the majority are willing to pay a premium for environmental and social responsible brands. “Consumer expectations are higher now than ever before,” a Cargill official said, especially when it comes to buying chocolate. A majority of those surveyed said they were readier to pay a premium for environmental sustainability than for low-sugar or organic chocolate.

In the US, the government issued its first ever dietary guidelines for infants and toddlers, which recommends not to feed any added sugars to children younger than 2 years old and less than 10% of daily calorie intake after 2. The government rejected the recommendations made by the Agriculture Department and the Department of Health and Human Services to lower the recommended consumption of added sugar from 10% to 6% of calories consumed daily saying the evidence was insufficient to support stricter restrictions on sugar consumption. The government also rejected a proposal to lower the recommended limit on alcohol intake from two daily drinks for men and one daily drink for women to one daily drink for both women and men.

In the UK, meanwhile, the government will be rolling out new restrictions on unhealthy food promotions from April 2022, including restricting where the foods can be placed in stores and banning discounted offers and free refills of sugary products. While more and more countries are looking into discouraging the consumption of junk food, a new discovery by archaeologists in Pompeii suggests that fast food may not be a modern invention. According to the Associated Press, archaeologists dug out a food stall dating back to 79 AD, with fragments suggesting that chicken, duck, snails and fava beans had been on the menu that day.

If you’re not ready to go completely vegan, and switching to eating bugs doesn’t appeal to you either, but you still want to do your bit for the planet, you may want to consider getting your pet to eat bugs instead. Nestle Purina PetCare will be launching its pet food made from crickets in the US sometime this month. Insect-based pet food is already gaining grounds in Europe, with cricket a popular option as it needs 12 times less feed than cattle for the same amount of protein and vets in the UK are recognising that this is good quality protein too. It is likely to remain a premium product for the foreseeable future, however, given the higher costs of production. That’s why Nestle Purina PetCare will also be investing USD 550 million in expanding its pet food plant in Georgia, US.

This summary was produced by ECRUU

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December 21, 2020December 14, 2020

Traders and merchants

Coffee traders and merchants move coffee from areas where it grows well (and cheaply) to places where it grows less well, or not at all. They transport coffee from surplus areas to deficit areas. If coffee is worth more money in the US than in Brazil – and if that difference is more than the cost of shipping it (plus a little profit margin to make it worthwhile), then the trader or merchant will make it happen.

Coffee traders do not only move coffee from surplus to deficit areas. They also store and process it. They hold coffee at times when it is not needed (after the harvest) until a time it is needed (throughout the year). Coffee millers process coffee from a form in which it is not wanted into a condition in which it is wanted, transforming cherries into green beans. Roasters transform the green beans into roasted or soluble coffee.

Millers and roasters are, by definition, traders. A miller buys cherries and sells green beans, while a roaster buys green beans and sells roasted beans. Just as a trader may depend for his livelihood on his skill in buying coffee in one country and selling it in another, a roaster depends on his skill in buying coffee in one form and selling it in another. Millers and roasters are traders, and they need trading skills to perform their tasks correctly.

When you think about that a little, it becomes clear that what a trader is most interested in is not the outright price of coffee but the difference in the prices of that coffee in its different geographies, times and forms. It is the price differential that matters, not the outright price. Traders like to limit their exposure to the outright, or flat price, of a commodity. They usually hedge their outright price risk, preferring to make their money on the differentials – the difference between the cost of the futures and the price of their particular coffee.

All traders – and that includes roasters – will try to reduce their risk of future price movements by hedging what they buy, taking an offsetting position for the same quantity in the futures market. Having purchased the physicals, a trader will sell futures as a hedge. When he sells the coffee, the trader will buy back their futures hedge; they no longer need to be protected against a move in the outright price of coffee because they don’t own it anymore.

Everyone involved in the coffee supply chain is taking and managing price risk. The farmer is perhaps taking the most significant risk by growing coffee in the first place. He may try to offset some of that risk by selling in advance – selling something that he doesn’t (yet) have.

The trader is taking a risk on the quantity that he buys but offsets that risk by hedging in the futures market. The roaster is also taking a risk; he has invested in his roasting machinery and has the risk that coffee prices will be too high to allow him to make a profit when he sells his roasted beans.

When I began my trading career with Cargill in the late 1970s, my first business card gave my title as ‘Commodity Merchandiser’. But what is the difference between a trader and a merchandiser? Traders take positions on the markets, betting whether prices – or the differentials between prices – will rise or fall. Merchandisers move commodities along the supply chain, taking a tiny margin at each stage of its journey.

Traditional commodity merchandising has become more challenging and less profitable over time. It has become tough to make a margin just moving coffee along the supply chain.

One of the significant difficulties that merchandisers now face is that information is widely and freely available. It also travels incredibly fast. Technological change has reduced the potential for traders to arbitrage prices between geographical regions.

The other significant change is that governments and government agencies have pretty much left the coffee business. In the past, governments were often responsible for selling their country’s production, and this led to opportunities for corruption. Low-paid government officials were easy targets for unscrupulous traders; selling tenders were often rigged in favour of the traders that gave the biggest bribes. The markets have now been privatised, and this no longer happens.

In a world of instant information, it is no longer possible for merchants to take advantage of price differentials in various countries; instead, they now have to anticipate them. It is the point where a merchant becomes a trader. A trader predicts where shortages and surpluses will occur, and he takes a position in the market in anticipation of future price moves. As a result, analysis has become the lifeblood of trading.

It is not unusual for a trading company to employ more analysts than traders. Nor is it uncommon for traders to spend most of their time not on trading, but analysis. It is impossible to succeed in the commodity markets without an experienced group of traders and analysts to interpret and understand the mass of information that needs to be absorbed.

But analysis is not the only thing that you need to succeed in the physical commodity markets: you also need clients. Traders, therefore, have to keep in regular contact with their client networks, and they have to move physical coffee along the supply chain. There is now such an overlap between trading and merchandising that they are pretty much the same thing.

Merchandising coffee allows you to see the trade flows, helps with your analysis, and enables you to anticipate trading opportunities in the coffee market. But the margins on straight merchandising are now so thin – and sometimes even negative — that it is pretty much impossible for a pure coffee merchandiser to survive. The profits from trading subsidise the lack of profits, or the losses, on merchandising. In that sense, merchandising enables trading, and trading facilitates merchandising. They are mutually dependent.

This is an extract from my latest book ‘Crop to Cup – Conversations over Coffee’, available now on Amazon

December 17, 2020

Commodity Conversations Weekly Press Summary

The Chinese government continues to push its “Operation empty plates” to reduce food waste amid growing concerns of possible food shortages. Officials denied any possibility of shortages, however, and the country’s consumer price index saw a 0.5% drop in November, the first annual drop in over a decade. An economist explained that the fall was led by declining pork prices, which dropped by 12.5% in November, following an increase in the domestic hog population. This could be short lived, however, as pork prices have been rising again in December due to seasonal demand for meat in preparation for the Lunar New Year. The crackdown on imports has also contributed to lower meat availability, with the government’s coronavirus testing measures slowing import clearance, while consumers prefer to buy domestic pork.

Rising food prices are also an issue in Russia, where the government announced measures to cap the price of several essential commodities, including a temporary quota for grain exports and a temporary export tax on wheat. Sugar and sunflower oil producers agreed to cap prices themselves, failing which the government threatened to lower the sugar import duty and tax sunflower oil exports.

A big winner in all of this is Brazil, which expects to see USD 100 billion in agribusiness exports in 2020, up 3.5% from 2019 and the second highest after 2018. The projection made by Insper Agro Global notes that a third of exports are destined to China, Brazil’s biggest agricultural trade partner since 2013. Soybean exports by themselves should generate USD 36 billion, driven in large part by the recovery in China’s hog population.

Within this context, it is little surprise that more and more Brazilian agribusinesses are choosing to go public on the domestic stock exchange. A mergers and acquisitions consultant said there was strong investor demand for these companies thanks to the weaker Real and interest rates at historically low levels. However, a banker involved in one of the IPOs said that sustainability and good environmental practices were key.

In the UK, the Prime Minister said this week that a UK-EU trade deal looked unlikely, which prompted retailers to reiterate their warning that a no-deal Brexit would lead to higher food prices. The British Retail Consortium warned that 80% of the country’s food is currently imported from the EU duty-free and the absence of a trade deal would lead to average tariffs of 20%. Brexit could also lead to sub-standard food imports, the Future British Standards Coalition (FBSC) said, explaining that the government had refused to sign food safeguards into law. Despite agreeing to ban the import of chlorinated chicken and hormone-treated beef, the current system allows the government to make changes on food import rules without a vote in parliament, the FBSC said.

Soybean from Brazil is facing a backlash in Europe amid the rapid rate of deforestation in the Cerrado which supplies two thirds of the country’s soybeans. Some 160 food groups and investors have asked the major trading houses to stop procuring soybean linked to deforestation in the Cerrado region by the end of the year. Nestle already stopped buying Brazilian soy from Cargill back in May 2019, and two European fish feed companies announced they would stop using Brazilian soybean in their feed, one of which said it would be using European grains instead. The Financial Times explained that part of the issue is because, by law, farmers in the Cerrado only have to protect 20-35% of the native forest, against 80% for farmers in the Amazon.

Brazil overtook the US as the number one producer of genetically modified (GM) soybean in the world in 2019, according to a report by ISAAA. Overall, however, the area under GM crops dropped globally by 0.7%. The area dropped by 4.7% in the US, the country with the largest area under GMO crops, but increased by 3% in Brazil, the number two in the world. The report suggested that GM crop area seemed to have reached a peak, having remained stagnant for a few years now.

In the US, the Food and Drug Administration (FDA) gave the green light to the first GM pig safe for people who are allergic to red meat. The Center for Food Safety complained that the FDA didn’t do enough tests and flagged the risks of a pig escape and contamination with wildlife. But the company that engineered the pig, United Therapeutics Corporation, isn’t working on meat for consumption. Rather its goal is to develop pig-based organs that can be transplanted into humans. “[This] is one step on our journey to address the shortage of transplantable organs in the US,” a company official said

Also in the US, some 12,000 peanut farmers filed a class action lawsuit against three shelling companies, including Olam and ADM, accusing them of depressing prices by close to 20% between 2014 and 2019. The three companies, dubbed Big Peanut by The Counter, have an 80% market share of the industry. Two of the Big Peanuts are reportedly about to settle with the farmers.

Dear readers, we would like to wish you a Merry Christmas and Happy New Year. The Commodity ConversationsxECRUU report will resume on 7 January 2021.

This summary was produced by ECRUU

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December 14, 2020December 10, 2020

The History of Coffee

No matter what historians claimed, BC really stood for ‘Before Coffee’.― Cherise Sinclair

The first reference to coffee as we know it today was in the early 15^th century when the Arab mystic al-Dhabhani saw Ethiopians drinking ‘qahwa’, now the Arab word for coffee. The Ethiopians, however, call coffee ‘buna’, which also means bean.

As coffee gained popularity throughout the Arab world, it began to be used less as a religious drink and more as a social stimulant. In 1511, Khair-Beg, the governor of Mecca, ruled that coffee was like wine and hence banned by the Koran. He ordered the city’s coffee houses to be closed, only to have the ban overturned by his boss, the Sultan of Cairo.

Despite its growing popularity, coffee production was slow to pick up; it was only after the Ottomans occupied Yemen in 1536 that they began to extensively cultivate the crop in the country. The Ottomans exported the coffee from the port of Mocha, and it became known as ‘mocha’.

When the first English sailor reached the port in 1606, he wrote that there were over thirty-five merchant ships, some from as far away as India, waiting to load the precious green beans.

Some of the coffee was shipped to Alexandria in Egypt and then on to Venice. Still, mostly it stayed within the Ottoman empire, reaching Damascus and Istanbul by the middle of the century. By then, coffee was no longer considered just a religious drink, but also a social one. By the end of the 16^th century, there were over 600 coffee shops operating in Istanbul.

The way of brewing coffee changed as it travelled. Arabic coffee (qahwa) is a light-coloured liquid made by lightly toasting the beans, crushing them with various spices such as cardamom, and then boiling them in water. Turkish coffee (kahve) is made with more darkly roasted beans and brought to the boil at least twice but without spices.

For a time, the Ottomans successfully prevented coffee cultivation from spreading outside the area of Mocha; they refused to let berries leave the country unless they were first boiled in water to prevent their germination. However, exports had grown to such a level that it was impossible to stop some un-boiled beans from getting through. As Muslim pilgrims returned to their homes, they took coffee beans with them.

One such pilgrim, Buba Budan, is credited in 1600 with smuggling out some beans by taping seven of them to his stomach. He took them back to India and planted the beans next to his hut at Chickmaglur in the mountains of Mysore. Buba Budan is now (rightly) revered as a saint, but it was not until 1840 that the English began the commercial cultivation of coffee in India; the plantations extend now from the extreme north of Mysore down to Tuticorin.

In 1614, Dutch traders brought a coffee plant from Mocha to Amsterdam, and by mid-century, they had taken plants to Ceylon (now Sri Lanka) and Dutch Malaba (now Cochin), where they started small plantations. From there, in 1696, the Dutch took cuttings from the plants to their colonial island of Java. A flood washed away the early seedlings, but the Dutch tried again three years later, this time successfully. In 1706, the first Java coffee had reached Amsterdam; some coffee plants were grown successfully in Amsterdam’s botanical gardens.

During the 17th century, ‘Mocha’ and ‘Java’ became synonyms for coffee; they are still so today.

This is a short extract from my book Crop to Cup – Conversations over Coffee now available on Amazon.

December 10, 2020

Commodity Conversations Weekly Press Summary

In order to meet its goal of reaching net-zero emissions by 2050, Nestle announced that it will invest USD 3.6 billion over the next five years, focusing on regenerative agriculture, renewable energy and plant-based products. More countries and companies have joined the 2050 net-zero pledge in recent weeks, including Glencore. The group, however, argued that fossil fuels still had a role to play and mentioned that it was not planning to sell its coal mines in Australia. Glencore also announced that the CEO will retire next year and that Glencore Agriculture will be rebranded as Viterra.

Carbon offset programs will be essential to meet these goals, as Mondelez explained that any “product that has to be produced and transported will have some carbon footprint”. Mondelez is testing the concept with a product launched in France, the carbon-neutral NoCOé cracker. Beyond using local and organic products, Mondelez is planting trees in partnership with Rainforest Action. The product will also help verify whether consumers are willing to sacrifice price and convenience in order to help the environment.

Singapore made headlines when it approved the sale of the first cultured meat, produced by the US-based Eat Just. The chicken bites are produced in a bioreactor without the slaughter of an animal. Nonetheless, the company was the first to admit that a lot of progress still needed to be made, as the meat is still expensive and energy-intensive. It also relied on foetal bovine serum extracted from foetal blood, although this could eventually be replaced by a plant-based alternative. For these reasons, an observer argued that the launch was “good news, but not great news.” In the long-term, another observer expressed optimism that cruelty-free cultured meat could replace cuts of traditional meat while plant-based products will replace processed meat like burgers and sausages.

As investment in the plant-based meat sector continues to soar, Canadian researchers highlight the need to properly evaluate the true environmental impact of switching to plant alternatives. Supply chain logistics behind the production and distribution of proteins also play an essential role, along with the choice of base ingredients. Experts also highlighted that working conditions and food safety should be factors when assessing the sustainability of plant-based meat. Separately, a study by Tufts University suggested that the only way for US cities to focus on locally produced foods was by reducing the consumption of meat. The land needed for grazing livestock would make it difficult to supply enough meat locally for more than 20 percent of meals.

The world of machine learning and food development collided when Google’s parent company announced that the DeepMind AI was able to crack a longstanding problem: protein folding. Protein folding contains a number of variations that approach infinity but DeepMind’s DeepFold AI can predict the structure within days. Beyond the huge implications for the biomedical sector, food researchers also pointed out that this could be a fundamental change in the search for new proteins, along with the possibility of replacing rare ingredients like saffron and vanilla.

Google announced other food-related ventures as two prototypes developed by the X factory will now be scaled and commercialised. The first is the “dana-bot”, a food distribution network designed to track food waste to help food banks and redirect waste from grocery stores. The second prototype leverages computer vision to analyse the food thrown out in kitchens. Going even further in the realm of science fiction, Finland-based Solar Foods raised USD 30 million to test the production of “air protein”. Called Solein, the protein is made using carbon dioxide captured from the air and mixing it with bacteria.

When the US prohibited the consumption of alcohol, apple producers started designing sweeter varieties more suited for direct consumption instead of fermentation to make cider, according to Civil Eats. Some cider producers are now scavenging in the wild to rediscover old apple varieties much more suited for cider. South Hill Cider, in the US, is grafting and planting these varieties in its own orchard. Meanwhile, a jogger in Wiltshire, UK, was puzzled when he found a solitary apple on a wooden trackway. With the help of the Royal Horticultural Society, he discovered that the apple was a new variety which means he gets to name it. The choice is tricky and he explained: “My seven-year-old son wants me to call it Cristiano Ronaldo but that’s not happening. My wife, Hannah, is the apple of my eye, so she’s in contention.”

This summary was produced by ECRUU