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Commodity Conversations Weekly Press Summary

Last week, Nigeria’s President said he was “taking [the] focus on agriculture to the next level” as he banned the central bank from giving foreign exchange to all food importers. This policy started in 2015 when the President came to power and blocked foreign exchange access for 41 items, including rice, which was then extended to dairy products in July. An analysis by the BBC argues there is a lack of reliable data to assess the success of the policy but it did lead to domestic rice production increasing to 8.9 million mt in 2018, from stagnating around 7.1 million mt in the 2013-17 period. However, the policy also pushed domestic prices up and caused a surge in smuggling. Commentators argue that the idea is not a bad one but it needs to be accompanied by other measures, such as assisting farmers to increase yields. 

Farmers in the UK are facing a different kind of pressure – a target of net-zero emissions by 2040. They have placed their bets on several technologies, including battery-powered precision robots that would simultaneously reduce diesel used in tractors and allow targeted pesticides use. Keeping grass fed cows outdoors – instead of soybean fed livestock indoors – will also help reduce emissions while lowering soybean demand. 

In India, too, the Prime Minister has appealed to farmers to reduce their use of pesticides on crops by 10-25%, saying chemicals were hurting “Mother Earth.” He said that the government would soon launch a campaign aimed at ending the use of chemical fertilisers completely while sticking to its commitment to double farm income. However, the FICCI pointed out that Indians use 0.27kg/ha of chemicals, compared with 4.58kg/ha in the US. 

The International Maritime Organization (IMO) rule requiring all ships to switch to low-sulfur fuel from January 1, 2020, could be a game changer for wheat trade flows. The analysis by Platts quoted traders as saying that it was easy for big buyers, such as Indonesia, to switch between Australian, Black Sea and Argentinian origins as the quality was almost at par. As such, freight costs were usually the determining factor. The IMO2020 rules will make freight more expensive which means that Australia, which recently lost market share to the Black Sea, could become more competitive in Asia again. 

Another environmental concern that could affect tradeflow is the fate of the EU-Mercosur trade deal. Analysts warned that the Brazilian President’s stand on the environment – and notably his recent denial of deforestation data – could push some countries such as France not to ratify the deal. Brazil’s National Institute for Space Research (INPE) said it had tracked 72,843 fires in Brazil so far this year, including half of them in the Amazon region, an increase of 80% on year. Environmentalists have blamed the President’s policies on the increasing deforestation, while he, in turn, accused NGOs of starting the fires as part of a media campaign against him.

At the same time, Brazil is focusing strongly on China. The Brazilian delegation which recently went there came back with a USD 1.5 billion coffee deal. The Santa Monica group will be setting up to roasters in the country, distributing some 100,000 coffee vending machines and eventually open a series of coffee shops.  

After a successful pilot project in the US, Coca-Cola is rolling out on a national scale its Dasani PureFill water dispenser line. This is part of a move towards “package-free delivery at scale” as well as part of its commitment to scrap 1 billion virgin PET plastic bottles from its supply chain. The group will also start selling its Dasani water in aluminium cans and bottles, also in abid to reduce plastic use. 

Similarly, Nestle Waters North America launched an Instagram #NotTrash campaign to encourage consumers to ask, via the social media platform, if they need help to figure out how to recycle its Poland Spring bottled-water products. The company explained that consumers tend to be confused about recycling, which explains why only 30% of plastic bottles are recycled in the US. 

Bunge CEO said the company was focusing on improving risk management through better coordination with the commercial team and by doing more analysis. The company, which just moved headquarters from New York’s White Plains to Saint Louis in Missouri, is aiming to have completed its “portfolio transformation and optimization work” by the middle of next year. 

Meanwhile, data analysed by Bloomberg showed that the 125 family members who own Cargill received a USD 643 million payout this year, the highest since 2010 and over USD 5 million each. Some say that this will likely postpone any potential plan of going public despite diluting shares over time. Based on the share value of its publicly traded competitors, Cargill could be worth an estimated USD 50 billion. 

Last but not least, and we bet you didn’t see this coming, a global survey found that the UK has the healthiest packaged foods and drinks in the world, followed by the US and Australia. What is less surprising is that the survey also found that the poorest countries had the unhealthiest packaged foods.

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AgriCensus Report

Brazil output of corn-based ethanol to hit 1.4bn litres in 2019: USDA

Brazil’s production of corn-based ethanol will rise 75% this year as new capacity comes onstream and domestic demand surges as the country prepares to roll out its RenovaBio mandate program, the USDA said in a report late Monday.

Most of Brazil’s ethanol production is derived from sugar cane and is a significant exporter to the US and Europe, but its output includes a growing share of corn as that segment generates much better returns than the ailing sugar cane sector.

The USDA said total ethanol output from corn this year is estimated at 1.4 billion litres, an increase of 609 million litres compared with 2018.

The US government researchers noted that there are currently 10 plants producing ethanol from corn in Brazil in the states of Mato Grosso and Goias.

It added that four plants under construction that should start operations in the next 1-2 years and cited figures from the country’s Corn Ethanol National Union (UNEM) that the Latin American nation is forecast to produce 2.6 billion litres of corn ethanol in 2020 and 8 billion litres by 2028.

Brazil’s overall production of fuel ethanol is expected to rise 4% this year as the world’s second-largest producer of the biofuel finalises rules and trading mechanisms for its mandate programme and prepares to step up exports, the USDA said.

The research said Brazil’s total ethanol production for 2019 is estimated at 34.45 billion litres, an increase of 4% compared with the revised figure for 2018.

Brazil’s consumption of fuel ethanol is expected to rise to 31.75 billion litres in 2019, up 7% from 29.7 billion litres last year, as “steady and strong demand for hydrated ethanol at the pump is pushed by continued high gasoline prices in the majority of the Brazilian states,” the USDA said.

The researchers added that decisions made by Brazilian consumers are usually made on the basis of the ratio between hydrous ethanol and gasoline prices.

“The 70% ratio between hydrous ethanol and gasoline prices is the rule of thumb in determining whether flex car owners choose to fill up with hydrous ethanol (price ratio below 70%) or gasoline (price ratio above 70%),” the USDA said.

It added: “This decision is tied to the energy content of each fuel and the fact that ethanol’s energy content is approximately 36% lower than pure fossil gasoline.”

International trade

The USDA’s Sao Paulo-based research team said Brazil’s total ethanol exports are estimated to be 1.8 billion litres this year, up 11% compared with total exports in 2018, which totalled 1.62 billion litres.

“In spite of the competition to supply domestic demand, exports have benefited from windows of opportunity opened by spikes in US ethanol prices,” the USDA said.

Brazil’s total ethanol imports for 2019 are estimated to be 1.2 billion litres, a decrease of 495 million litres relative to the previous year.

The Latin American nation’s imports of ethanol are for fuel use only and originate almost entirely from the US, the research pointed out.

The USDA estimated that Brazil’s production of soybean-based biodiesel, which is estimated at 5.8 billion litres, would rise 8% relative to 2018, based on an estimated 0.8% growth rate for the Brazilian economy in 2019 and the increase of the biodiesel blend to 11% (B11) next month.

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The History of Agriculture

My book on the grain merchants has reverted to the title I first thought of, “Alphabet Soup—The Seven Companies at the Centre of Your Food Supply.” I am still aiming for publication in early-November.

There is a saying in the book business that “the wastepaper basket is a writer’s best friend.” In putting together the first draft of my book, I deleted large chunks of what I had previously written. I have fished out some of the least bad bits, and I will share them with you over the coming weeks. This is the first:

As Richard Manning wrote in “Against the Grain: How Agriculture has Hijacked Humanity,” of the roughly 300,000 years that mankind has wandered this earth, we have spent 290,000 of those as hunter-gatherers. Agriculture is a relatively new game for us and, as you have realised when visiting your local supermarket, we still have hunter-gatherer genes.

And even during the last 10,000 years, farming has changed little. Fields were regularly left fallow, and animal manure was the sole fertiliser. It was only in the early 1800s that scientists began to understand that inorganic minerals such as nitrogen, potassium, lime, and phosphoric acid could replenish depleted soils, leading to the production of mineral fertilizers.

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. Rich mineral nitrate deposits were found in Chile, and nitrate mines gradually took the place of guano in the late 19th century.

However, as Michael Pollen writes in The Omnivore’s Dilemma, the great turning point in the modern history of agriculture can be dated to the day in 1947 when a huge munitions plant at Muscle Shoals, Alabama, switched over from making explosives to making chemical fertilizer. 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, and the chemical fertilizer industry (along with that of pesticides, which are based on the poison gases which were also developed for war) was the product of the government’s effort to convert its war machine to peacetime purposes.

Even though the earth’s atmosphere is about 80 percent nitrogen, nitrogen atoms have to be split and joined to hydrogen atoms (“fixed”) before they can be used for fertilizer 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 by 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 amount of life on earth would have been limited by the small amount of nitrogen that bacteria and lightning alone could release. Mr Smil argues that as a result, 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 percent of the people on the earth today would not be alive if not for the invention. Without synthetic fertilizer, billions of people would never have been born.

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

Michael Pollen argues that once mankind 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 reliance on fossil fuel. The Haber-Bosch process works by combining nitrogen and hydrogen gases under immense heat and pressure, the energy supplied by electricity. The hydrogen is supplied by oil, coal or, most commonly today, natural gas.

Growing crops, which from a biological perspective had 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 man-made—and more than half of all the synthetic nitrogen made today is applied to corn alone.

© Commodity Conversations ®

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Commodity Conversations Weekly Press Summary

In the UK, around 17% of the population has been stockpiling food and medicine to prepare for an eventual no-deal Brexit in October, according to a survey by Premium Credit. The total cost of the stockpile is estimated at GBP 4 billion, which has affected the cash flow of both businesses and individuals. Nestle warned that a no-deal departure would lead to “major challenges” for the food industry. Back in 2018, the group already said it had increased stocks to prepare for the March 29 deadline. 

In contrast, the National Farmers Union welcomed comments by the new Prime Minister who mentioned allowing the production of Genetically Modified Organisms (GMO) in the UK. Researchers in aquaculture biotechnology also welcomed the move and mentioned that GMOs could help address some of the most pressing issues facing our food supply. Nonetheless, experts warned that seeds would have to be developed specifically for the UK, which would take time, while GMO exports to the EU would have to go through a lengthy approval process. 

The White House weakened the Endangered Species Act (ESA) this week in order to minimise its economic consequence and improve efficiency. Farmers will most likely be able to use more pesticides in at-risks habitats, which could be bad news for the bumblebee, a recent addition to the endangered list. A new study suggested that the growing use of neonicotinoids pesticides has increased the toxicity level of agricultural land 48-fold in the last 20 years, which threatens the wild bumblebee. Farmers have increasingly been using neonicotinoids instead of organophosphates as they are cheaper and safer for humans. In response to the study, Bayer and Syngenta, the makers of the top three neonicotinoid products, said the toxicity loading method used by the researchers oversimplified exposure levels. 

The US Environmental Protection Agency (EPA) said labels warning that glyphosate can cause cancer will no longer be approved. The head of the agency argued they were confident the product was not carcinogenic. California had looked into imposing warning labels on the herbicide but the proposal was blocked by a preliminary injunction. 

Cargill announced that it will no longer accept Canadian lentils that have been treated with glufosinate ammonium, distributed by BASF in its Liberty herbicide. Canadian growers were warned that the EU and Japan allowed the herbicide but under a very low maximum residue limit (MRL), while the US has not yet set an MRL. On the other hand, Cargill said it will start accepting soybean treated with fluoxastrobin fungicide after conducting a comprehensive scientific review. 

Singapore-based Olam saw profits in the first half of 2019 drop by 8.5% on year to USD 230 million, in part due to lower coffee prices. The CEO pointed out, however, that this was satisfactory given the current market conditions, adding that the group’s diversified portfolio was helping it cope well in the current scenario. Olam will continue on its path to diversify away from non-core businesses to be able to invest in areas of growth, such as its bid earlier this year to buy out Nigeria’s Dangote Flour Mills. 

Wilmar, on the other hand, reported a 52% drop in net profit to USD 151 million during the second quarter of the year as the impact of the African Swine Fever on soybean crush margins was bigger than expected. In contrast, the group’s sugar operations in Australia and Indonesia improved, along with the consumer products and oleochemicals sectors.

A Feed4Thought survey conducted by Cargill revealed that 55% of respondents thought the first priority of a farmer was to provide “safe, healthy, abundant and affordable food”, while 28% said the priority should be sustainability. A Cargill spokesperson noted that the two demands were not necessarily exclusive. The survey also found that most people viewed farmers in a positive light. In contrast, another study analysing social media conversations found that people were increasingly talking about sugar, albeit in a negative light. The study found that monk fruit and coconut sugar were among the most mentioned alternatives. 

The rising popularity of imposing a tax on sugar-sweetened drinks could lead the way to similar sin taxes being imposed on red meat, according to Fitch Solutions. Meat is increasingly being targeted for its impact on the climate, animal welfare and health. The idea has already been discussed in Denmark and Sweden, while a poll in Germany showed that a majority of respondents were in favour of imposing a tax on meat to promote better living conditions for animals. 

Subway announced that it will sell Beyond Meat’s plant-based meatballs in 685 restaurants across the United States and Canada. The news pushed up the share price of Beyond Meat, which has gained 545% since the IPO in May. While some are jumping on the plant-based meat bandwagon, this Australian chef is taking another direction by encouraging people to treat fish like meat. In his new cookbook, he introduces the Hot Smoked Fish Turducken: yellowfin tuna loin, wrapped in a cod fillet, wrapped again in a tail-on ocean trout fillet, and smoked for a few hours. 

This summary was produced by ECRUU

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AgriCensus Report

Argentine ags trade fears higher export taxes amid election shock

The increasing likelihood that Argentina’s incumbent President Mauricio Macri will lose the presidential election in October has stoked concerns in the country’s grains and oilseeds market that high export taxes – a trademark policy of the previous government under the populist Cristina de Kirchner – will return.

The results of a primary election on Sunday were a massive setback for Macri’s market reform-centred agenda, hugely heightening expectations that the centre-left, interventionist coalition Frente de Todos will take power just months from now.

If this comes to pass, the new government is expected to implement fixed export taxes in a reprise of the policies of former president De Kirchner, who is a running mate of the centre-left’s leader Alberto Fernandez.

That is because further falls in the peso – which on Monday at one stage plunged 30% against the US dollar – will make the flexible formula enacted by the Macri government less sustainable.

At present, the export tax formula for corn and wheat is calculated as 4 pesos for every US dollar that is exported, while for soybeans, the current tax is at a fixed 18% with an additional 4 pesos for every US dollar over that threshold.

But since yesterday, the value of the variable 4 peso level has become lower,  paving the way for a possible hike in taxes if government coffers start to dry up.

“Under [currency] devaluation, export taxes became cheaper day-on-day,” an Argentinian broker said in reference to the fall in the proceeds of export taxes as the value of peso crashed.

Market sources based in Argentina said it is likely a potential left-wing government will raise export taxes, particularly on wheat and corn, to around 20%-23%.

“That would be honey for a new [Frente de Todos] government,” a source said.

IMF loan

“A new Kirchner administration will tax exports [more] if they run out of IMF assistance. Although you would not expect that to happen during 2019,” an Argentine broker said.

Fernandez has vowed to renegotiate the terms of a $57 billion loan the country received from the International Monetary Fund in 2018 intended to help the heavily-indebted country to service future borrowing.

Farmer sales

Despite the initial reluctance to sell soybeans following the peso’s crash on Monday, reports from market sources on Tuesday indicate that at least 250,000 mt of soybeans were sold on the domestic market in Argentina yesterday as farmers sought to capitalise on the fall in the peso despite expectations that the currency will fall further in the coming months.

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A conversation with J-F Lambert

Good morning J-F. Could you briefly describe who you are and what you do?

I am a former banker with a banker’s DNA. I spent most of my career in international banking and trade finance, with stints in Greece and Asia. I was originally with Crédit Commercial de France -CCF, and then with HSBC, when they took over CCF. I moved to London where I built the structured trade finance activities, and then the global commodity finance activities for the group.

I’m now a consultant on trade and commodity finance and strategy for banks, companies and funds. I also teach commodity market dynamics at Sciences Po in Paris, and regularly lecture at the London Business School.

How are the different trade houses adapting to the changes in their business environment?

Although everybody is investing in logistics, Glencore is differentiating itself through a strategy of size. They believe that through size they can reduce costs, and perhaps even become a price-setter rather than a price-taker.

When you talk to ADM or Cargill, they tell you that they don’t trade commodities, but that they are an integrated supply chain from farm to fork. Their profits are not coming from trading; their profits are coming from sophisticated supply chain management. They also endeavor to generate commercial margins by producing and selling adding-value products downstream.

Cargill has been doing this for many years now, shifting focus to animal and fish proteins. This certainly makes sense when population is increasing and the middle-class is growing. The world needs more protein, and Cargill’s investment into the verticality of the protein supply chain is paying off handsomely.

ADM is a different animal. Let’s not forget that the original “A” amongst the ABCDs was André, not Archer Daniels Midland. ADM is by and large an agri-industrial company, not a trading house. It has developed into trading, but the bulk of their money is spent and earned on the industrial part of the business.

Dreyfus will also tell you that they are no longer a trading house, and that they are now supply chain managers. However, Dreyfus is probably one of the last true large trading houses left in the market. That is quite a challenge in a market where the odds of making money through trading get slimmer.

Bunge is somewhere in between Cargill and Dreyfus. There is more trading at Bunge than there is at Cargill, but Bunge is keen to complement their upstream capabilities with downstream access, in search for commercial margins. Their aim is to lower their reliance on trading and become more of an agri-industrial company.

What about COFCO, or rather their trading company COFCO International Ltd? You once said that their role was to feed the dragon.

COFCO International is a game changer in the world of agricultural commodity trading.

I believe their true mission is to optimize sourcing at origin and ensure a smooth and efficient supply for the Chinese market. Their grip on China as a destination is already strong and will only get stronger. This is a major issue for the ABCDs, as price discovery in China will get more difficult to read.

I believe the rivalry between the U.S and China is a new normal. If that view is correct, COFCO International’s role becomes even more important. It has to restructure the sourcing and origination of China’s food imports in order to lower the country’s dependency on the U.S. To fulfill it efficiently, I would expect further acquisitions/alliances down the road.

Do you believe that traceability is an integral part of a trade house model?

Traceability is not a luxury, it is “a must have.” Part of the process of industrialization is to efficiently support that traceability requirement. For now, consumers in developed countries are the most demanding, but with emerging urban middle classes around the world, requirements for traceability will only rise and spread.

There seems to be a growing trend for banks to link finance to sustainability and human rights objectives.

I see a future—not too far away—where at least the large banks will eventually only finance sustainable production. This is the trend. If you look at the coal business, not a single international bank will finance a new project in coal fired power generation. I think that banks will have to exit non-sustainable agribusinesses. Not doing it would merely be unacceptable to the society at large, and the reputational risk incurred would be too high.

 Will any of the big trading companies exit their bulk commodity trading operations to concentrate on higher value parts of the supply chain?

Trading companies will not “quit” trading. It is their core expertise and their culture. However, trading as a stand-alone is no longer generating profits in line with the risks undertaken. All large trading companies therefore are endeavoring to complement – or rather, enhance – their trading capabilities by capturing what they have identified as the higher value parts of the supply chains. This is easier said than done.

First, you need to identify the right supply chain and the right portion of it: upstream or downstream. Second, investing in supply chains is costly and companies need the financial strength to do so.

Not every player can afford the risks and costs involved. This leaves them with two alleys: partnerships and mergers amongst equals.

Do you think that trade houses should be publicly quoted?

A listed company has to have a growth story to tell, year after year to investors. This does not fit well with the cyclical nature of the commodity business. But I will go one step further. As I already said, commodity traders are currently struggling to make money, and I think that they will continue to struggle in the years to come. So I doubt we will see any commodity traders listing in the next 10 or 15 years.

Would you recommend a young person now to join one of the big grain trading companies?

There is no better school for someone to learn about markets and discover how the world works. Commodities are about history, demography, geography, economy, finance and geopolitics! It is a fantastic training for young people, even if they intend to move on to other activities.

Thank you J-F for your time.

© Commodity Conversations ®

This is a brief extract of a conversation that will be included in my upcoming book on the grain trade, to be published before the end of 2019.

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Commodity Conversations Weekly Press Summary

This week, China pledged to stop all purchases of US farm goods, on top of considering new duties for products imported after August 3. This is in response to the new US tariffs due to come into force in September. Goldman Sachs said the latest escalation made a trade resolution unlikely before the US elections in 2020. The bank had earlier assumed that resolving the trade deal would be in the President’s interest ahead of the elections. 

This will make things harder for US farmers and ranchers who were already struggling to survive. However, the President hinted that the government could offer more aid to farmers, on top of the USD 28 billion already pledged. The comment contradicted an earlier message by the USDA which warned farmers that no further aid was planned.

The bad weather and delayed planting is also making the situation difficult for US livestock producers who are looking to alternative feeds amid surging corn prices, as the country is expected to harvest its smallest corn crop in four years. Alternatives feeds include wheat, outdated pet food, leftover bakery products and imported South American grain. 

Brazil’ agricultural sector is one of the winners in the trade war. China’s Cofco noted that tax and pensions reforms enacted by the new Brazilian government will encourage investments in the country by providing more predictability and stability. 

Unfortunately, efforts by the Brazilian government to attract investors has led to a significant increase in the deforestation rate, according to official data from the National Institute for Space Research. The deforestation rate now risks falling back to the levels seen in the early 2000s, which could impact the sustainability pledges made by large companies. Mondelez, for one, is using satellite data provided by Global Forest Watch Pro, nicknamed the “Google Maps of forests”, to monitor its suppliers in Brazil. 

The worsening environmental performance of Brazil’s farm sector could potentially threaten its ability to trade and jeopardise the new free trade agreement with the EU. The Brazilian agriculture minister argued that the country was able to maintain its high standards despite the accelerated pace of approval for agrochemicals. The country needs to “win the communication war”, she added. 

Another trade agreement at risk is the African Continental Free Trade Area (AfCFTA) which is being challenged by Nigeria’s protectionist stance. So far, all African countries but one – Eritrea – signed on. Also in Nigeria, Dangote Flour Mill (DFM) announced that it had received a final bid from Olam wishing to take over the firm for NGN 120 billion (USD 331 million). Now a global commodity group, Olam started in Nigeria as a cashew nut exporter 30 years ago.

A few weeks after launching a new chocolate made entirely from the coca fruit, Nestle announced a new range of Nescafe Gold which is entirely plant-based. Three new latte products will be launched: almond, oat and coconut coffees. Similarly, Marfrig Global Foods and ADM will collaborate to offer a plant-based burger in Brazil later this year. JBS SA also announced a plan to sell a plant-based meat patty, called Seara. 

In the aquafeed sector, the USDA has approved Cargill’s plant-based fish oil alternative for US cultivation. Using canola oilseed, Cargill is able to provide a source of long-chain omega-3 fatty acids, required in aquafeed, without putting pressure on wild fish stocks. 

The UN’s Intergovernmental Panel on Climate Change (IPCC) is due to release a new report this week analysing the relationship between land use and climate change. The main takeaway, researchers say, will be to repeat the call to switch to consuming less meat and dairy towards plant-based alternatives. 

Not all plant-based solutions are equal, however, as highlighted by this study of breakfast cereals published by the Union of Concerned Scientists. The paper recommends switching to oat-based cereals instead of corn-based cereals, because corn cultivation leads to nitrate runoff and water pollution, while oats are often grown as a cover crop which regenerates soils. 

Ever heard that the longer the soup cooks, the better it tastes? Well if that was true, this Bangkok restaurant would have the best soup on earth, as three successive generations have been stewing the same broth continuously for the past 45 years!

This summary was produced by ECRUU

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THE BIG READ: Why trade tensions won’t worry Chinese crushers

In late May 2018, shortly after claiming his administration was making good progress in talks to avoid a trade war with China, US President Donald Trump confounded the market by saying he would, within a month, publish a list of Chinese goods that would be subject to fresh import taxes of 25%.

The reaction was instantaneous – US soybean futures tanked, Brazilian premiums rose and the flat price of soybeans at Brazilian farms would go on a four-month rally to record highs.

That dynamic was in anticipation that China would slap a tax on US soybean imports – which it duly did.

Crush margins in China tanked and food inflation started to occur in protein products, with Chinese crushers struggling as a result.

Fast forward 14 months and things look very different.

On Thursday President Trump said he would tax $300 billion worth of Chinese goods at 10%, starting in a month.

US soybean futures fell and Brazilian premiums rose.

But this time, they only rose enough to offset the futures fall and there are several reasons why Brazilian flat prices for soybeans may not experience the rally they saw last year.

Lower demand, greater supply

Firstly, African swine fever will cut demand for Chinese soymeal.

On Thursday, the chief executive of global agribusiness major Archer Daniels Midland (ADM) said that pig stocks would fall by 35% this year as a result of the disease.

That equates to about 150 million pigs and about 15-20% of soymeal demand.

Yet, as big as that is, ADM’s estimate is conservative compared with some forecasters who now think pig stocks could be slashed by as much as half by the end of the year.

Given China relies on soybean imports for as much as 90% of its soymeal demand, the disease itself is now estimated to cut imports of soybeans to their lowest since 2015 at 83 million mt in the next marketing year, starting in October.

As well as a fall-off in demand, on the supply side of the ledger a huge rise in non-US production will also stem any rally in Brazilian bean prices.

Argentine production this year will rise to more normal levels of 56 million mt compared with 37 million mt last year – a hike of 18 million mt.

And with a more punishing tax regime for Argentinian crushers that export soymeal this year compared to last, exports of beans are expected to soar from 2 million mt last year to at least 9 million mt and perhaps as high as 16 million mt as a smaller percentage of soybeans produced in Las Pampas will be crushed.

And with that more than offsetting a 14 million mt decline in Brazilian exports, it looks like China will be well-stocked, particularly given the fact that Chinese state-owned companies have already been stockpiling US beans this year.

Indeed, Chinese stocks at ports are at a five-month high, according to data from China’s National Grain and Oilseed Information Centre published Thursday.

“I don’t know how China will respond. It seems like the imports of US soybeans will stop again,” said one trader at a Chinese crusher following the tweet.

Bumper corn

That being said, it won’t all go China’s way should the new trade tensions result in a prolonged boycott of US beans by China as there are some upside pressures for non-US production.

A huge 100-million mt corn crop in Brazil, and the fact that Brazilian farmers are cashing in on it, means they are not under pressure this year to sell soybeans to finance next year’s crop.

That contrasts sharply with last year – when Brazil’s corn crop was hit badly by a drought leaving soybean sales as a necessary source of income.

And current prices of soybeans in Brazil in historical terms are not that high, meaning farmers won’t be in a hurry to sell.

Indeed, the price of soybeans sold at ports in Brazil in reais terms are only marginally higher than the average so far this year and 20% down on the peak last year.

With internal freight prices higher this year than last, it is likely farmers will drive a hard bargain and won’t be selling cheap, according to sources.

Good news for EU

While Brazilian prices more or less flatlined after Trump tweets on Thursday, US cash prices at ports sank alongside futures, leaving the spread between beans loaded at Santos and those at the US Gulf spiking $5/mt to just under $21/mt.

To put this in to context, freight and quality differentials mean US beans are competitive into China when they are about $16/mt below Brazilian prices, so on the face of it they look very cheap.

Nevetheless, that $21/mt differential remains a long way off the $96/mt seen in October at the height of the trade war, and European crushers who buy imported beans will be keen to see how far that differential can grow.

Unless things change dramatically, it’s hard to see why anyone in Europe would buy non-US beans.

But for now, the bets in China are that instead of injecting a fresh round of urgency into the talks with the US, they may actually prolong a trade war.

“New tariffs will by no means bring closer a deal that the US wants. It will only make it further away,” the chief editor of state-owned newspaper the Global Times said on Twitter on Friday.

Given that the US is drowning in supplies of soybeans – with more than 1 billion bushels of ending stocks expected later this month – US farmers will be more keen to sell to China than China to buy from the US.

And with next year’s elections coming into closer view, the administration will be under pressure to help farmers – a key support base for Trump – shift some agricultural products to China.

Trump’s statement on Thursday showed how important the promised purchases of products such as soybeans, ethanol and sorghum by China are to him – alongside sales of opioids they were the only two issues mentioned in his 7am tweet.

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More Questions for GJ

What are the biggest challenges currently facing the grain merchandising industry?”

In the 2000 to 2010 boom the industry built up too much capacity, too many silos. Farmers around the world have also built storage capacity. Their need for merchants of grain to store commodities, and to take them off their hands at harvest time has become less. That is a significant change that challenges intermediaries such as ourselves. We need to add value to the farmers in a different way than we have done in the past.

Another challenge that we face is government intervention; the current trade conflict is an example. Tariffs and import and export bans make it harder and more costly to move food around the world. They lead to inefficiencies and extra costs.

Ian McIntosh, the CEO of Dreyfus, recently said, “One tweet and everything changes.” Traders need volatility, but they like volatility that is at least partially predictable.

If you trade you need price volatility. If the price doesn’t move, you can’t make money. You might not lose either, but not losing isn’t enough to stay in business. By definition traders require volatility.

However, unpredictable political volatility increases risks and costs. It becomes a casino, and then it becomes gambling rather than trading. There have been a lot of market impacting tweets. That has made trading difficult in the past year.

But one thing I would say is that our global scale has helped us to find solutions. Recently, trade tariffs have made it more expensive to supply US beans to our buyers in China, but because of our global scale we have been able to supply Brazilian beans instead. We couldn’t do that without global scale. If you were a small regional player in the US you would have been caught in that.

Can grain merchants still add value, or can the market now do without intermediaries?”

There are a lot of myths around the grain trade, that traders just make money hand over fist, that they are making huge amounts of money on the backs of farmers and consumers. It is not true. In reality, margins are very thin in the agriculture sector.

On the plus side, pressure on margins means that we are constantly looking to make the systems more efficient, to cut back costs, and to make sure that our agricultural products are moved in the most cost effective and efficient way.

So yes, there is a need for intermediaries as long as they can continually reinvent themselves to add value. We have to differentiate ourselves from our competitors and to add value on both ends of the spectrum, at origin and at destination. If you cannot add value, then there is no reason for you to be in business.

Is traceability compatible with tradability?

I don’t think traceability necessarily kills tradability, but it clearly restricts it. You end up with an IP (Identity Preserved) product. It is a value added product that is not really exchangeable. A commodity is a commodity because it is exchangeable. An IP product requires segregation; it is not a standard product.

Our objective within Cargill is for all products to become sustainable. Once that happens the distinction between traceability and tradability no longer exists.

How has Cargill changed since you joined?

At its core, the company has not changed. We are still a values-driven company where ethics and compliance is at the top of who we are. That has not changed over 150 years and I don’t think it will ever change. It is a family requisite. The Cargill family cares about the company, about passing on to the next generation, and that will only happen if we take care of the company in an appropriate manner.

Cargill has however changed from a portfolio perspective. When I joined in 1987 we were still predominately a trading company. The trading part of Cargill is still a critical part of the company. We still have an active trading business. We trade actively around our assets. We are a major supply chain manager. But we have also diversified our portfolio into the value-added products. We have invested heavily into animal feed, into the meat businesses, into starches and sweeteners, fermentation. That has diversified the revenue streams, but it has also allowed us to capture margins in the downstream supply chain just as the margins in trading were under pressure.

Chris Mahoney, the CEO of Glencore Agriculture, told me that something like 15 percent of his company’s revenue comes from trading and merchandising.

It is difficult to put an exact number on it, and trading is an art not a science; it varies from year to year. We still have a huge amount invested in people and talent to trade and position in the market place, and I would guess that it is larger than our competitors today. Nevertheless, the trading side of Cargill relative to the rest of Cargill is now less than it used to be. That is simply because our portfolio on the value-added side has grown significantly.

What makes Cargill different from other merchandising companies – what is your USP?

I am not going to talk about our competitors, so I will answer that question in terms of what I think we are good at.

Number one is our exceptional talent—our people. Number two is that we are truly global as a company; we have good assets in all the key geographies, whether at origin or destination. Number three is the way that the different businesses within Cargill work together. Number four I believe we can differentiate ourselves by the importance we place on our relationships with customers and suppliers. We work with our end users and our suppliers to adapt to their changing needs.

Would you recommend young people to become traders, to join Cargill?

You are asking someone with a fascination for markets and trading, so yes I would recommend anyone to become a trader. Trading will never disappear. We manage risks, and those risks will never disappear. There is risk all along the agriculture supply chain and that risk has to be managed. To manage risk you have to understand the marketplace.

To take that one step further, you go beyond simply risk management into trading opportunities, where you see something that the market is mispricing, and you seek to profit from that. That is how markets work. It is a fascinating business. You have global forces at play.

There is now greater need to understand mathematics and mathematical models than in the past. Data science is becoming increasingly more important. I joined Cargill before the Internet existed. And I studied law, not mathematics. But I guess I must have some ability at maths, otherwise I wouldn’t be where I am today.

So you need to be strong in mathematics now to be a good trader, and that is not for everyone.

You also need to be able to manage stress. Your job should not be at the cost of your health. It is a tough environment. A lot of people come and go. It is performance driven culture, if you don’t perform consistently you will be replaced. You are always at the cutting edge. Performance is quick to come and go.

Cargill is often viewed as a training programme for the industry. How do you feel about that—and how do you manage it?

 I have mixed feelings about that. In one sense it bothers me. Through our training we are obviously feeding our competitors with talent. But at the same time I am proud that we recruit and train people so well. That tells you a lot about this company and the way we invest in our people. I think that is a good thing.

But frankly there is no choice at the end of the day. We are a pyramidal structure. People are promoted on merit, and there will be people that fall out of that system. Our objective is to maintain our strongest talent. We don’t always succeed. But not everyone can make it to the top, so there will always be people that seek other opportunities. I think that is ok. It is the way the system works; it is inevitable.

What would like to read about in a book about the grain trade?

The grain trade plays a vital role in the agriculture sector and I think that story needs to be told. The industry has a stigma that is hard to lose but the key is transparency. We have to show we are doing good, but we also have to admit to our challenges and vulnerabilities. I am proud of the way that Cargill has evolved. We tell our story in good faith. We have very strong values, and we are in the business for the long run.

To feed a growing population we have to make sure that our farmers receive a fair payment for their crops and that they thrive. But at the same time we need to care for the planet. We don’t want any further deforestation. There are paradoxes that we need to manage. We are in the middle of this and want to play a role. There are a lot of conflicting issues to be managed. We cannot ignore one away in favour of another. They need to be handled and met at the same time.

Thank you GJ for your time!

The full interview will be published in my upcoming book, “Out of the Shadows: The New Merchants of Grain.”

 © Commodity Conversations ®

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Commodity Conversations Weekly Press Summary

Bunge reported a net income of USD 205 million in Q2, compared to a loss of USD 21 million in the same period last year. This was thanks in part to gains in soybean crush hedging and despite weak demand out of the US due to the ongoing US-China conflict. Bunge also benefited from its 1.6% stake in plant-based burger company Beyond Meat (more on this below). Bunge’s CEO said that the trade war, as well as the killing of hogs in China due to the African Swine Fever, were two big red flags. However, analysts argued that Bunge would be better-shielded than its competitors thanks to its strong South American presence. 

COFCO International is planning to invest at least USD 200 million in Brazil within the next two years. The head of the company’s Brazilian branch explained that the focus would be on infrastructure, transport and especially storage, adding that it had been on the verge of making an acquisition which fell through. A lot will depend on making sure any investment is sustainable environmentally speaking, he added. He also expressed concern over the solvability of independent farmers – many of which are going broke – as well as the issues with the minimum freight rates. When asked about the impact of the African Swine Fever, he said that shipments of soybean to China had been within expectations for the group. 

Marubeni’s US-based Columbia Grain Trading, on the other hand, announced it completely stopped soybean sales to China. Marubeni’s Gavilon unit, however, will continue business as usual. The group is facing other issues; a huge pile of soybean stored in the open near one of its Missouri grain elevators has been burning since mid-July due to a heat-wave. The pile is inaccessible because of the surrounding floodwater so the company decided to let it burn.  

ADM, meanwhile, continues to believe in a near resolution of the US-China trade dispute and that China will soon resume buying significant amounts of US crops. An analysis by Morgan Stanley, however, argued that such an approach put the group at risk. The bank forecast that the second half of 2019 will probably continue to be tough for US origination. Separately, Cargill told Bloomberg it was focusing on cutting costs amid difficult times, while sources said that two senior executives have already left. The company said it was “reviewing [their] business plans.”

Nestle beat expectations when it reported a 3.5% increase in sales for the first half of 2019 reaching USD 45.83 billion – a 3-year high. The sales growth in developed markets was at a 7-year high of 2.4% thanks in part to pet products and drinks. Chinese sales were disappointing, on the other hand. In China, Nestle launched a competition with Tsinghua University to find the best alternative to current packaging with a focus on sustainability. In the UK, the group has switched to using biodegradable security seals on its transport fleet in a bid to reduce the estimated 200,000 seals that end up every year in landfills. Both moves are part of the company’s target of only using recyclable and reusable packaging by 2025. 

Nestle’s CEO said that in the three years he’s been in the position, the main challenge has been to become much faster and flexible when innovating and launching new products to compete with new smaller companies. He pointed to two areas of significant growth and prospects for the group: plant-based foods and retailing Starbucks products. The plant-based market has attracted a lot of interest from investors although Nestle does not see it as replacing meat products but rather as a way of offering a wider choice to consumers. 

On the subject of investor interest in plant-based alternatives, Beyond Meat’s share value increased 775% since the group’s IPO (which was already the biggest in a decade) three months ago. Analysts were quick to point out, however, that the company is not even making a profit yet. 

Danone’s sales in the first half of the year were up 1.2% to USD 14.119 billion, driven in big part by the Essential Dairy and Plant-based Protein segment. The CEO said that plant-based beverages were a key driver, while the group continued to focus on innovation as well as expanding geographically. In New Zealand, Danone is investing USD 26 million to make its spray drying plant – which processes raw milk into powder – carbon neutral by 2021. The group is aiming to be completely carbon neutral by 2050 across its supply chain – from farm to fork. 

Mondelez, meanwhile, is planning to cash in on changing consumption patterns in rural India. Chocolate demand in India was 15% higher on year last year due to a reduction in sales tax from 28% to 18% but also because villagers are becoming richer. Mondelez said they will be doubling their presence within three years from 50,000 villages in 2018. It also launched a Dairy Milk bar with low sugar last month in India. Similarly, it launched its Dairy Milk with 30% less sugar last week in the UK. It took several years to nail the formula, the company said.  

Several NGOs have started a petition against the EU’s proposal to ban the use of meat and dairy names for plant-based products, such as ‘steak,’ ‘sausage’ or ‘cheese.’ They argue that consumers buy these products specifically because they are plant-based and that changing the labelling was pretty much an “insult to the public’s intelligence.” Taking it one step further, a councilwoman in NYC has sponsored a bill to completely ban foie gras on animal welfare grounds. 

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