Commodity Conversations Weekly Press Summary

The concerns over the Amazon fires continued to grow this week as some fear the environmental reputation of Brazilian food producers will be jeopardised for years to come. Norway’s Mowi, the largest salmon producer in the world, said it would source soy outside of Brazil unless the government addressed the fires, and the biggest meatpacker in the world, JBS, said it was closely monitoring its suppliers in the area using satellites. Although it admitted that monitoring indirect suppliers was challenging. Many other Brazilian agribusinesses, including from the paper and pulp sectors, argued that the President’s environmental stance has been ‘disastrous’ in terms of what was being communicated to the outside world.

In contrast, the sugar union, UNICA, said the current government could not be blamed for the fires, adding that the environment minister was committed to protecting the forest. The CEO of Summit Agricultural Group, which owns a corn ethanol plant in Brazil’s Mato Grosso, argued that the media was not covering the Brazilian President’s response fairly and that sending in the army had been the right thing to do.

The US President is also potentially facing a growing backlash from farmers for undermining the ethanol standard, a key political topic in Iowa where it involves at least 40,000 jobs. Most Democratic Presidential candidates for 2020 have come out in strong support of the ethanol industry, but environmental activists note that their stances often contradict earlier pledges. They also argue that supporting ethanol goes against the goal of completely phasing out fuel-based engines, as proposed in the Green New Deal.

The wavering support for the ethanol mandate, along with the damage caused by the trade war, pushed some to believe the President is losing farmer support. But this poll conducted at the end of July suggests the opposite, as 66.6% of farmers said they would vote to reelect the President, up from 59.6% at the same stage last year. Analysts suggested this could be thanks to the generous cash payouts he offered farmers.

In Indonesia, the government is taking action to protect its palm oil industry by banning the use of “palm oil-free” or “no palm oil” messages on food products. The government highlighted that the messages pushed consumers to think the product is not healthy, a claim that has not been proven. A similar move was implemented in Malaysia, the home of FGV Holding, the world’s largest producer of crude palm oil. FGV reported poor results for its second quarter, which it mostly attributed to the sharp drop in palm oil prices. The group is also looking to restructure its struggling sugar business, with Wilmar reportedly one of the investors interested in buying a stake.

Still in Malaysia, Nestle reported a good growth momentum in the second quarter, as product innovations and portfolio enhancements sustained strong consumer demand. The same cannot be said about its tinned milk product in Australia – Nestle announced plans to close its tinned milk factory in northern Victoria. Consumers are less interested in the products and it cannot compete with cheap imports, the group said. In Europe, Nestle expanded its plant-based meat offer by launching Incredible Mince and renewing the recipe of its Incredible Burger.

Meanwhile, a recent survey in the US found that the proportion of people who identify as vegetarian or vegan has remained steady over the past 20 years and only represent a small portion of the population, at 5% and 3% respectively. But experts note that this hides the growing popularity of semi-vegetarian diets. Regardless, in Argentina, beef consumption is not dropping even after a 15-20% hike in prices. The depreciating currency has led to a recent surge in prices but consumers are reportedly willing to lower their budget elsewhere before cutting down on beef purchases.

Japan’s second-largest beer company, Kirin, announced a plan to spend USD 1 billion to buy a 30% stake in Fancl, a maker of health foods and cosmetics, in order to deal with a shrinking local beer demand. In contrast, Coca-Cola will launch its first alcoholic drink ever in the country, a lemon-flavoured fizzy drink mixed with a grain-based alcohol called shochu. In India, Coca-Cola will launch a non-alcoholic malt-drink through its Barbican brand. Both products are seen as new alternatives amid a global shift away from soft drinks.

The most exciting Coca-Cola innovation, however, comes from the UK, where the group will be testing the use of robots to deliver drinks in Alton Towers, a theme park resort. The self-driving robots will use AI technology to manoeuvre and deliver drinks to outlets across the park.

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August 28, 2019

AgriCensus Report

Brazil-US soybean spread hits nine-month as trade war heats up

The difference in price between Brazilian and US soybeans loading out of the US Gulf has hit its highest level since November as the bilateral trade war between the US and China heats up in the wake of new Chinese US soybean import tariff announcements.

The price of soybeans loaded out of the Brazilian port of Santos for October shipment hit $374.50/mt on Friday compared with $327.50/mt from the US Gulf, according to Agricensus data.

The spread, which stands at $47/mt, is the highest level since November 12 last year as China’s announcement that it would increase soybean import tariffs to 30% from the current 25% starting September 1 weighed heavily on both the futures and US cash markets Friday.

Cash premium offers for loading out of the US Gulf in October slumped by 7 c/bu as sellers eyed little prospect of renewed Chinese demand anytime soon and bids remained scarce.

Flat prices fell by more than 2% on the day as a result, from $335.50/mt on Thursday.

Yet Brazilian premiums soared with offers up by 12 c/bu as exporters anticipated an increased of Chinese purchases both on a FOB and CFR basis which outweighed a weaker board and kept flat prices just $1.50/mt weaker on Thursday’s value to settle at $374.50/mt.

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August 26, 2019

CRISPR Crisps

Grown commercially since 1997, GM (genetically modified) corn now accounts for about one third of the corn grown in the world, most of which has been genetically modified to tolerate glyphosate, sold as Roundup, a relatively inexpensive herbicide that kills all plants except those with genetic tolerance.

Monsanto released glyphosate resistant soybeans under the name Roundup Ready Soybeans in 1996 and within ten years 80 percent 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. Drought tolerant GM corn was approved by the USDA in 2011, and commercialized in 2013.

As Christine Du Bois writes in her book, “The Story of Soy,” some 80 percent of all soybeans in the world are genetically modified to be resistant to Roundup. In the Americas, that figure rises to 95-100 percent. In terms of acreage, GM soy accounts for around half of all GM crops in the world.

GM soy largely came about as a result of the introduction of Roundup in the 1970s, with Monsanto trying to find a gene that was resistant to the herbicide. They eventually one in bacteria in a Roundup factory’s waste pond, and engineered it into soy plants. The introduction of Roundup Ready soybeans allowed farmers to increase yields by planting rows closer together. Without it, farmers had to plant rows far enough apart to allow weed control by mechanical tillage.

The Monsanto Company was no stranger to controversy; it once manufactured the insecticide DDT, as well as the defoliant Agent Orange that was widely used in the Vietnam War. Bayer, a German multinational pharmaceutical and life sciences company bought Monsanto in 2018 for $66 billion. Since then Bayer has been entangled in litigation over claims that Roundup causes cancer, something that the company obviously denies.

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: fertilizers, herbicides and pesticides; chemical companies made their money selling these inputs. Now the cost is in seed development . The result has been a merging of the chemical and seed businesses: over recent years, the large chemical companies have bought up the seed companies.

Although GM technology has revolutionised the industry, its effect on yields is sometimes questioned. By one estimate, about 50 percent of yield increases since the 1920s have been the result of breeding, including genetic modification, while the other half have come from improved farming practices: better farming techniques have been just as important as genetics. However, that is hardly surprising when you consider that the primary objective of genetically modifying crops has not been to increase yield potential. The increases in yield that have come with genetically modified corn have come in the form of yield protection and stability, not actual increases in yield potential.

In “Seeds of Science: Why We Got It So Wrong on GMOs”, Mark Lynas, an early anti-GMO activist, admits that the scientific evidence for the safety of GMOs is robust. He writes, “I cannot deny the scientific consensus on GMOs while insisting on the strict adherence to the one on climate change, and still call myself a scientific writer.”

Meanwhile, Amanda Little, in her book “The Fate of Food: What We’ll Eat in a Bigger, Hotter, Smarter World, quotes Tamar Haspel, a journalist for the Washington Post, as saying, “The argument against GMOs has never really been about the GMOs themselves. It is about a corporate-dominated, industrialised food system for which GMOs serve as a kind of proxy.”

She argues that the public may be more accepting of the new gene editing technology, CRISPR (pronounced CRISPER). Gene editing involves the deletion, insertion, or modification of the genome at a specific site in a DNA sequence. She writes,

“CRISPR may not win minds and hearts overnight, and we still have much to study and learn about it. But here’s hoping that transparency, community involvement, and applications in the public interest will bring gene editing sceptics to the table — disbelief at least temporarily suspended — to give it a chance.”

However, as The New Food Economy argues, these new techniques are already creating a debate about what “genetic modification” really entails. Most people use the term to refer to inserting foreign DNA from one organism into another. This process, known as transgenic mutation, cannot happen on its own in nature.

CRISPR doesn’t require the insertion of foreign genetic material. The technology allows scientists to precisely edit in, or edit out, targeted traits. In this sense, CRISPR is an acceleration of traditional methods of plant and animal breeding, and not an unnatural mutation that could not occur outside of a laboratory. The United States Department of Agriculture (USDA) seems to agree, and has decided not to regulate gene-edited crops in the same way as GMOs.

Of all the new developments and new technologies in agriculture, CRISPR seems to be the one with the most potential to increase yields, something that is essential if we are to stop deforestation and biodiversity loss. But to do that, it will first have to be accepted by consumers. Fingers crossed that it is!

August 22, 2019

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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August 21, 2019

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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August 19, 2019

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.

August 15, 2019August 15, 2019

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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August 14, 2019

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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August 12, 2019August 12, 2019

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.

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.

August 8, 2019

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