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One Friday night in July 2016, 32-year old Jack Marrian was woken from his bed in his suburban Nairobi home, handcuffed and taken to the city’s central police station. It was the beginning of an almost three-year nightmare that saw him spending three weeks in a crowded Kenyan jail, deprived of his passport for two years, charged with drug smuggling, and faced with the prospect of spending 30 years of his life in jail.

The previous evening Kenyan Customs officers—in the full spotlight of local media—had opened one of four shipping containers that had just arrived in the port of Mombasa. They found that two of the 50k bags of white sugar in one of the containers had been replaced with 100kg of cocaine, with an estimated value of US$6 million.

The sugar was part of a total consignment of 22 containers that was being shipped from Brazil to Kenya, with transhipment in Valencia in Spain. Mshale Commodities (Uganda) Ltd, the East African arm of British sugar-trading company EDF Man, was the importer of the sugar, and the company’s name was on the documents. Jack is a director of the company.

Jack told me by telephone from Nairobi that it is unheard of for a consignment of shipping containers to be split up so that some containers arrive ahead of schedule. He explained that the four containers that arrived early couldn’t be cleared through the port when the shipping documents were for a 22-container consignment. “A shipping line would normally never split consignments like that as they would be liable for the punitive port storage of the early arriving containers in the discharge port until the balance arrived,” he told me.

“I first heard of the issue from the TV news on the Friday evening,” he said. “The media said that four containers had arrived that day, which did not make sense to me as my shipment was 22 containers, and showing an ETA ten days later.

Unknown to Jack at the time, the US Drugs Enforcement Agency, the DEA, had been tracking the drugs from the moment the smugglers had placed them in the container while it was waiting to be loaded at the port of Santos in Brazil. The DEA had warned their counterparts in Spain that the drugs were on their way, and suggested that they wait to see who came to pick them up. Somehow the warning leaked out, and no one turned up to collect them. Before the Spanish police could get a mandate to open the container, it was whisked off on the next boat to Mombasa. The DEA then informed the Kenyan authorities that the cocaine was on its way.

The container with the drugs, MEDU3333950, was fast tracked out of Valencia directly to Mombasa. The other containers that were split up in the process were reconsolidated in Salalah port, to arrive in Mombasa with the others.

Smuggling drugs in legitimate containers is known as Gancho Ciego or “Rip-on/Rip-off.” The method is widely used by drug gangs around the world, but most particularly out of Brazil. The UNODC describes Rip-on/Rip-off as “a concealment methodology whereby a legitimate shipment, usually containerized, is exploited to smuggle contraband (particularly cocaine) from the country of origin or the transhipment port to the country of destination. In “rip-off” cases, neither the shipper nor the consignee is aware that their shipment is being used to smuggle illicit cargo. For this method to be successful there will always be local conspiracy both in the country of origin or the transhipment port as well as in the destination country.”

The European Monitoring Centre for Drugs and Drug Addiction adds, “The drugs are usually loaded in the dock area, so the ‘rip-on’ team must be able to get the drugs into the container terminal and to locate the container, which must be in an accessible position. In most cases the security seal needs to be replaced with a duplicate to avoid obvious signs of tampering.

“At the port of arrival, the drugs need to be retrieved, which can be achieved in a variety of ways. The drugs can be removed from the container by corrupt port workers or by external teams who gain access to the terminal. After the ‘rip-off’ is complete, the container is either left open or resealed with another false /duplicate seal. The success of the rip-off depends on knowing the location of the container within what is often a very large container terminal with tens of thousands of containers. However, just knowing the container number is usually not enough. It must also be accessible, which again usually requires a corrupt port or company worker to manipulate the position of the container.”

In Jack’s case the smugglers cut the locking bars of the container so as to gain access to it and insert the drugs without disturbing the original seal. A spare MSC seal was found amongst the drugs by the Kenyan authorities.

When the Kenyan police arrested Jack they showed him a photograph that had been taken at passport control in Nairobi airport of three Caucasian men; they asked him if he knew them. He did not, but they were subsequently identified as suspected members of the ‘Ndanghreta crime syndicate. They had arrived at Nairobi airport a few days before the four containers arrived in Mombasa. No one is sure, but the plan was probably for the smugglers to bribe their way into the port, recover the drugs, and rescue an operation that had gone wrong. Unfortunately for them—and for Jack—the Kenyan police got to the drugs before they did.

After Jack was arrested, the DEA wrote a letter to the Kenyan prosecutors explaining what had happened, writing, “The DEA would like to stress that there was no indication the cocaine was to be received in Kenya.” They added, “The company owning the consignment had no knowledge that the cocaine was secreted inside their shipment of sugar.”

Unfortunately, the Kenya authorities continually denied ever receiving such a letter, and the case against Jack and his co-defendant Roy Mwanthi, a Kenyan clearing agent at the port, dragged on. It was only in March 2019 that the case was finally dismissed.

“I don’t want this to happen to anybody in our business ever again,” Jack told me.

“But how can anyone stop it?” I asked him.

“In my case,” he told me, “the vertical bar on the shipping container concerned had been cut through, so that the bar could be turned, and the container opened, without disturbing the seal. (See photo below.) The smugglers than put the drugs inside, closed the container and re-welded the bar, without breaking the seal.

“I think it should be standard practice for containers to be double-sealed between the two doors,” he continued. “The first seal would be a cable that goes between the two central bars, and act as a physical deterrent that needs to be banged off before the container can be opened. The second would be a multiple-layer security-sticker that goes across the two doors with a bar code readable by any standard smart phone. The sticker will allow anyone to check quickly and easily at any point whether that seal has been broken.”

“But how can we implement that change?” I asked him. “How can we make that happen?”

“Traders can implement their own policies for sealing containers,” he replied, “but there needs to be an industry standard. It shouldn’t be something that individual importers need to ask for as an add-on, or as a special favour.”

Listening to Jack, however, I wondered about the effectiveness of any sort of sealing method. Along with the drugs in the container, Kenyan Customs found a counterfeit seal that would have been used to reseal the container in Valencia once the drugs had been removed.

“Surely the solution lies in the hands of the shipping and trading companies,” I asked him. “It must come rather from the port authorities increasing security at the ports.”

“The challenge,” Jack admitted, “is that you are up against a large-scale well-funded organisation, especially from Brazil.”

At the same time as Jack was struggling with the courts in Kenya, Mr Ammaiappan Vasudevan, the 51-year-old partner of Amro Sugars—a sugar importer in Sri Lanka—spent ten months in a Colombo prison pending trial on charges of also smuggling cocaine from Brazil.

On 4th May 2016, 184 sugar containers belonging to Sucden were loaded onto MSC Julie in Santos, Brazil. The Sri Lankan company Amro Sugars bought 54 of the containers while they were afloat, while other Sri Lankan importers bought the 130 remaining. The consignment went via Sines, Portugal where the containers were trans-shipped onto MSC Luciana for Sri Lanka. The cargo cleared customs in Colombo on 9^th June, but the containers sat unopened for four days in a privately owned yard until they were inspected by the Sri Lankan Narcotics Raid Unit (NRU).

The NRU had received a tip-off giving them a precise container number. The country’s President, along with attendant press, was present to witness the NRU opening the container. Inside, the NRU found 80 kg of cocaine, marked with a tiger stamp, in three black travel bags, along with duplicate seals.

Mr Vasudevan was present at the time the container was opened and he was arrested on the spot, along with the two wharf clerks who had cleared the sugar consignment through Customs. In addition, Amro Sugars’ bank accounts were frozen, leaving the company barely able to operate.

Even though the NRU privately acknowledged that Mr Vasudevan had purchased the sugars afloat—and therefore could not have known about the drugs—he still languished in jail while the investigation continued. At the time it was the biggest ever drug seizure in Sri Lanka, and drug smuggling is an unbailable offence in Sri Lanka.

One month after the seizure, Amro Sugars’ employees found 274 kg of cocaine in a further two containers and immediately informed the NRU. Because they did so, no one was arrested and the company was ruled an unwitting recipient. However, there was no review of Mr Vasudevan’s case, and Amro Sugars’ bank accounts remained frozen.

This second, separately purchased, consignment had left Santos aboard MSC Letizia, the same ship that carried Jack Marrian’s sugar. All the containers had been loaded on the same date. When the ship arrived in Valencia, the Amros sugar containers were trans-shipped onto MSC Maria Saveria for Colombo, and Jack’s sugar was transhipped to Kenya.

By some estimates, almost half a tonne of cocaine may have been aboard the MSC Letizia when it crossed the Atlantic in June 2016. The drugs were believed to have been destined to the Italian crime syndicate ‘Ndanghreta, which controls up to 60 percent of the cocaine traffic between South America and Europe, and operates in ports all along the Iberian Peninsula, as well as in Italy. According to Nicola Gratteri and Antonio Nicaso, authors of the 2015 book on the crime group Oro Bianco (White Gold), the Rip on / Rip Off technique was developed in the Calabrian city of Gioia Tauro. More than 3.6 million containers pass through the port each year, making it tough to supervise each shipment.

The Italian police first worked out that containers were being broken into when they realised that certain container numbers did not match their seal numbers on arrival. ‘Ndanghreta responded by producing counterfeited seals with matching numbers.

The UN Office of Drugs and Crime states that less than 2 percent of the more than 500 million containers that are shipped yearly are inspected. Drug gangs often target sugar containers because sugar does not show up on scanning equipment. As such, the containers have to be searched by hand – a huge task. This makes the Rip On / Rip Off method relatively cheap. Even if a container is seized, there is only a relatively small quantity of cocaine in each container, reducing the cost to the gang.

I spoke to Sivarajah Jegathieswaran, Mr Vasudevan’s nephew (and partner in Amro Sugars), by telephone from Colombo.

“We were unlucky,” he told me. “We took only 54 of the 184 containers on that first shipment, but one of those 54 contained the drugs. The containers were allocated randomly between the three buyers, and we were unlucky to get the one with the drugs in them. The NRU told us that they knew that we were innocent and that we were not involved in the smuggling, but they still kept my uncle in jail. We don’t understand why. Maybe it was political; maybe they were afraid to release him and then have the media criticise his release. They preferred to keep him in prison.”

He told me that they even refused to release his uncle when a few months later three further containers arrived in Colombo with cocaine in them destined for another importer. The importers again informed the NRU, and no action was taken against them.

I asked Sivarajah what needed to be done to stop this happening again. “It has already been done,” he replied. “We have stopped importing sugar—and indeed other commodities—from Brazil and South America. It is not worth the risk. In any case we make so little money out of the imports. It is not just our company. None of the importing companies in Sri Lanka will now buy Brazilian sugar. We have all stopped importing. Sri Lanka now buys their sugar from Europe, Ukraine and India.

“When my uncle went to prison we asked the Brazilian embassy for help, but they said they could do nothing. Now that everyone in Sri Lanka has stopped buying Brazilian sugar the Embassy has come back to us. But they are not protecting us. There is nothing they can do.”

I asked Sivarajah if he was still bitter about the experience.

“My uncle left the company after his release from prison,” he told me. “He left it to my father and me. He had had enough.

“Some of the containers from the MSC Letizia ended up in Myanmar,” he continued, “but no action was taken there against the importers. So why did the authorities in Kenya and Sri Lanka act the way they did?”

Jack Marrian is the nephew of the Earl of Cawdor, whose family seat is Cawdor Castle in the Scottish Highlands. His case received considerable coverage in the UK media, and I wondered to what extent his aristocratic background might have explained the Kenyan authorities’ reluctance to drop the case, even in light of the DEA evidence.

I asked Jack if he felt that he had been singled out, and made a scapegoat. He replied that he didn’t think so, although he did “believe that it was politically expedient for the Kenyan authorities to publically accuse and prosecute me.”

“In a way I was fortunate to have had all that support from the media,” he continued. “I think it helped.”

“Has the experience put you off trading?” I asked him.

“It has made me very cautious about trading anything out of Brazil,” he replied. “Brazil is extremely high risk. People need to understand the sheer volume of drugs that get smuggled around the world in shipping containers. We traders need to understand the risks. And we need to take the issue seriously.”

© Commodity Conversations ®

Part Two

Could you tell us a little about the Viterra acquisition, and how it happened?

It was a complicated transaction and at that time I had little experience in major M&A. Canada and therefore Viterra became a focus for us because the Canadian Wheat Boards monopoly rights were about to be rescinded by the government. We were also already a big trader of wheat, barley and canola and these were key exports from Canada so it was complimentary. We began by looking at the business as a whole, and we identified the businesses that we didn’t want. We presold the fertiliser production and distribution to Agrium and CF Industries. We presold a smaller piece of the fertilizer business and some of the grain handling assets to Richardson. If the transaction hadn’t gone through those sales would have been unwound.

We presold those businesses in part to help with financing the acquisition but also because we either didn’t want them or because we wanted to involve Canadian companies in the transaction. There wasn’t an anti-trust issue, as we didn’t already have a business in Canada, but we had to get approval as a foreign company taking over a strategic Canadian company. Pre-selling parts of the business to Canadian companies helped us enormously in getting Canadian government approval. 

We also sold off quite a number of businesses post the acquisition, like the pasta, malt business and the petroleum distribution business; we ended up keeping only about 50% of the company. The enterprise value of the total acquisition was $7.3 billion. At the time it was the biggest acquisition in our space—and still is.

The deal was finalised in Toronto. The Viterra people were in a building and I was in a restaurant with the rest of the deal team just over the road. At one stage there was a long silence and we thought we had lost it to ADM. There was a bit of toing and froing during which I was on the phone with Ivan Glasenberg, Agrium and Richardson deciding whether we should pay more, and how much more. That was one of the beauties of working for Glencore and particularly with Ivan whom I reported to directly. For such a large company there was almost no bureaucracy. You could make big decisions incredibly quickly and easily. It was a huge advantage.

Glencore is somewhat more structured now than it used to be, but to some extent it has to be given the growth of the business post the merger with Xstrata. It is still the same people though. And the company is people. It is only as good as the people that run it.

Why did you keep the Viterra name?

In Canada Viterra had a long history and a well-respected name, appreciated by the farming community, so we had no reason to change it. In Australia, Viterra itself had only bought the business three or four years earlier. Glencore already had a sizable trading business in Australia, headquartered in Melbourne. The Viterra business was headquartered in Adelaide and it was a separate non-trading business providing handling services to third parties as well as to Glencore, so it made some sense to keep the two separate.

Glencore Ltd has transformed itself from a trading company into a mining and trading company. Is Glencore Ag planning any similar transformation, or did the Viterra acquisition already do that?

I think we have largely already done that. Something like 80 percent of our earnings now comes from non-trading. But the asset businesses of Glencore Ag are quite different from the mining businesses of Glencore PLC. Even where we have a dense set of assets such as in Canada—65 country elevators and 5 port facilities—we are buying from the farmer and selling to customers around the world; nothing is entirely back-to-back. So these are asset-based businesses with strong elements of trading running through them. As I said this type of business now constitutes 80 percent of Cargill Ag’s earnings. 

You mean Glencore Ags?

(Laughs) Yes, sorry. You know I still sometimes answer the phone “Cargill!”

Trading has become more difficult for reasons that are well known to everyone. This will not change. The transformation to an asset based company, both in Glencore as a whole and Glencore Ag bought Glencore PLC to where it is today with an annual EBITDA of $14-15 billion. This would obviously be quite impossible as a trading company. Already in the early 2000s we could see that pure trading was going to become increasingly challenging.

Other trading houses are moving both ways along the supply chain. Cargill has moved into proteins; ADM and LDC into ingredients. Is Glencore Ag planning to do something similar?

No. I think that is very difficult to do. If you are Cargill and you started to do that forty or fifty years ago, as they did, then that was the right move. They can continue in that same direction. It is a natural progression. For us to transform ourselves now from an upstream procurement, handling, oilseed-crushing company into a company that captures the full value chain—that includes refining, bottling, milling, branding, ingredients, feed—is very difficult.

I say that for a simple reason: we originate about 80 mln tonnes per year and it is much easier to capture those big flows upstream as you are dealing with fewer origins. For example, Russia exports 40 million tonnes of wheat each year through five or six port facilities. Argentina supplies almost 50 percent of the world’s soybean meal through just a few export corridors. You can capture big flows in relatively few countries moving through big facilities. The business is much more fragmented on the consumption end. Egypt, the world’s biggest buyer of wheat, imports ten or eleven million tonnes and there are multiple importers and in turn numerous millers. 

One of the mantras that you hear in our business is that you have to capture the full value chain. We can’t possibly do that now. It would cost billions to build downstream businesses of a tonnage that was even remotely relevant to the tonnage that we secure upstream. That is not viable from where we are today. Instead we have to look at improving the core business by deploying capital in the right places.

What do your Canadian shareholders add to your business—and do you think that at some stage Glencore Ag will spin off as a private company?

Glencore Ag is already a separate company owned 50 percent by Glencore and 50 percent by our two Canadian shareholders. They add financial muscle. They are in for the long term. They bring certain insights and observations as an outsider in terms of analytics, finance and a global investment perspective that is valuable. 

Are you still looking at mergers and acquisitions?

I still very much believe that the industry requires consolidation through mergers or acquisitions. Moving downstream is not tackling the problem. What I believe we need to do is stick to our core business, focus on developing the broadest geographic footprint to spread the crop and event risk, increase our economies of scale, and take a disciplined approach to organic expansion. The industry is still under pinned by good demand growth and seaborne trade will grow at a faster rate than consumption itself. Technology does not threaten our handling and processing business as it cannot replace the assets themselves. 

Where is there over-capacity?

In the north of Brazil…in the US Pacific North West…..in the US Gulf….in the Ukraine…on the east coast of Australia. There was only limited overcapacity in Canada on the west coast but with recent investments in the port of Vancouver there will now be more overcapacity for a number of years. 

Not only is there over capacity, but also the existing installed capacity has become a lot more efficient, largely because transport has become more efficient. Trains and trucks are getting bigger, and operators have expanded their terminal input capacity. For example, the railroad in Canada and barge system along the Amazon are increasingly more efficient. Efficiency gains are of course effectively capacity gains.

What is preventing M&A activity in the sector?

A number of things. You would think that pressured margins would encourage acquisitions. The industry has had a difficult two or three years during which potential acquirers have had their own earning issues and were obviously less bold. Things were potentially cheaper but the buyers were more careful. On the other hand, sellers are reluctant because they think the industry is going to get better. It hasn’t yet. Anti-trust and foreign control regulation is also a potential hurdle to some combinations.

Half of Brazil’s cane is used to make ethanol. Do you believe biofuels have a future?

People blow hot and cold on biofuels. Politicians were positive on biofuels 12 years or so ago, and they set up structures to support them: either mandating their use or providing tax advantages, or both. This propelled ethanol production in the US and Brazil, and biodiesel production in Europe.

In 2007/8 and again in 2012, we had periods of high crop prices and people became rightly very concerned about the competition between food and fuel. When you look at the amount of food that gets processed into fuel it clear why this is an issue. We should be very concerned about using food to produce fuel when people don’t have enough food. The other issue is when you look at the carbon footprint of biofuels and consider fertilizer, water and diesel use, you can question whether they are really that good for the environment. That issue hasn’t been completely resolved. This turned the politicians off and the political support was pulled.

However, I think there has been something of a rethink. Food prices have come down and we have surpluses again. When that happens, biofuels can help support prices for farmers. Over 40 percent of US corn production is used for ethanol, and over 50 percent of EU rapeseed is used to produce biodiesel. If you took away that demand, prices would collapse along with farm incomes. 

How involved are you in biofuels?

We have three biodiesel plants in the EU. Margins were low for 3-4 years with static demand and production overcapacity. In the past few years no new capacity has been added, and some capacity has been taken out. Demand has increased a little. Meanwhile, the drought last summer put some plants out of action as they couldn’t get their barges up the rivers. At the same time, the EU blocked SME imports from Argentina and, in some circumstances, PME from Asia. Margins have improved considerably and the business has been good for the past year. 

Biofuels are a good example of optionality in Ag assets. There is an embedded optionality in Ag assets.

So assets are your biggest asset, so to speak!

An asset base is essential today but in addition to their asset portfolios what distinguishes companies is their people, their culture, the way management and employees interact and treat each other—the respect they show for each other. What kind of a company do you want to make it? In the end any company can hire bright people, but it is the steps it takes to build a motivated, hard-working, entrepreneurial, fast acting team that is important for success. People spend the greatest part of their lives at work; they do not do it only for the money. The Glencore culture is a strength I believe, certainly helped in the early days by private ownership. It is something that must be nurtured to ensure that despite growth it is not lost. 

Thank you Chris for your time!

© Commodity Conversations ®

Part One

Good morning Chris, and thank you for taking the time to talk with us. First question: You rowed in the Oxford & Cambridge Boat Race from 1979 to 1981 and are a four-time winner at Henley Royal Regatta. You won the silver medal in the eight at the 1980 Moscow Olympics. What lessons did your rowing career teach you that have been useful to you as a commodity trader?

Sport for me is a microcosm of life, especially business life. As in everything, the more you put into it, the more you get out; the harder you work the better you become. So the things that you need to do to succeed in sport are the same things you need to do to succeed in business: effort, focus, discipline, and dedication. The beauty of sport is there is little politics, if you are fast nobody can deny it. There is no quick fix, it takes years of effort and hard work to do well in sport; the same in business!

When the Canadian Globe and Mail interviewed you in 2016, the journalist wrote that you looked like you “could empty a grain silo in about 10 minutes with a shovel.” How do you keep so fit, and how does it help you bear the pressure of the job?

I probably exercise five times a week, including cycling at the weekends. When I cycle I go at it hard. And in the gym I don’t sit on the rowing machine for 45 minutes. I do interval training, for example five times 1,000 metres. That is not only better for you but is also less boring! Also, I time and record everything, and I wear a heartbeat monitor.

Ivan Glasenberg, the CEO of Glencore, was a champion race-walker for both South Africa and Israel, and runs one hour every morning with a group of senior managers. Is physical fitness actively encouraged at Glencore?

I believe Ivan runs or swims every morning, there is an office swimming group I know because I have tried and failed to keep up with them when I have been in Baar. We used to run together when we were travelling. I think it is part of the culture, although not for everyone. When you are exercising hard you are not thinking about anything. In fact, if I am not suffering I find it less relaxing!

Marc Rich once famously told his wife when they got married that he could spare the family 30 minutes on a Saturday and 45 minutes on a Sunday. How do you manage your work / life balance?

That is absolutely not the case with me. There was one big transaction, the Viterra transaction, which was an exception. It was an intense six or seven month period during which I spent many weekends in Canada. That period aside, I believe I have always been able to balance my family and my work. I virtually never travel on the weekend—I make a point of that. My family is very important to me.

When you were at Cargill you “invented” the model of modern sugar trading, levering large physical positions against futures positions and then making big profits on the futures. That was very innovative, although the model has pretty much run itself to death now. You could have ended up running Cargill. Why did you leave?

I don’t know that I could have ended up running Cargill. I started in sugar which was relatively independent, and a little apart from corporate Cargill. Working in the sugar division of Cargill at that time was a little bit like running your own company. There was no real interference from above, but at the same time the financing and the corporate support were there. It was ideal.

Cargill likes to rotate their senior managers, and in the mid-nineties I was transferred to the grain division in a regional management role. There are a lot of people in Cargill who know something about grain and, good company though Cargill is, there were too many opinions at that time for my liking. Perhaps unreasonably I found it restrictive and missed the trading and so I left, probably more my fault than Cargill’s.    

Didn’t you at one stage trade coffee?

Yes, you’re right, but for only a short period. Every morning we had to taste different grades of coffee, and one day my colleagues played a trick on me, and slipped in two cups of tea. I couldn’t tell the difference!  Let’s say I was not the best coffee taster in the world!

When you first left Cargill you worked for a short while at Phibro?

Yes, in Westport Connecticut with Andy Hall, who incidentally also rowed for Oxford against Cambridge, but a few years before me. I made the easy choice—which probably wasn’t the right choice—to go back to what I knew: to go back to the sugar business in a pure trading role.

When I joined them, Phibro was part of Salomon Smith Barney, but a few months later they were bought by Travellers Group, and then three months after that they merged with Citibank. These were two big bank mergers and commodities didn’t fit their plans. Andy told me I could stay on, but that I would have to keep the business small, and focused entirely on futures and derivatives. I already believed that a pure derivatives trading business was never going to work in sugar. It had to have a physical base with origination, sales and a distribution book. Guessing whether the market was going to go up or down was never going to work, or at least it was never going to work for me.

So you joined Glencore in Rotterdam. You had moved from Geneva to Westport, and after only a few months moved back to Europe. What did your wife think of that?

She was not very happy. My wife is American—she had been excited about going back to the US, and that was one of the reasons why I accepted the position with Phibro. I remember promising her that this would be our base and this was going to be our life. We bought a nice house in Connecticut, one of those old colonial houses. Our daughter was born there.

But eight months later we talked it over, and both realised that the opportunity with Glencore was just too good to turn down. She was very supportive. We agreed to give it a go for a couple of years, and that if it didn’t work out we would come back to Connecticut. That was 21 years ago. We moved to The Hague. She found it tough for a few years, but stuck with it. The Dutch are easy to get on with, and it is a lovely place to live—great for kids. We love it.

I joined Glencore in 1998 as number two with geographical responsibilities for South America, the FSU and Africa, and became head of Agriculture in 2002.

In 2011 your cotton-trading department lost $300 million, wiping out your total profits of that year. Would you like to briefly explain what happened, and what you learned from it?

We had a large long position in non-US physical cotton hedged in the US futures market. It was a basis, or premium, position—not an outright position—so we believed our risks were somewhat limited. The physical market was tight at that time—both in the US and globally. Our position expressed the view that world cotton was undervalued compared to US cotton.

One company decided to take delivery of the US cotton futures. They had specifically sold US cotton to their customers and wanted US cotton to cover their sales. The problem was that they wanted to take delivery of more US cotton than was physically available for delivery. Rather than swap US cotton for other cheaper origins, which was the economic thing to do in my view, they maintained their long position in US futures and the market went sky high. Non US origins also went up in price, but to nothing like the same extent. A huge differential opened up between US cotton and non-US cotton.

You were head of Glencore Ag at that time, so the problem ended up on your plate?

I was responsible for setting up the cotton desk so it more than landed on my plate. It was my plate. It was clearly my responsibility. We had hired a team from outside, because we didn’t have a cotton business. Clearly with hindsight we should have looked to have developed a cotton team from within, supplemented with outside expertise. Glencore in Switzerland was not happy of course but Ivan supported me in a way that I never forgot. 

How important is corporate culture, and if it is important does it make it hard for mergers to work in the trading business?

Corporate culture is critical and that is one reason why it is challenging to acquire trading businesses. Acquiring assets—a logistics business and supply chain management—is easier. There is also the issue that unless you are willing to double the risk—double the size of the VAR—then one plus one doesn’t necessarily equal two. We also do not feel we need to buy trading expertise as we already have it.

© Commodity Conversations ®