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A conversation with José Orive, Executive Director of the International Sugar Organisation

Good morning José. Could you please tell me a little about yourself?

I grew up on a ranch in Guatemala; we were mainly cattle, but we did have some sugarcane and we fed the molasses to the cattle. My brother stayed on the farm and I studied law at Georgetown University in the US, and then did a masters degree in international trade agreements. That led to me working with the Guatemalan diplomatic service as a trade negotiator.

So you are a diplomat with experience of trade negotiations. Does that help in your current role?

It does, especially given the sensitivity around sugar at the moment. Different people have different expectations—and the cultural differences are enormous. Although most people view the ISO as “being about statistics,” we are really about people.

But what does the ISO do exactly?

We are a United Nations body that came out of the Bretton Woods Agreement. It was part of the post-World War era, where food security was of paramount importance.

At first, the ISO intervened actively in the world sugar market, telling people what to produce, when to market it, what stocks to hold and what price to sell at. But by the end of the 1970s, countries realized that the market did all those things better, and did away with the so-called “economic clauses” of the agreement.

Our role now is to monitor, analyse and study the world of sugar and biofuels. Our goal is to produce intelligence that enriches people’s decision making. We avoid telling people what to do, but we lay out the variables and the key factors around issues that are pertinent to the sugar world.

We have 88 country members, including the EU, which acts as one party, and 10 staff.

Is it part of your mandate to defend the sugar industry?

Yes it is. We have an advocate role. It is an interesting function, as many governments do not have a single voice on the issue. Sometimes we act as arbitrators between ministers of health and ministers of trade and agriculture—around the importance of sugar for sustainable development and its role in nutrition as part of a healthy diet.

You have to remember that the sugar industry is a key driver for development and incomes in rural areas in many developing countries. When you visit these countries you can see how villages and small towns can be lifted up when a sugar mill opens nearby. You will see schools and hospitals being built, and then the next generation ends up with a college degree. That is something that governments have to encourage. Sugar plays a huge part in that; it is a driver for development.

Does the ISO also get involved in arbitrating between farmers and millers?

We are currently undertaking a study of the payment systems of cane and beet worldwide. One of the main drivers for this has been the desire of growers of beet and cane to participate in downstream projects such as ethanol, electricity co-generation and green plastics.

Some millers want farmers to participate in the downstream products, but they argue that farmers have to invest with them and assume some of the risk. Other millers say, “No, we acquire the raw material and we pay for it. What we do with it is our business and not yours, because you have been paid. We can lose money in a bad year if the price of these products is
low, but that is our risk and not yours.”

With governments becoming increasingly anti-sugar, are they asking themselves why they should be members of an organization whose role it is to promote the sugar industry?

I haven’t seen a country or a government directly question their membership as a result of their position on sugar. That said, it is almost impossible to stop finance ministers from considering a sugar tax. They look at the additional revenue and it is hard for them to resist. Sugar taxes are driven both by politics and revenue. The tax in Mexico raised $1.2 billion over two years.

Do sugar taxes reduce sugar consumption?

If you take Mexico as an example, domestic sugar consumption dropped during the first year after the tax was introduced in 2014-15, but by the beginning of 2017 it was back to its pre-tax level. By September 2017, consumption was above the pre-tax level.

Politicians suppose that if they make a product more expensive people will stop consuming it, or consume less of it. But that is not the case when the product is relatively cheap to start with.

But aren’t sugar taxes just taxes on the poor? Rich people don’t care, but people on low incomes do. And as you have shown in Mexico, they don’t consume less; they just pay more in taxes.  

That is exactly the case in Mexico where sugar consumption is overwhelming concentrated among the poorer sectors of society.

But is that money being given back to the poor in terms of education or healthcare?

That is the question. I don’t understand why governments aren’t making a big fuss about all the schools and hospitals that they are building with the revenue from the sugar tax. But they aren’t. It is total silence.

If you have $600 million coming in per year and you are only spending $200 million on schools and hospitals, people will start asking what you are doing with the rest of the money. And people will start asking whether the money has been spent efficiently. Politicians hate that.  We have tried to look at the figures in some countries, and we must try to get the politicians to stand up and be transparent with the numbers.

Some advocates of sugar taxes have asked for the revenues raised to go into a separate fund, but in most cases this hasn’t happened. The money just gets funnelled into the general kitty box.

Are you arguing that the sugar taxes have not had any effect on sugar consumption?

Sugar taxes don’t seem to have affected consumption in developing countries, but per-capita consumption in niche markets of developed countries is falling, and the anti-sugar lobbyists are claiming credit for that.

But per-capita sugar consumption in developed countries has been falling for the past fifty years.

Historically, global sugar consumption has been rising at 2.0/2.1 percent per year. Now it is rising 1.6/1.5 percent. The growth in global sugar consumption has slowed, but the total amount consumed is still growing. England is an exception to that; total sugar consumption is dropping in the UK.

Apart from sugar taxes, what are the other challenges facing the industry?

Producers are realising that they have to diversify, and not to put all their eggs in one basket. The companies that are diversified are doing well in spite of the current low sugar prices. I think the traditional model of specializing in, and just producing, sugar is outdated.

I also believe that more effort needs to be made to bring together cane growers and millers, beet growers and factory owners. The industry also needs to work together better to share best practises in terms of sustainability, nutrition and new technologies.

And what are your main challenges at the ISO?

First, we have to stay relevant, to constantly tweak our products and services to make sure that they are relevant to our members. I am sure that we can do more with the data that we have, and we are working on that.

Second, we have not only to maintain our existing membership but we also have to bring in new members.

Third, we have to organize good events—events that are rich in content, interactive and dynamic.

Fourth, we must build relations with our sister organisations in other commodities, to learn from them and share with them.

Fifth, we must learn how to better engage with NGOs, for example on child labour and sustainability, and with health organisations, on sugar and nutrition. If governments are going to adopt policies that affect our industry, then our industry needs to have a seat at
the table.

Where are the success stories in the sugar industry?

There are many. The role that sugar plays in rural development is well documented, but it also has a role in nutrition. Guatemala has the world’s most successful micronutrient programme with the fortification of sugar with Vitamin A. The programme has completely eradicated infant blindness in the country, as well as leading to a fall in child mortality. Malawi and Tanzania are now following Guatemala’s example. We need to do more
to highlight these successes.

Thank you José for your time.

“Study grain long enough and the world shrinks.” Dan Morgan

As some of you may know, I am currently working on a book that will look at the ways in which the grains markets have changed in the forty years since Dan Morgan wrote Merchants of Grain back in 1979.

At the time, Dan had already identified many of the trends that would drive the grain markets into the future.  On the demand side, he wrote about population growth, rising incomes, changing diets, and in particular the increase in demand for meat protein. On the supply side, he foresaw that agricultural yields would continue to improve. He also foresaw the increase in international trade that would accompany globalisation.

But what didn’t he foresee? What have been the shifts in the past 40 years that have moulded the current grain trade? To help me answer that question I went to see Arnauld Petit, the Executive Director of the IGC, the International Grains Council, based in London.

By way of introduction, Arnauld told me that the IGC is an intergovernmental organisation that was formed post World War II in order to ensure an egalitarian distribution of wheat. Today, the IGC has 56 member countries, and its mission is to facilitate international cooperation in the grains trade; to promote openness and fairness in the grains sector; and to contribute to grain market stability and to enhance world food security. It does this by improving market transparency through information sharing, analysis and consultation on market and policy developments.

In 2012, the IGC joined the Secretariat of the Agricultural Market Information System (AMIS), an initiative established at the request of the Agriculture Ministers of the G20. AMIS covers four crops (wheat, maize, rice and soybeans) and aims to promote food market transparency and the coordination of policy action in response to market uncertainty.

            The GTC holds an annual conference in London in June that brings together the public and private sector in the world of grain. Last year the conference attracted over 350 delegates from 60 countries. I made a note to myself to attend this year.

When I contacted Arnauld I told him about my book project, and I warned him that I would be asking him to list what he considered to have been the top five most significant shifts in the grain market in the last forty years. He had since given it some thought, and we got right into the heart of the matter.

“Number 1 on the list,” he told me, “must be the shift to Asia, particularly the economic take-off in China. Rising consumer incomes, combined with urbanisation, have had a relevant effect on diet and food demand. As the Chinese get richer they eat more meat and fish. This demand for meat has driven the huge increase in vegetable protein imports, and has been the driver behind the explosion in soybean production worldwide. Forty years ago, China imported only a marginal quantity of soybeans. In 2019 the country is expected to import 87.5 million mt, more than half of the total trade in soya.

“At the same time,” he added, “Asian people are eating more wheat products. This has in turn increased their demand for wheat.”

“And Number 2 on the list?” I prompted.

“Before the First World War, Russia was a major exporter of wheat, but by the 1960s the Soviet Union had turned around to become a major importer of grains. In 1979/80, the USSR imported 12 million mt of wheat and 14.5 million mt of corn; and in 1984/5, the bloc imported a massive 28 million mt of wheat and 20 million mt of corn. Now the situation is quite different: in 2018/19 Russia alone is expected to export more than 36 million mt of wheat and 3 million mt of corn. Meanwhile, Ukraine is expected to export over 16 million mt of wheat and 28 million mt of corn. That is an impressive turnaround that nobody would have been able to predict.”

“Do you think Russian exports will continue to grow,” I asked.

“Not necessarily,” he replied. “Most of the new production is in Siberia where it is too cold to plant winter wheat. The short Siberian summers leave farmers only a short window to plant and to harvest; production in the region depends very much on the weather.

“In the meantime, the Russian government is keen to move from grain production to livestock production, mainly pigs. They view this as a way to add value to their supply chain. If the Russian meat industry continues to expand then we could see a decline in grain exports. Some people are asking whether we have already seen peak exports.”

“And what would be third on your list of structural changes?” I asked.

“It would have to be the expansion of the biofuels industry. Forty percent of US corn is used for ethanol production while 50 percent of EU rapeseed is used for producing biodiesel.”

“Those figures are surprisingly high,” I interrupted. “Such a big diversion to biofuels must have had a big impact on prices.”

 “Not really,” Arnaud replied. “When the US ethanol industry started to take off in the mid-2000s there was a big debate in the press as to whether corn should be used as fuel: the “food versus fuel” debate. Looking back, it is now evident that that debate was flawed. US ethanol production hasn’t seriously impacted either the price or the availability of corn for food or feed.”

“Why is that?” I asked.

“Because corn contains both protein and carbohydrates; you can use the protein for animal feed and use the calories to drive your car. When you make ethanol from corn you get a by-product called “Distillers’ Dried Grains with Solubles” (DDGS), which can be used as a feed ingredient for livestock. Each 56-pound bushel of corn used in dry-mill ethanol production generates about 17.4 pounds of DDGS.

“A similar situation exists in Europe with rapeseed: you use the oil for biodiesel and the high-protein rapeseed meal as feed for animals.

“But there is another reason why the whole fuel versus food debate of the early 2000s was flawed. People forget that in Europe after the Second World War, 70 percent of your acreage went to feeding (fuelling) your labour force, including feed for your horses.  Today a rapeseed farmer will see only half of his production going for fuel! The debate was based on the assumption that the market is fixed, and that we have a choice between food, feed and fuel. That is incorrect.”

“But what about the negative environmental impact of using land to grow food for fuel? Aren’t we losing biodiversity?”

“Not in the EU or US at least,” Arnaud told me. “Arable Land has been falling as from 2008, while forestry and urbanisation has increased.”

“Is that because yields have increased?”

“We saw yield increases in Europe until about 2007, but these have now plateaued, particularly for wheat. Corn and soybean yields have continued to increase in the Americas because of GM technology and new breeding techniques. Remember there is no GM wheat anywhere. Wheat yields depend on the weather: sometimes good and sometimes less good.

“What is 4^th structural shift on your list?” I asked.

“It is the development of the starch industry for sweeteners and food use. High Fructose Corn Syrup (HFCS) has taken a significant part of the market for sweeteners in both China and the US, largely because it is cheaper than sugar. Isoglucose, as HFCS is called in Europe, has had less impact in the EU, largely because production has been restricted through quotas. Those quotas have now been lifted, and we will be watching closely to see how the market develops.”

“And the last one on your list?” I asked Arnauld.

“Number 5 on the list has to be the big expansion of soybeans. In 1978/19, global soybean production was just 77 million mt, but is set to reach 363 million mt in 2018/19 according to our latest forecasts. This has been achieved through a heavy expansion of acreage around the world, and especially in the US, Brazil and Argentina.  Demand and trade have also risen especially strongly and we have seen some significant shifts over the decades, with Brazil now by far the dominant exporter.

The question now is whether palm oil will follow the same path, and compete with soy oil in all its outlets: We are following this carefully. ”

“Thank you Arnauld. Your comments have been very helpful. Is there anything that you would like to add?”

“Only that I look forward to seeing you at our conference in June!” 

The recent announcement from Olam that they are exiting the sugar trading business has provoked mixed feelings among those left in the business, especially as it comes fast on the heels of Bunge’s sale of their own sugar trading business to Wilmar. Fewer trade houses may mean less competition, but are these just more rats leaving a sinking business?

Forty years ago, when I joined Cargill, I was told that the company made no money on selling grains to destination: the FOBS to CIF portion in the supply chain. Instead, the company viewed these sales as a necessary evil. The money was made upstream: tiny margins on (at that time) selling seeds, fertilizer and other chemicals to farmers, buying and storing the grain at harvest time, shipping it in barges down the Mississippi, storing it again at the port and then elevating it onto the ships. Cargill also made money by offering risk management services to the farmers, and even executing their transactions on the futures markets.

The final stage of selling and shipping the grain to the final buyer was a mug’s game that you had to play as best you could, without losing too much. As Bunge, Cargill and the other heavyweight trading companies knew 40 years ago, the money was in originating grain, not in marketing it to destination.

After completing my training program I moved to Cargill’s sugar department. There I looked after the futures and kept the position, first in London and then in Minneapolis. It was a sharp learning curve; during my time on the futures desk the sugar price rose from 9c/lb to 44c/lb, and then back down again. We didn’t get every move right, but we made money and had fun doing so!

At that time Cargill was the new kid on the block in the world of sugar trading. The company had launched the desk a few years prior to me joining, and then had promptly lost their trading team to Phibros. At that time, EDF Man, Sucden, Tate and Lyle, Woodhouse Drake and Carey, and Kerry (led by the King of Sugar, Robert Kuok) were “the big five” companies that dominated the sugar market.

The big five knew the business inside out, and they had the long-standing relationships that helped them to get trades done. They had all made considerable fortunes in the 1974 sugar bull market (that had seen sugar prices rise to 66c/lb). They were well financed, well connected, well trained and with a considerable depth of experience and expertise. All that the two American newcomers (Cargill and Phibros) could hope for were a few crumbs from the table.

Back in London, Cargill transferred me from futures to white physical sugar. My new role was to buy white sugar from European producers and sell to the MENA region. At that time most sugar-importing countries bought through government tenders. I had a miserable time trying (and failing) to make money by buying FOBS Europe and sell CIF MENA. It was exactly the sort of business that the company had warned me against on my training program.

I found life as a physical sugar trader so tough that I eventually threw in the towel and left to be a broker, first on the futures and then on the physicals. After I left, Cargill gradually expanded their footprint in the sugar sector and eventually invented a profitable business model of leveraging their loss-making physical business into huge profits in the futures markets.

A byproduct of this, however, was to make the standalone physical business even less profitable. As other companies tried to replicate Cargill’s model, the competition to make the physical sales became even fiercer. Over time, traders ended up losing more on the physicals than they gained on the futures. The model broke through overuse, and no one has yet found a satisfactory, and equally profitable, alternative,

Trading companies tend to do well when a market is dislocated— when traditional trade flows are disrupted and buyers have to find alternative supplies. This can occur because of poor weather, or because of government intervention, such as tariffs. Trading companies with a global footprint can really add value in such disrupted markets, but they struggle to make ends meet in dull ones.

If not dull, the current situation in the world sugar market is difficult. Supplies are ample and producers, particularly in India, are sitting on large stocks. Because of the nature of the cane cycle, this situation has lasted longer than many had hoped. All that traders can do is be patient and to wait for the cycle to turn.

What applies to sugar also applies to the companies that trade sugar. New companies enter a market when trading conditions are favorable; old companies leave when conditions deteriorate. Unfortunately this often happens with a lag: new entrants usually appear after markets have peaked; existing participants often leave just as conditions are about to turn up.

Of the “big five” companies that dominated the sugar market in the 1970s, two have disappeared completely. In volume terms the “big three” list today would arguably comprise Alvean, COFCO and Wilmar (including RAW), with EDF Man, Sucden and Dreyfus following closely behind.

The main participants have changed, but this amount of ebb, flow and natural wastage is not out of line with what has occurred in sectors outside of the commodity business. It is less than what has occurred, say, in technology or healthcare.

The physical sugar trade has always been tough, and companies have continually had to reinvent themselves to thrive and survive. Structural change and disintermediation are making things even tougher.

But then no company in any sector can sit back in the belief that what worked in the past will work in the future. As Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.”