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“In the sweat of thy face shalt thou eat bread, till thou return unto the ground.” Genesis 3:19

Unlike corn or soybeans, humans, not animals or cars, are the most important in terms of the world demand for wheat. On average, animals only eat about 18 per cent of the world’s total production of wheat. This number falls to less than 4 per cent in developing countries but as much as 35 per cent in developed countries. As a rule of thumb, wheat works as animal feed when it is 10 per cent cheaper than corn, or when wet weather reduces its protein content to under 10 per cent.

Even though wheat acreage has increased only modestly, wheat is now grown on more land area than any other food crop: 222 million hectares versus corn at 196 million hectares and rice at 163 million hectares. In 2020, the world’s farmers produced 772 million mt of wheat, making it the second most-produced cereal after corn at 1.1 million mt. Rice comes in at third place at 500 million mt.

Wheat is still the world’s biggest traded agricultural commodity by volume. In 2020 world exports were 194 million mt, just ahead of corn at 184 million mt and soybeans at 170 million mt; little of the world’s rice production trades internationally: 45 million mt in 2020.

If you were to ask your guests at your next dinner party to list the top wheat-producing countries in the world, I bet that they would all get it wrong. They may guess correctly that the EU tops the list at 136 million mt, but few would know that China now produces more wheat—134 million mt—than any other country in the world. China’s farmers now grow about the same quantity of wheat as Russia (85 million mt) and the US (50 million tonnes) combined. India is the world’s third-largest producer at an estimated 107 million mt.

Your party guests may have more success with exporters. Russia is now the world’s largest exporter at 39 million mt, followed by the US at 27 million tonnes and Canada and the EU, both at 26.5 million mt. Ukraine comes in fifth on the list at 17 million mt. (All figures are for 2020.)

I can guarantee that none of your dinner party guests could name the world’s top wheat importers! Although Egypt used to supply the Roman Empire with wheat from the Nile valley, it is now the world’s largest importer at 13 million mt. Unsurprisingly, when you consider their large population, Indonesia comes second at 11 million. China imported nine mln mt of wheat in 2020, while Turkey comes fourth at 8 million mt.

Wheat is an essential source of carbohydrates, but with a protein content of about 13 per cent, it is also the world’s leading source of vegetal protein in human food. However, it is just this protein content—the gluten—that is now causing controversy.

Gluten gives dough its elasticity, helping it rise and keep its shape while at the same time leaving the final product with a chewy texture. However, gluten can trigger adverse inflammatory reactions—a broad spectrum of gluten-related disorders, including celiac disease—in 1 or 2 per cent of the population. Also, between 6 and 10 per cent of people suffer from non-celiac gluten sensitivity. ‘Wheat Belly’ symptoms can include bloating, headaches, tiredness, and skin problems.

In his bestselling book Wheat Belly published in 2011, the American cardiologist William Davis claimed that modern wheat is addictive; he recommended that you exclude it entirely from your diet.  In promoting his book, he wrote:

‘The wheat of today is nothing like the wheat of 1960, 1950—that is, the wheat that our moms or grandmothers had—so it has been changed. This new crop has implications for human health that have never been anticipated. So, this is appropriate for nobody, no human, nobody in this audience, should be eating this modern creation of genetics research.’

He added: ‘I’d like to make the case that foods made with wheat make you fat…. I’d go as far as saying that overly enthusiastic wheat consumption is the main cause of the obesity and diabetes crisis in the United States.’

His views have been vigorously contested both by scientists and by the wheat industry. As an ex-sugar trader, I am personally delighted that he is blaming wheat rather than sugar for the obesity epidemic of the past forty years. I am, however, unqualified to give an opinion on the matter.

© Commodity Conversations ® 2021

Farming looks mighty easy when your plough is a pencil and you’re a thousand miles from the cornfield.  – Dwight Eisenhower

Corn is an awkward crop. Because of its shallow roots, it is susceptible to droughts, intolerant of nutrient-deficient soils, and prone to being uprooted by high winds. Corn reproduces sexually each year, randomly selecting half the genes from a given plant to propagate to the next generation. Corn breeding in prehistory led to larger plants and larger ears. Modern breeding began in the 19^th century and, in the past 75 years, both conventional cross-breeding and genetic modification have succeeded in making corn less awkward, increasing output and reducing the impact of droughts and pests.

Many of the corn varieties grown in the US and Canada today are hybrids; over 90 per cent are the result of genetic modification. Grown commercially since 1997, GM corn now accounts for about one-third of the corn grown in the world, most of which has been genetically modified to tolerate glyphosate, or to provide protection against natural pests. Glyphosate, sold as Roundup, is a relatively inexpensive herbicide that kills all plants except those with genetic tolerance, which pretty much means all of them.

Monsanto released glyphosate-resistant soybeans under the name Roundup Ready Soybeans in 1996 and within ten years 80 per cent of all soybeans grown in the US were Roundup Ready.

Roundup Ready corn received FDA approval in 1997 and it was commercially released in 1998. It used much the same technology as in soybeans but also had built-in insect protection in the form of a Bt protein, a naturally occurring bacterium that lives in the soil and is toxic to insects.

Scientists also modified corn genes to make the crop more drought tolerance. The USDA approved drought-tolerant GM corn in 2011 and it was first commercialized in 2013.

Over the past twenty years, GM technology has revolutionised farming and transformed the seed and agricultural input business. Previously, much of a farm’s cost of production was in purchasing chemicals, fertilizer, herbicides and pesticides. Chemical companies made their money selling these inputs. Now the cost is in the development of the seeds. The result has been a merging of chemical and seed businesses with large chemical companies buying up the seed businesses.

Although GM technology has revolutionised the industry, its effect on yields is sometimes overstated.  By one estimate, about 50 per cent of yield increases since the 1920s have been the result of breeding, including genetic modification, while the other 50 per cent has come from improved farming practices. Better farming techniques have been just as important as genetics.

The USDA first began to publish corn yield estimates in 1866. Yields of open-pollinated corn varieties in the US remained fairly stagnant, averaging about 1.6 tonnes per hectare, for 70 years until about 1936. There was no significant change in productivity during that entire time period, even though farmers’ seed-saving practices represented a form of plant breeding.

Agricultural yields began to lift off with the adoption of hybrid corn in the late 1930s, but the most significant improvement in the annual rate of yield gain began in the mid-1950s in response to continued improvement in crop genetics, increasing adoption of nitrogen fertilizer and chemical pesticides, as well as agricultural mechanization. Since 1955, corn grain yields in the U.S. have increased at a fairly constant 1.9 bushels per acre per year, sustained primarily by continued improvements in genetics and crop production technologies.

The increase in global corn production in the last forty years has been more than impressive. In 1979, farmers in the US harvested 201 million tonnes of corn; in 2019 they harvested 366 million tonnes. In that same forty-year period, world corn production has increased from 425 million tonnes to 1.122 billion tonnes. Total world trade has increased by 100 million tonnes, from 70 to 170 million tonnes. However, in the same period, corn acreage has increased only 13 per cent, from 29 to 33 million hectares.

In his book More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources―and What Happens Next the bestselling author Andrew McAfee writes:

‘Farms of less than one hundred acres grow 15 per cent less corn per acre than farms with more than a thousand acres. And bigger farms get better faster. Between 1982 and 2012 farms under one hundred acres grew their total factor productivity by 15 per cent, whereas farms over a thousand acres grew theirs by 51 per cent.’

And as for the environmental costs of large-scale farming, Andrew McAfee writes:

A comprehensive review published in Nature Sustainability in 2018 concluded: “The data does not suggest that environmental costs are generally larger for high yield farming systems. If anything, positive associations – in which high yield, land efficient systems also have lower costs in other dimensions – appear more common.”

In other words – and contrary to popular belief –  large farms are generally more environmentally-friendly than small farms.

But I am getting ahead of myself here. More on this in later posts.

© Commodity Conversations ® 2021

This is an extract from my next book: ‘Commodity Crops – and the merchants who trade them.’

Readers have posed some interesting questions following my blog last week on cocoa.

One asked me to explain why I said a minimum sales price becomes a ceiling on the market. The answer is that if the price can’t go up, it will go down. If traders and manufacturers know that they can buy at a specific price, they have little risk in being short below that price. If the price rises, they can cover their shorts at a predictable loss. Minimum prices skew the risk/reward ratio and encourage people to sell short.

On a broader level, one commented that, because Ghana and Ivory Coast account for 60 per cent of world cocoa, they have the market power to set cocoa prices. He suggested that cocoa producers should get together to form COPEC, cocoa’s equivalent of OPEC.

Unfortunately, cocoa is not the same as oil. Oil producers can reduce supply by turning off a tap; they can leave it in the ground. It doesn’t deteriorate. Cocoa producers can’t turn off a tree. The trees keep producing, cocoa builds up at the ports, rots in the warehouses, and loses some, or all, of its value. In the meantime, farmers are left unpaid – with all the dire consequences that entail.

Cocoa is a front-loading crop: grinders and chocolate manufacturers tend to hold large stocks that they can run down if producers hold off new sales. Cocoa buyers are more affluent and better financed than producers – and they probably have better infrastructure.

One reader argued that the market is almost as concentrated on the buy-side as it is on the sales side. I very much doubt that cocoa buyers work together in the same way that cocoa producers do. Still, I would guess the balance weighs in the buyer’s favour in terms of market power.

A couple of readers pointed out that as growers only receive around 5 per cent of a chocolate bar’s cost, increasing the cocoa cost by $400 per tonne would only increase the bar’s price by one or two per cent. They have a point. Besides, Cargill recently conducted a survey that showed consumers would be willing to pay more if they thought that the farmer would benefit. ‘Surely,’ asked one reader, ‘consumers would pay 2 per cent more for their chocolate if they thought that it helped the farmers?’

The answer is that it would, but, increasing the price that farmers receive would encourage them to produce more, adding further pressure on prices.

Expressing this problem differently, another reader said that producing and consuming countries should cooperate in setting a fair price for cocoa.

In the past, the United Nations has done that by setting up commodity organisations to ‘manage’ the markets; cocoa, coffee, or sugar were three such examples. These commodity organisations tried to use stock management to bring supply and demand into balance at a price that gave a decent return to growers and a reasonable price for consumers.

When world prices fell, the various commodity bodies set to work by either purchasing (in the case of cocoa) physical cocoa to hold off the market or asking (in the case of coffee and sugar) producers to build stocks and limit exports. When prices rose again, they released these stocks.

These noble efforts, sadly, failed. When prices fell, coffee producers continued to export; they desperately needed the money to feed themselves. In the case of cocoa, the ICCO ran out of funding. In the case of sugar, producers failed to build the stocks they were supposed to. (Brazil famously said that their inventories were in the cane in the fields.)

As a consequence, when prices rose, either the stocks weren’t there or were insufficient to stem the prices’ rise.

As we saw earlier, market participants will tend to sell short ahead of a stock release price level; if stocks aren’t there, then the price explodes as shorts run for cover. It means that not only do international price agreements not work, they also actually increase market volatility. They are like communism: a great idea in theory, but a disaster in practice.

It is true even if the producers are in rich, developed countries.

The EU used to fix minimum prices for many agricultural products, maintaining them through a mix of quotas, stock management and subsidised exports. Over the years, production costs dropped as farmers became more efficient. Still, the EU continued increasing their minimum prices in line with general inflation. In the end, sugar prices were so profitable that French farmers used to call sugar beet quotas’ white gold’. Butter mountains and wine lakes built up. So did subsidise exports – to the detriment of farmers in importing countries.

The EU has gradually wound down their market management schemes (sugar and milk were the last to go), along with, thank goodness, subsidised exports. The EU has replaced them with direct income support. Agriculture is still the largest item in the EU’s budget at 38 per cent, but down from 73 per cent in 1985.

Finally, one, rather astute, reader argued that the Ivory Coast should have thanked Hershey for taking delivery of the December futures market. By doing so, Hershey pushed the world cocoa price higher, taking some of the old crop cocoa (that had been weighing on prices) off the market. He may have a point.

Instead of manipulating the world price, what should Ghana and Ivory Coast do to help their impoverished growers? I posed that question this week to the head of one of the leading NGOs in the sector. I will publish his replies shortly.

© Commodity Conversations ® 2021

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.

© Commodity Conversations ® 2021

 

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.

© Commodity Conversations ®

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