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A conversation with Karel W. Valken, Global Head Trade & Commodity Finance (“TCF”) Agri for Rabobank

Good morning Karel, could you tell me a little bit about Rabobank and it’s involvement in agriculture?

Rabobank is cooperative bank that emerged from small agricultural cooperative banks founded by Dutch farmers. We have Members but no shareholders.

Agriculture is our backbone. We understand the seasonality and the complexity of farming. As a cooperative it can be a challenge to raise enough capital, and for that reason we tend to be conservative. But the advantage of not being listed is that we can take a longer-term view of the business; we can be more patient. We are perhaps more focused than other banks on contributing to the wellbeing of society.

I saw from your website that your mission statement is “Growing a better world together.”

I recently did a presentation to the bank’s executive board where I looked at the mission statements of the ABCD+ group. They all had similar statements. We are aligned.

“Growing” stands for sustainable, healthy growth, development and progress. “A Better World” goes beyond our clients, employees, and members and includes our communities and our associations. “Together” is important because, as a cooperative bank, we believe in the power of coalitions. Our strength lies in connecting people and knowledge. It is much more than an empty slogan!

This mission is part of our Banking for Food (“B4F”) strategy. It entails the meaningful role we want to play in food transition, and how we can help feed the 9 billion people that will be on this planet in 2050, while respecting planetary boundaries.

In terms of sustainable financing, which commodity presents the greatest challenges?

If you look at my area of responsibility, most challenges are in cocoa and coffee, simply because of their level of complexity and the need to improve the livelihood for smallholders. We spend a lot of time on those two commodities, even though they are much smaller in terms of volume than grains and oilseeds.

Our challenge is to stop deforestation and prevent climate change, while at the same time feed the world: how can those two objectives coexist? We have to embed sustainability in the business and our daily thinking. Our “sustainable toolkit” includes services & financing from Rabo Foundation/Rural Fund but also the Fund we established with United Nations called “Agri3” to combat deforestation and enhance livelihood of smallholder farmers.

Do you think a time will come when Rabobank will only finance commodities that are certified as sustainable?

This year we were the sustainability coordinator of a $2.5 billion Revolving Credit Facility with green features. Customers are getting discounts on the interest rates they pay as long as they meet certain sustainability criteria. I would not be surprised going forward if companies that are not green, or less green, they will still get financing, but they will have to pay a premium.

It is different for palm oil. The consumer pressure is different. We do not finance companies that are not RSPO members. We may sometimes make an exception if a company is not RSPO certified as long as it is committed to become RSPO certified, and has put the correct milestones in place. We can help them on that journey.

Could you describe a typical TCF finance?

TCF has traditionally meant, “transactional financing,” where we would finance, say, a Ukrainian wheat exporter to purchase wheat from farmers and to export it. We can finance the wheat from the moment it is in an upcountry silo though until the importer’s Letter of Credit is opened and cashed.

We make an important distinction for the ABCD+ group—the seven companies covered by your book. The ABCD+s each have individual credit ratings within the bank, which allows for unsecured financing. We provide them with anything up to $1.5 billion in working capital that they can use throughout the globe for different purposes. We do not finance them on a transactional basis. That is why the distinction between ABCD+ companies and non-ABCD+ companies is so important.

How do you see your business evolving in the future?

There are two strategic drivers for our agri-clients: sustainability and innovation.

We divide innovation into two categories: food and feed innovation and digital innovation. The first is to meet changing consumer demands. For example, Dreyfus recently invested in a company producing fake blood from beet for vegetarian burgers. We help our clients with this type of innovation through our franchise. We have a platform called FoodBytes, headquartered in California, which looks at the innovation needed to meet changing consumer demands. We help our clients with start-ups and their incubation to take them to the next step.

On the technical/digital innovation side, we have embedded in our teams a number of people who are looking at, say, Blockchain or robotics. If you look at Dreyfus again, they recently signed a joint partnership with a big e-commerce platform in China, which they will use to sell their brand of soybean oil.

Traditional TCF is changing. The amount of due diligence that we now have to do is such that smaller merchants will have increasing difficulty in obtaining financing. We do not have the mandate to do business with companies with a capital below $25 million, simply because the income we can create from this kind of client is too small—and the risk is too big.

The world’s population is growing and international trade will have to play an increasing role in keeping people fed. International traders will continue to have a role despite disintermediation and the democratisation of information. Their role will be in logistics and risk management, and having a large global footprint will allow them to maintain optionality in the chain.

Thank you Karel for taking the time to share your experience with us!

© Commodity Conversations ®

This is a short extract of an interview to be published in my upcoming book.

A conversation with Greg Morris

Good morning Greg. Could you please tell me about your current role within ADM?

Good morning Jonathan. Earlier this year, I was asked to bring together our Origination and Oilseeds business units into what we call today, Ag Services and Oilseeds, which I now lead. This new combined business unit constitutes a significant portion of the employees, the revenues and the profitability of the corporation. Fortunately, it is also made up of some of the best talent in the company and the industry, so I am fortunate to work with a great team every day.

What tonnage of commodities does ADM trade each year?

 We process about 60 million tons of ag commodities each year. We don’t disclose the tonnage that we trade, but it would certainly be bigger than that.

Some people would say that ADM is an industrial rather than a trading company. Would you agree?

Many companies that operate in this space feel that their job is to trade. Our philosophy at ADM is different. We trade with a purpose. We don’t trade just to trade; I think that is yesterday’s model.

We trade to support higher utilization rates in our assets. We trade to help provide products for our customers. So no, I wouldn’t say that ADM is necessarily a trading company. We trade as a critical function of managing our portion of the supply chain to serve our global customer base.

 Are you affected by the current overcapacity in agricultural production and logistics?

 We’ve certainly had some challenges with oversupply of some of raw materials, such as grains and oilseeds, and this has led to margin compression. However, it goes back to having the right philosophy.

Recent trade policies and decisions have resulted in regional dislocations, as has the terrible weather in some of the growing areas in the U.S. Some parts of the U.S. have been badly hit by flooding; others have been relatively okay. Our global footprint has allowed us to keep supplying our customers – when we can’t get something out of the U.S., we can often get it out of Europe or South America, and vice versa. That’s really the critical role for our industry – companies with global reach like ADM are the ones that can move agricultural and food products from areas of supply to areas of demand. So it’s been a dynamic situation, but overall, I think we have fared pretty well in a challenging environment.

 Are there any ways that the sector could better meet the challenges it faces?

Looking forward, I believe that partnerships will become more interesting for the industry as a whole.

At ADM we’ve done some partnerships, as have others in the industry, in order to reduce the risk of an investment, or to participate in a new region of the world. For example, we’ve recently entered into two separate joint ventures with Cargill: one, called SoyVen, which owns and operates a soy crush facility in Egypt, and another, called GrainBridge, that is developing a single digital platform for farmers to consolidate information on production economics and grain marketing activities. We’re also a founding member of an industry initiative to standardize and digitize global agricultural shipping transactions.

 What advice would you give to a young person starting a career in commodities?

 In a trading role, and in the current environment, the best advice I could give would be to keep your head on a swivel. You have to pay constant attention, whether to global economics, geopolitics, the weather, currencies, or the latest consumer trend. As a commodity trader, you can’t read a newspaper or watch the news without naturally connecting it back to your business, because it all matters.

From a career growth perspective it’s important to think beyond whatever your current role is. I would advise any young person in this business to stretch themselves and find other ways to contribute to the corporation and develop good business management and leadership skills. Trading can be a great foundation, but don’t limit your professional options.

 Is there anything that you’d like to add?

I think for me it’s important to recognize that ADM has undertaken a lot of change in the recent past but there is one thing has remained constant: we are proud of the role that we play in the world.

Our purpose statement says “We unlock the power of nature to enrich the quality of life.” We believe that is a noble cause. But at the same time we are evolving. We are transforming our portfolio of businesses, our capabilities and the way we interact with our customers across all of our businesses. We are more process focused and disciplined and our growth strategy includes a very robust agenda.

ADM is a much different company than the company I joined 24 years ago. We’re a stronger company and I’m proud to have been part of the evolution.

© Commodity Conversations ®

This is an excerpt of a full-length interview with Greg that I will publish in my book later this year.

Jason Clay, the head of agriculture at WWF US in Washington, once famously calculated that the world’s farmers will need to produce as much food in the next forty years as they produced in the past 8,000 years. Can they do it?

The UN’s FAO believes that they can. At a world summit back in 2009 the Organisation predicted that in order to feed the world in 2050 global agricultural production would have to be 60 percent higher than it was in 2005. Although that sounds a lot, it would be a smaller increase than the agriculture sector achieved over the previous past half century.

Where will that 60% extra production come from?

The FAO expected that, in aggregate, more than 85 percent of the increase in production would come from improved yields. They projected global cereals yields would increase from 3.3 tonnes/ha in 2005 to 4.30 tonnes/ha in 2050. World average yields for other major crops were expected to follow similar patterns.

The rest would have to come from bringing more land under agricultural production. The FAO estimated that the world has a total of around 7.2 billion ha of land suitable for rain fed food production. After discounting for areas already in production, under forest cover or put to other uses – as well as land that is only marginally suitable – the world has some 1.4 billion ha of prime land that could be brought into cultivation.

Much of this, however, would have to come at the expense of pastures, and would require considerable investment. In addition, some of that spare land is not readily accessible due to lack of infrastructure and its distance from markets, making production uneconomical.

The FAO estimated that land under crops would increase by some 70 million ha by 2050. However it warned that much of the spare land is concentrated in a small number of countries, for example in Brazil. Some countries may find it difficult to increase the amount of land under food crops.

All this means that, at the global level, the FAO was optimistic that agricultural production could be increased enough to satisfy the 60 percent increase in demand projected to 2050 for both food and non-food uses.

Where are we ten years later? the World Resources Institute, a non-profit organization, still believes the challenge can be met, but only if certain  “gaps” can be overcome. In a recent report entitled “Creating a Sustainable Food Future” the WRI identified three gaps. The first is the food gap, the difference between the amount of food produced in 2010 and the amount necessary to meet likely demand in 2050. They estimated this gap to be 7,400 trillion calories, or 56 percent more crop calories than were produced in 2010. (Their numbers are pretty much aligned with those of the FAO.)

The second, the land gap, is the difference between global agricultural land area in 2010 and the area required in 2050 even if crop and pasture yields continue to grow at past rates. They estimated this gap to be 593 million hectares, an area nearly twice the size of India. The third, the Green House Gas (GHG) mitigation gap, is the difference between the annual GHG emissions likely from agriculture and land-use change in 2050 compared to emissions that have been targeted under the Paris Agreement to limit global warming to below an increase of 1.5°C.

The foundation argued that closing these three gaps would be harder than often recognized. The report’s lead author said, “If we tried to produce all the food needed in 2050 with today’s production systems, the world would have to convert most of its remaining forests, and agricultural alone would produce almost twice the emissions in 2050 allowable from all humans sources.”

The Intergovernmental Panel on Climate Change (IPCC)—a global group of scientists convened by the United Nations to study climate change—is also worried about agriculture’s GHG emissions. In a report published last month, the panel warned that cutting emissions from major polluters like factories and power plants won’t be enough to keep global warming below the two degrees Celsius agreed under the Paris Climate Agreement. They concluded that land use and food systems have to change, too.

The report found that food production (including post-harvest activities like transportation) accounts for between 21 and 37 percent of greenhouse gas emissions caused by humans. The scientists emphasized the need to manage land better and recommended diversifying cropland, reducing food waste and transitioning to vegetarian or vegan diets. The report found that methane emissions are rising again after a no-growth period between 1999 and 2006. Methane is a particularly potent greenhouse gas, and cows and global rice production are largely to blame.

They also warned that climate change will exacerbate food insecurity even in the best-case scenario. In fact, they say that climate change is already affecting agricultural production.

Many of the solutions outlined in the IPCC report—farming techniques that prioritize soil health, reforestation—take time. It can take years to rebuild soil that’s healthy enough to withstand a flash flood or a dust storm; a tree can’t start capturing carbon until it’s several years old. The IPCC warn that the time to act is now.

A failure to do so would lead to increased degradation of land because of intensive farming, while a rise in deforestation would accelerate climate change that would in turn make land less fertile and productive, the IPCC added.

We all agree that the way forward for agriculture, and for a sustainable food future, is through producing more food per hectare, per kilogram of fertilizer, pesticides, and herbicides, and per litre of water.

Are our farmers up to the challenge? You bet!

© Commodity Conversations ®