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Commodity Conversations Weekly Press Summary

Louis Dreyfus just launched its new Soy Sustainability Policy which will seek to limit the environmental impact of soy cultivation and guarantee a fair wage for farmers. The firm said that ensuring its supply chain was managed sustainably had become urgent amid strong growth in the soy industry. In Australia, Zoos Melbourne announced it would no longer sell Nestle products until the company gets its Roundtable on Sustainable Palm Oil (RSPO) certification back. The RSPO suspended Nestle’s membership at the end of June for lack of reporting.

Nestle has developed an infant formula made from potato protein for children who suffer from cow milk allergy. Most formulas are made from cow milk and a lot of the current alternatives, such as protein from soy or rice are inadequate. Meanwhile, Cargill launched Satiagel Seabrid, a carrageenan extract made from sustainably cultivated seaweed, which can be used to improve the texture of dairy products.

The CFTC found that block trading in the CME’s agricultural futures and options contracts – which was only allowed in January this year – occur mostly in the nearby contracts. This came as a surprise given that block trading was introduced with the aim of boosting the liquidity in the little-traded forward contracts and there is now a concern that it is in fact taking liquidity away from the nearby contracts. Many participants have welcomed block trading, saying it helps execute big trades without affecting prices. Others, however, argue it leads to a lack of transparency even though the CFTC found that these traded at a “fair and reasonable” price.

As the rhetoric around the US-China trade war escalates, many businesses are already facing a difficult choice following the imposition of tariffs on both sides: absorb the increase in cost, pass it on to consumers, or find other suppliers. A Chinese meat importer said only luxury restaurants would be willing to pay a higher price for American beef, while a natural fabric producer said he might move production to another Southeast Asian nation.

A potentially breakthrough experiment found that introducing seaweed to cow feed could lead to a significant drop in their methane emissions. The scientists at the University of California still need to find a way to make the taste of seaweed less disruptive, as cows reportedly ate less feed, but the good news is that their milk tastes just as good. In a report released earlier this year, the Environmental Protection Agency found that cows were responsible for around 25% of the methane emissions caused by human activities in the US.

More than half of all fish consumed by humans today are farmed, according to a new FAO report. But the amount of fish caught in the wild has not fallen, as the world’s growing population relies on fish for a good portion of its food intake. The report warned that farmed fish can negatively harm the environment as they are often fed with wild-caught sardines or anchovies. In the wild, over a third of all fish caught never makes it to the plate, mostly because of poor refrigeration and storage.

The war on sugar continues in the US. After California banned cities and counties from allowing sugar taxes on soda last week, the Yes! To Affordable Groceries campaign has submitted a petition to the state secretary’s office asking for a measure to stop local governments from introducing new taxes on sugary beverages or other grocery items during the November ballot. However, the petition, if approved, would not stop the legislature from introducing a statewide soda tax. Also, it would not scrap existing taxes like the soda tax in Seattle. In any case, people say that the Seattle initiative failed to curb sugar consumption as the tax raised USD 4.446 million, nearly USD 1 million more than predicted.

Still on sugar, food makers like Nestle and Hershey want labels to mention ingredients from genetically-modified (GM) sugar crops but farmers oppose it, saying that the sugar no longer has the modified gene when it is used to make processed food.

A London-based startup called Binkabi is setting up a decentralised agricultural commodity network which aims to use blockchain technology to link farmers and consumers in Nigeria and neighbouring countries directly via the use of tokens. The company hopes to boost agriculture commodity trading across borders which it says is currently undermined by the absence of trust and a lack of appropriate market infrastructure.

Talking of new technology, more and more people in Argentina are having to resort to barter clubs to find food amid high unemployment and inflation rates. Facebook groups have been set up to facilitate the barter system, with one such group setting a 1kg flour bag at a reference price of ARS 30 (USD 1.09) or the equivalent of 1 point. With 2 points you can get sunflower oil or a pair of jeans.

This summary was produced by ECRUU

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The last straw

Earlier today, when I went for my morning swim in the lake, I suddenly found myself caught up in a large semi-submerged plastic bag. My guess is that it  had once packaged a large-screen TV, possibly recently purchased for the World Cup. As to what it was doing in the lake, someone may have brought it down to one of the lakeside beaches to sit on during an evening barbecue. They had  inadvertently, probably after a few too many beers, left it there to wash out into the waves..

One moment I was swimming peacefully in crystal clear water; the next I was confused and panicked as I struggled to free myself from the plastic. At one stage my hands and arms were inside it and I had trouble staying afloat. My panic only lasted a few seconds, but as I brought the plastic bag back to the shore to dispose of in one of the rubbish bins on the beach, I thought of all the turtles and other marine life that get caught and perish in the plastic debris floating in our oceans. They too must suffer the same sense of panic and confusion that I had felt earlier today. One moment they are free; the next they are trapped in a thing of which they have no comprehension.

I had already been thinking about plastic last Saturday evening when my wife and I went out to dinner and we were served our cocktails with unnecessarily large—and unnecessarily plastic—straws. I thought about complaining to the waiter about them, but my habitual British fear of embarrassment stopped me. I didn’t want to spoil what was a lovely evening.

Starbucks announced this week that they would be completely eliminating plastic straws from their 28,000 stores around the world by 2020. And that is no small thing: the company currently uses more than one billion plastic straws per year.

McDonald’s also recently announced it will ban plastic straws at its U.K. and Ireland restaurants; other food outlets and airlines are following the trend. Cities are also joining in, with Seattle becoming the latest city in the US to do so. The UK environment minister has gone on record as saying he would like to ban plastic straws completely in the UK, while the EU has also proposed a ban on plastic straws and single use cutlery.

This week National Geographic published an excellent article on the history of plastic straws and how they took over the world. They write that in just the U.S. alone, one estimate suggests 500 million straws are used every single day. One study published earlier this year estimated as many as 8.3 billion plastic straws pollute the world’s beaches.

However, eight million tons of plastic flow into the ocean every year, and straws comprise just 0.025 percent of that.

Bloomberg argues that giving up plastic straws may make you feel better about yourself, but will have little effect on ocean plastic. The news agency cites a recent survey  that found that at least 46 percent of the plastic in the oceans by weight comes from a single product: fishing nets. Other fishing gear makes up a good chunk of the rest. (Bloomberg suggests that all fishing gear should be marked with the name of the ship that uses it: a complicated and difficult solution that will take time to implement.)

Banning plastic straws, like taxing calorific soft drinks, is a simple response to a complex problem. Doing so enables politicians to say that they are doing something to solve a problem, whether it is plastic waste or obesity, but in reality they must know that their actions will have little impact.

So what is the solution to plastic waste—and what can the food and agriculture industry do to help? The answer is, as usual, complicated.

The BBC published this week an excellent analysis of the issues involved with plastic packaging in the food industry. They argue that although plastic is viewed as bad, “the shrink wrap used on cucumbers for instance, can more than double the length of time the vegetable can last, allowing it to be kept for up to 15 days in the fridge and cutting food waste in half.

The BBC adds,

“Much of the food we now buy in supermarkets comes tightly wrapped in sealed plastic films and protective trays. This keeps fresh meat in an oxygen-free atmosphere, helping to prevent it from spoiling. Delicate fruit and vegetables are also kept safe from bumps that can degrade them, meaning they’re more likely to be sold. Putting grapes in their own individual plastic boxes has been found to cut food waste by 75%.”

The BBC also looks at the environmental cost of replacing plastic drink bottles with glass ones. They write that “it is generally not that much more expensive to produce a glass bottle versus one made from PET – about $0.01 more, according to some analysis. 

“However, when manufacturers start transporting produce in glass bottles, costs start to rise. A 330ml plastic soft drink bottle contains around 18 grams of material while a glass bottle can weigh between 190g and 250g. Transporting drinks in the heavier containers requires 40% more energy, producing more polluting carbon dioxide as they do and increasing transport costs by up to five times per bottle.

As a result, some, including those the packaging industry, argue that in many cases plastics are actually better for the environment than the alternatives.

But what about plastic made from renewable sources? There again the answer is not a simple one.

Coca-Cola became a leader in bioplastics when two years ago they launched the PlantBottle,  partially made with Brazilian sugarcane. However just because they are made from renewable green sugarcane doesn’t mean the bottles are biodegradable or compostable. They have to be recycled, but they also have to be separated from PET in the recycling process, driving up the costs.

France is a leader in the use of biodegradable and home-compostable plastic bags in supermarkets, and in 2017 took partial steps to ban single-use plastic bags. France’s Environment Ministry estimates that before the ban 17 billion plastic bags were used in France each year. Of those, some five billion were handed out at check-outs and 12 billion were for fruit and veg. An average plastic bag takes one second to make, is used for roughly 20 minutes and takes up to 400 years to degrade naturally.

The example of France shows that real progress can be made if the political will is there, even if only by one small step at a time. Further comfort can be taken from the fact that with petrol prices rising, recycled plastic is actually cheaper than fresh, virgin plastic made from oil. A tonne of virgin PET costs around £1,000 while clear recycled PET costs just £158 per tonne.

We can all be part of the solution by drinking from a reusable bottle whenever we can, and by conscientiously recycling the PET bottles whenever we can’t. As for plastic straws, they have become a totem for the anti-plastic movement; they help to focus our attention on the issue. So don’t wimp out like I did last Saturday evening: refuse a plastic straw whenever it is offered to you.

And one last thing: please don’t take any plastic with you when you go to the beach this summer. I had enough of a panic attack already!

All images from pixabay under Creative Commons

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Commodity Conversations Weekly Press Summary

ADM and Cargill announced they had successfully launched SoyVen. The Egyptian soyoil and soybean joint venture runs a soy crushing plant which was recently expanded to double its capacity. ADM also received the regulatory greenlight for a joint venture with Russia-based Aston Foods and Food Ingredients to run a corn wet mill and sell the sweeteners and starches produced. The JV will be called AKP. In France, ADM is planning to buy animal and aquaculture feed maker Neovia for USD 1.78 billion.

Nestle has been suspended from the Roundtable on Sustainable Palm Oil (RSPO) after it failed to submit the required progress reports. As of the end of July, the company’s certificates won’t be valid anymore. This comes at a time when an activist and hedge fund investor is putting public pressure on the group, accusing it of moving too slowly and struggling to adapt to changing consumer tastes. However, via its brands Herta, Buitoni, Wagner and Maggi, Nestle has committed to improving the quality of life of chickens. A company official explained this was in response to consumer demand for a sustainable food chain with high animal welfare standards.

Meanwhile, sources say that Nestle is looking at buying a majority stake in Champion Petfoods, a Canadian premium pet food company, for an estimated USD 2 billion. The pet food industry is expected to boom, as a report showed that pet ownership in China alone doubled last year. But pet owners are increasingly switching to more premium, meat-based, pet food, and environmentalists are concerned about the increasing “pawprint” – the carbon footprint associated to pet ownership. Close to one quarter of the negative environmental impact of meat production now comes from the pet-food industry. In response, pet food makers are looking at alternatives, such as koji proteins, lab grown meat or crickets, although designing a meat-free diet for dogs, and especially cats, is proving to be a difficult challenge.

The second largest yogurt maker in the US, Chobani, has ended its partnership with the TPG private equity firm and has entered a long term agreement with the Healthcare of Ontario Pension Plan. The creator of the brand said the new investor would allow it to regain more control, and simplify its balance sheet.

Olam’s Farmer Information System (OFIS) is helping bridge both ends of the supply chain – the farmer and the consumer – through technology. A cocoa farmer in Ghana said he was able to increase production and reduce pesticides use thanks to the connections and information made available through the app. On the other hand, Olam uses the app to buy directly from farmers as well to track the product from the moment it leaves the farm.

The blockchain technology is expected to bridge this gap even further and help farmers secure loans. Farmers in Russia have already been using a cryptocurrency called the kolion.

Traders are having to resort to loading Russian wheat on ships in the Sea of Azov, the shallowest seas in the world, because of backlog at Black Sea deepwater ports. The grain is then transferred to bigger ships in deeper water – a method often used for oil and gas but relatively new for grains. Last year, 20% of the countries’ grains were exported like that, up from just 3% five years ago.

A 2014 Vermont law which imposed the mandatory labelling of GMO products apparently did not have any significant impact on consumer attitudes, according to this new study. The authors argued that the intense lobbying efforts against the law by the food industry might have been an overreaction. If anything, consumers trusted the labelled products more, as it suggested that they had nothing to hide. A nation-wide labelling law, which nullified the Vermont law, was passed in 2016.

Woolworths had to backtrack on its decision to roll out early a ban on single-use plastic bags after cases of “bag rage” from customer unhappy about the policy. The chain conceded that people needed more time to adjust adding, however, that it would not tolerate any further violent acts against its staff. Four out of six Australian states have banned single-use plastic bags as of July 1.

Global warming is affecting the sugar level in wines, making it too high in France’s Bordeaux region. Another issue is that increasingly health-aware consumers are reportedly looking for lower alcohol degrees. As a wine is planted for 40 years, it is not easy to experiment with new grape varieties and producers are having to test one plot at a time.

Talking of too much sugar, the California governor approved a law which forbids any local government from levying a sugary drinks tax until 2030. This development marks a major win for Big Soda.

This summary was produced by ECRUU

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Palm oil – a complex problem

A report published last week by the International Union for the Conservation of Nature (IUCN) highlighted the way that the palm oil industry is encroaching on rainforest and endangering biodiversity.

However the IUCN also highlighted the little-reported point that alternative oil crops, such as soy, corn and rapeseed, require up to nine times as much land as palm. Palm oil provides a third of the world’s vegetable oil, from 10% of the land used for all oil crops. Switching to alternative crops could result in the destruction of wild habitat in other parts of the world, such as Brazil and Argentina.

The director general of the IUCN told The Guardian, “When you consider the disastrous impacts of palm oil on biodiversity from a global perspective, there are no simple solutions. If we ban or boycott it, other, more land-hungry oils will likely take its place.”

The IUCN report’s lead author added, “Palm oil is decimating south-east Asia’s rich diversity of species as it eats into swaths of tropical forest.” But, quoting US writer HL Mencken, he said, “For every complex problem there is an answer that is clear, simple, and wrong.”

The answer is to not to ban palm oil, but to make its production more sustainable. That is easy to say and difficult to do. Indeed, the IUCN report criticised current sustainability efforts, arguing that certified palm oil is little better than non-certified palm oil.

A spokeswoman for the Roundtable on Sustainable Palm Oil (RSPO), which certifies almost 20% of all palm oil, disagreed. She told The Guardian that, “While we acknowledge that the certification system is not perfect, it has made a real contribution against deforestation.” She added that the RSPO is currently strengthening its standards.

So here we have two of the ten factors that Hans Gosling highlighted in his recent book Factfulness: Ten reasons we’re wrong about the world—and why things are better than you think. First, things are more complicated than they seem. Second, they are not perfect, but they are getting better.

An example of that second point can be found in the slowdown of soybean expansion in the Amazon basin following a moratorium by trading and food companies  on purchases of soybeans from newly deforested land. The annual rate of deforestation for soybeans in monitored municipalities has fallen 85 percent since 2008 and has accounted for only 1.2 percent of total cutting in the Amazon region in the period.

According to Greenpeace, the moratorium shows that zero deforestation is a possible pledge, and that similar protection should be expanded to other areas facing destruction.

The problem, of course, is that we still have to feed the world’s growing population. Agricultural expansion is the single largest driver of biodiversity loss, and it makes sense on a global scale to increase yields from existing areas rather than expand into new areas. This can be done by improving seeds, breeds and processes, or by planting more efficient crops.

As the IUCN study admits, a hectare of palm oil trees produces roughly 4,000 kg of oil per year, while a hectare of soybeans produces only 475 kg. (Cynics might argue that it is this difference in yields, and hence costs, that is driving the western world’s anti-palm oil lobby, not concern over biodiversity loss.)

Looking at different crops in terms of calories, palm is one of the most efficient at 3,520 calories per square metre, just behind sugar beet at 3,652 calories per square metres, but ahead of sugarcane at 2,781 calories. So if you really needed to feed the world, you would cover the planet with those three crops.

Of course nothing is that simple. First, calories alone are not enough: the body also needs proteins, vitamins, fibre and micronutrients. (Although my kids might disagree, you cannot live on Nutella alone.) Second, those three crops aren’t suitable for all climates; they don’t grow everywhere. Third, as the Irish potato famine showed us, monoculture can be extremely risky.

However there is a fourth issue here: fairness. The IUCN estimates the total area of industrial scale palm oil plantations at 18.7m hectares, with smallholder plantations taking the total to 25m hectares. This means that smallholder farmers grow about one quarter of all palm oil. Those smallholder farmers are no different from any of us; they are simply looking to provide for their families and ensure a better future for their children. It is difficult to tell them that they can’t do that.

In his book, Hans Gosling warns against another human instinct: to always blame someone when something goes wrong. Just as polar bears have become the totem of global warming, orang utans have become the totem of all that is wrong with palm oil. But unlike polar bears, whose numbers are increasing, Borneo’s orang utan population has fallen by an estimated 150,000 in the past 16 years.

The IUCN estimates that most of that decline has been caused by hunting, rather than through habitat loss as a result of agricultural encroachment. (There is an argument that agricultural expansion is bringing humans into closer contact with wildlife, and and that it is this that has lead to an increase in hunting.)

All in all, if you were to ask your friends and neighbours why orang utans are dying out, they will blame palm oil. If the palm oil industry wants to win back the hearts and minds of the world’s consumers, they will need to work with the local population to reverse that decline in the orang utan population.

As one of the coauthors of the IUCN report said, “We need to work with people to help them understand that orang utans are not dangerous and that it’s illegal to kill them. We know this decline has been largely due to hunting, and if we can turn that around, these orang utans could, over a long period, bounce back. When you lost the habitat, it’s gone forever, but the forests are still there. If we can stop the hunting and killing, we can reverse the trend.”

The conclusion has to be that boycotting palm oil is not a solution to the problem of biodiversity loss; it may in fact displace and aggravate it. The only (horribly complex) solution is to work with bodies such as the RSPO to improve sustainability, to help smallholder families lead better lives without cutting down virgin forest, and to educate the local population not to kill protected wildlife. The solutions are as difficult as the problems are complex, but they are nonetheless urgent.

Images from Pixabay under creative commons

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Commodity Conversations Weekly Press Summary

Wilmar announced it stopped sourcing palm oil from Indonesia’s Gama. Greenpeace had earlier called on the tradehouse to break ties with the producer saying that it was clearing rainforest and violating Wilmar’s No Deforestation, No Peat, No Exploitation policy. Greenpeace had pointed out that Gama was started by members of the family which owns Wilmar. The latter said, however, that it did not have any decision making power on Gama. In Nigeria, Wilmar entered into a joint venture with palm oil plantation PZ Cusson to set up a mill and oil palm plantations. The group also launched a Pilot Out growers Scheme to help farmers grow sustainable oil palm.

A recent report by the International Union for Conservation of Nature found that, in terms of deforestation, there was little difference between the oil palm plantations there were sustainably certified and those that were not. One expert admitted that the concept was still new and therefore would take longer to make a significant impact. He argued, however, that it needed more support from consumers. The report also warned that replacing palm oil with another source of vegetable oil would not help. Palm is the most efficient oil-producing plant. Any alternative would require much more land – and therefore potential deforestation – to produce the same amount of oil.

In a bid to reduce the waste of fresh fruit and vegetables – which make up 40% of all wasted food in the US – a startup called Apeel has found a way to double the shelf life of avocados with a plant-based film that strengthens the fruit’s skin. The technology could replace the wax that producers currently use. It won’t even cost more because the shops will save by reducing waste.

After testing blockchain for a year, a group of 11 companies including Walmart and Nestle have launched the Food Trust consortium. Using the technology across their supply chain, Food Trust should help them identify issues with food and be more efficient at recalling contaminated foods. Walmart’s vice president called it the “FedEx tracking for food.”

Danone’s investment fund plans to invest in 20 to 25 food startups by 2020 with a focus on the health sector and alternatives to animal protein. The managing director explained that the new companies would help them capture the fast changing consumer tastes – something difficult to do for a group their size. The fund will also look to invest in subscription-based business models and home delivery. The announcement comes at a time when France Danone is facing issues with its Moroccan operations where it lost over half of its fresh milk market share following a consumer boycott. To change consumer perception the company said it was considering selling milk at the cost of production without making a profit.

In the US, Cargill has been facing protests from animal activists demonstrating in front of its plant in High River asking the company not to kill cattle. Similarly, butchers in France have had to ask for the government’s help against militant vegans who have attacked meat shops and caused a slump in meat sales. Food companies are also thinking about changing the terminology on packages and getting rid of words like “steak”, “fillet” and “sausage” for non-meat products even though less than 3% of the population is vegetarian.

The UK is facing a CO2 shortage which is affecting the delivery of frozen foods, the meat industry (animals are killed with carbon dioxide guns) and the supply of the fizz in carbonated drinks. Coca-Cola even had to stop one of its production lines as a result. The shortage is mainly due to seasonal factory maintenance. However, increasing natural gas prices and falling world ammonia prices have encouraged the local fertiliser industry to import ammonia, in turn affecting the output of CO2 which is a by-product of the fertiliser industry.

At a time when there is increasing pressure to curb pesticides use – with the EU recently banning neonicotinoids use and granting glyphosate a shorter renewal period – Syngenta‘s CEO warned that the world was running the risk of facing food shortages within 20 years if pesticides and GM crops were banned. He argued that agricultural technologies were essential to increasing food output from less land and to tackle climate change. However, last year the UN argued it was a myth that the world needed pesticides to be fed.

Finally, a shared-production model called Community Supported Agriculture in which local residents fund organic farmers and give inputs in food production is becoming increasingly popular in Brazil. Consumers pay a farmer on a monthly basis to produce seasonal vegetables and fruits and in the event of a crop failure, they share the costs.

This summary was produced by ECRUU

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Are commodities a zero sum game?

A close friend (and ex-trader) recently contacted me to argue that unlike services or many manufacturing industries the supply chain for commodities is a zero-sum game. The market fixes the price of the end product, so if one participant in a supply chain makes more money, someone else in the supply chain has to make less. The same applies to market share. As demand is static, or at best growing very slowly, if one producer sells more, another must sell less.

It is an interesting point. Everyone in a commodity supply chain is a price taker—they have to take whatever margin the market allows them. They only way they can make a bigger margin would be to use their market power to squeeze other supply chain participants in order that they make less. And, argues my friend, widespread communication, instant information, and all the other things that I have written about in the past, have reduced the market power of the agricultural trade houses. As a result, they now capture a smaller share of the margins in the chain.

This would probably change if the supply chain was disrupted for external reasons, such as crop failure, natural disaster, or war (whether armed or trade), but as the CEO of Cargill said a couple of weeks back, it is no longer enough to “rely on the occasional crop failure, export ban, or supply shortage to save the day.”

If we accept that a commodity supply chain is a zero sum game, there is a way of increasing your margins without taking money from your suppliers and clients: you can do it by cutting your costs. This can be done in a number of ways.

Cutting labour costs is often (usually) a company’s first response to margin pressure. Reducing headcount can do this, making the remaining employees work harder or more efficiently. Reducing salaries or, in the case of traders, bonuses is another option.

Companies can reduce costs by outsourcing specific tasks in the hope that other companies will be able to perform a function more cheaply that they can. (We saw this recently with Bunge closing their sugar trading department and letting other trade houses merchandise their production.)

Innovation, either in processes or technology, can help companies reduce labour costs and gain efficiency. Obvious examples include better communication between offices, data handling in offices, and mechanization (including robots) in manufacturing and handling. There is no reason to think that innovation will suddenly end. Indeed there is reason to think that the trend will accelerate, (for example blockchain and AI), enabling further cost reduction along the supply chain.

Farming is the one part of the agricultural supply chain that has probably benefited the most from innovation and technology. Hybrid seeds, more efficient farm machinery, improved pesticides and insecticides, as well as drone and GPS technology have all helped to reduce costs.

Economies of scale are a common source of cost reduction; building a one million tonne commodity processing plant or port loading facility will not cost twice as much as building a 500,000 tonne one. However the best way to reduce unit costs is to increase throughput; make sure that the capacity you have built is being used to its maximum.

Lastly, and this in the interest of everyone, companies can cut cost by reducing waste. The UN estimates that food waste and crop losses amount to close to one trillion dollars each year. That is a huge cost not just to the environment but also to the agricultural supply chain. Even making small inroads into that waste could significantly benefit the profitability of supply chain actors.

In a zero sum supply chain, the only way to increase your profits without picking others’ pockets is by reducing your costs. Unfortunately, what may work for an individual company (or farmer) may not work collectively.

One farmer can take advantage of innovation and technology to grow the same size crop from a smaller area, but his instinct will be to plant all his available land and produce more. To capture economies of scale a processor will build a mega-plant, and to reduce his unit costs he will look to maximize throughput. And, obviously, any success in reducing wastage will also increase available food supply.

There is therefore a tendency for cost cutting in a commodity supply chain to lead to increased supply. And increased supply usually results in lower prices. Acting alone, an individual player in the supply chain may be able to increase his margins by cutting costs. However, if everyone does it, the resulting extra production could result in a fall in price that negates the costs saved.

Looking at this in another way, economic theory tells us that the price of any particular commodity is, in the long term, determined by the marginal cost of production of that commodity’s most efficient producer. The more efficient the producer, the lower the cost.

Or looking at it from yet another angle, you have to ask, “Who has the market power?” If you are talking about Apple, it is the producer. If you talk about apples, it is the consumer. Where there is no product differentiation—and there is none in commodities—the market power lies with the consumer and not the producer.

Transforming commodities into ingredients can shift market power from consumers to producers. Some commodities, such as coffee and cocoa, are already losing their commodity status and are differentiated by origin. End-consumers are already willing to pay more for gluten-free, or lactose-free, or organic, or non-genetically modified, or locally produced food. And the big brands are willing to pay more (hopefully) for specific food varieties that fit their particular recipes.

That takes us back nicely to the beginning of this blog. Cost cutting can help restore margins for individual participants in the food supply industry, but it is not a solution for the supply-chain as a whole. The only way for the food supply chain to restore margins is by recapturing the market power that they have lost over recent decades. Crop failures or other disruptions would do that in the short term, but product differentiation is the only solution in the long term.

Image courtesy of Pixabay under creative commons

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Commodity Conversations Weekly Press Summary

Following the group’s decision to close their sugar trading desk, Bunge is in talks with various trade houses to sell all of its Brazilian sugar production this season. The VP for Bunge South America explained that, previously, 70% of its output was marketed by other tradehouses while the remaining 30% went to its own trading desk. The announcement follows news last week that Bunge will delay the initial public offering (IPO) of its Brazilian operations. Some even say that the IPO could be canceled after recent rumours that the Brazilian government was looking into subsidising fuel again, making ethanol less competitive.

Trade houses are having a difficult time with increasing regulations – MiFID II in Europe – and the trade war between US and China which could lead to defaults. An analysis by Bloomberg argues that companies like Cargill and ADM are expected to be hurt given that a major part of US export to China are crops and food products. On the other hand, a consultant argued that the disruptions would create trading opportunities. He added, however, that risks are bigger because of the huge volumes involved as trade houses have had to scale up in order to become more competitive amid thin margins. Cargill has been voicing its support to global trade in Washington DC last week, asking people to fight to protect global trade which it argues helps equality and the environment.

This week, Cargill published its first corporate responsibility report for its ocean transportation business in which it announced a commitment to reduce its CO2 emissions by 15% by 2020. It already reduced emissions by 5.7% in 2017. The company charters some 650 dry bulk and tanker vessels every year, making it one of the biggest bulk vessel operator in the world. The head of Ocean Transportation also explained that food and beverage companies were increasingly looking at the whole agricultural supply chain, and not just production at the farm level. “The biggest driver, in the end, is the consumer,” he said.

In Belgium, Cargill will invest in liquid chocolate production at its chocolate plant. The company said that demand for premium chocolate was growing fast and that consumers wanted non-GMO, organic and sugar-free products.

On the other hand, a judge in the US has allowed six plaintiffs to sue Cargill and Nestle for child labour slavery, a 6-year old case in which six cocoa workers say they were captured from Mali as children and forced to work on Ivory Coast cocoa plantations. Both Nestle and Cargill denied the case, saying they were fighting hard against slave labour in their supply chain.

The Mars company, meanwhile, won against a class action which tried to force them to warn on chocolate product labels that child slave labour may have been used in the cocoa picking process. The California court ruled that disclosure could only be forced if the quality of the product was affected.

Nestle is working with XPO Logistics on a state-of-the-art warehouse in the UK. Referred to as the “digital warehouse of the future,” the distribution centre will use advanced automation, artificial intelligence and predictive data, among other things, to be as fast and efficient in its distribution as possible. It will also have environmentally friendly features such as rainwater harvesting.

McDonald’s has committed to replacing the 1.8 million plastic straws it uses every day in the UK with the paper version. The company said customers had pushed for the change in part after programs such as the BBC’s Blue Planet II series highlighted the situation in oceans. Paper straws cost 50% more than the plastic ones but McDonald’s hopes to more than offset the additional cost through positive public perception, the company said.  

This comes at a time when the UK has been looking for other countries to export its plastic waste after China started restricting the import of waste at the beginning of the year. Environmentalists point out that the waste is instead being exported to Malaysia, Vietnam and Thailand which are among the biggest ocean polluters in the world. The investigation, which was carried out by Greenpeace, also warned that these countries too are starting to put curbs on the import of plastic waste which means that the UK will have to reduce waste “at the source.”

Finally, you probably didn’t see it coming but Coca-Cola has tied up with Korean company The Face Shop to launch its first makeup collection. The items are packaged in Coca Cola’s signature red and smell like the drink. You can buy your very own here.

This summary prepared by ECRUU

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Factfullness: Sugar and Obesity

“We find simple ideas very attractive. We enjoy the moment of insight, we enjoy feeling we really understand or know something. And it is easy to take off down the slippery slope, from one attention grabbing simple idea to a feeling that this idea beautifully explains, or is the beautiful solution for, lots of other things. The world becomes simple. All problems have a simple cause—something we must always be completely against.

Or all problems have a simple solution—something we must always be for. Everything is simple. There’s just one small issue. We completely misunderstand the world. I call this preference for single causes and single solutions the single perspective instinct.”

So wrote Hans Rosling in his brilliant book, Factfulness: Ten Reasons Why We’re Wrong About the World—And Why Things Are Better Than You Think.

Obesity is one area where we are all looking for a simple solution to a serious problem. One food product, sugar, is singled out as the cause of obesity; reducing sugar consumption, or giving it up altogether, is seen as the simple solution.

Most health scientists admit that obesity is more complex than just excessive sugar consumption. Public Health England demonstrates the complexity of the problem of obesity with this “simple” representation of its causes on its website.

Meanwhile, the US Center for Disease Control writes: “There is no single or simple solution to the obesity epidemic. It’s a complex problem and there has to be a multifaceted approach. Policy makers, state and local organizations, business and community leaders, school, childcare and healthcare professionals, and individuals must work together to create an environment that supports a healthy lifestyle.”

The sugar industry argues that sugar is a calorie like all others, and that obesity is caused by excessive calorie consumption compared to physical activity. But what does the data say about calorie consumption?

In the UK, the Department for Environment, Food and Rural Affairs (DEFRA) has carried out annual surveys of the British diet since 1974. Their data shows that there has been a significant decline in UK daily per capita calorie consumption in the last forty years, from 2,534 in 1974 to 1,990 in 2012. This represents a decrease of 21.5 per cent.

What about sugar: has consumption also fallen? The DEFRA survey showed a 16 per cent decline in the consumption of ‘total sugars’ since 1992. Meanwhile, the Institute of Economic Affairs found that in the period 2002 to 2014, sugar consumption fell 7.4 per cent. Meanwhile, research carried out in 2014 by Czarnikow (a consultancy) found that UK sugar consumption peaked at 53 kg/head in 1957, dropped to 48.5 kg by1970 and has since fallen to 35kg/head.

This chart shows the reality of the situation in the US: obesity has risen while per capita calorific sweetener consumption has fallen.

In his book Mr Rosling warns,

“Being always in favour or always against any particular idea makes you blind to information that doesn’t fit your perspective…Constantly test your favourite ideas for weaknesses. Be humble about the extent of your expertise. Be curious about new information that doesn’t fit, and information from other fields.”

In a later chapter Mr Rosling writes about the human need to attribute blame—to always find a (usually evil) culprit. He calls it “The Blame Instinct” and defines it as, “the instinct to find a clear, simple reason for why something bad has happened.” He continues,

“It seems that it comes very naturally for us to decide that when things go wrong, it must be because of some bad individual with bad intentions. We like to believe that things happen because someone wanted them to, that individuals have power and agency; otherwise, the world feels unpredictable, confusing and frightening.

“This instinct to find a guilty party derails our ability to develop a true, fact based understanding of the world; it steals our focus as we obsess about someone to blame, then blocks our learning because once we have decided who to punch in the face we stop looking for explanations elsewhere.  

“This undermines our ability to solve the problem…because we are stuck with over-simplistic finger pointing, which distracts us from the more complex truth, and prevents us from focusing our energy in the right places.

In 2016, the Journal of the American Medical Association published a peer-reviewed article that alleged that the sugar industry had subverted health science during the 1950s and 1960s. The article received wide media attention and reinforced the public’s impression of the sugar industry as “evil”, on par with the tobacco industry.

Ask your friends and neighbours what they think about sugar and they will tell you that the world is getting fatter because sugar consumption is increasing, and that this is all the fault of the evil sugar industry. It is a simple explanation for an exceeding complex issue, with someone (evil) to blame.

I will leave the last word to Hans Gosling,

“If you really want to change the world, you have to understand how it actually works and forget about punching anyone in the face.”

Sugar photos from pixabay under creative commons

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Commodity Conversations Weekly Press Summary

Forbes published its 2018 Global 2000 list, where it ranks the largest firms based on a composite score, and Anheuser-Busch, the Belgian-Brazilian brewer, took the top spot among food and beverage companies, with a global rank of 41. They overtook Nestle, now ranked as the second largest F&B firm after dropping 14 ranks to number 48, followed by Pepsico at number 102. Coca Cola was the third largest F&B firm although it dropped from number 56 in the global rank last year to 209 this year.

Pepsi said it closed its distribution centre in Guerrero, Mexico, about three months after Coca-Cola Femsa did the same. The company cited violence, extortion and unsafe environment for its employees as the reasons behind the closure. In Japan, meanwhile, Coca-Cola introduced a zero calorie lemon drink, called Coca-Cola Clear, which was developed in Japan and contains sucralose and acesulfame K as sweeteners.

A Cargill executive said during a Washington conference that global trade was being disregarded and villainized, which could plunge the world into a period of isolationism. She highlighted that Cargill generates 10% of its global revenues through NAFTA. And in case you missed it, the CEO of Cargill explains his vision on how to survive the disruptions brought about by the digital age and consumers demand for product differentiation in this in-depth Bloomberg article. He says he recognises that the era of making large profits by being the middleman between producer and consumer is over, as he outlines a plan to become an integrated food company, starting with beef and aquaculture.

The speech come as China temporarily imposed hefty deposits of 18.8%-38.4% on Brazilian chicken imports from June 9, after an investigation revealed that Brazil accounted for nearly 50% of China’s chicken meat imports in 2013/16. The announcement coincides with the US pressuring China to allow US poultry imports. In 2017, 9% of Brazil’s chicken exports went to China, according to Brazilian industry group ABPA.

French farmers plan to block the refineries and fuel depots of Total SA to protest against the company’s decision to import palm oil for its biorefinery in La Mede. The union FNSEA said the move was also directed at the government over trade agreements recently signed which permit imports from countries that do not maintain the same standards as France. The beet grower’s union CGB expressed its support.

The state-owned Gecamines from the Democratic Republic of Congo will be getting a USD 150 million settlement from Glencore, after it agreed to end proceedings which seeked to dismantle Kamoto, a joint venture between the two firms. Analysts noted this was a small price to pay and that the conversation had remained rational and commercial, while it should also remove some uncertainty in the cobalt markets where prices are hovering around historical highs.

In South Africa, Glencore and the local investor group Public Investment Corp are the lone joint bidders to purchase a 75% stake in Chevron’s assets in the region for USD 1 billion. The assets on sale include a refinery in Cape Town producing 100,000 bbl/day and 800 fuel stations in South Africa and Botswana.

A team at Oceana has devised an interactive mapping tool called Global Fishing Watch, in partnership with Google and SkyTruth, to catch illegal fishing operations. The tool uses satellite data and monitors over 70,000 fishing vessels via an Automatic Identification System installed in most large vessels. Anyone can now help monitor the activities of commercial fishing vessels in real-time.

The Dutch laser technology firm Eosta thinks it has found a solution to avoid plastic packaging for  organic food products: a laser mark imprinted directly on fruits and vegetables which has no impact on taste, look or durability. However, it can only be done on products with hard shells.

And do you remember the discredited 2013 scientific paper which argued that a Mediterranean diet high in fruits vegetables, nuts and olive oil, significantly reduced the risk of heart diseases? The authors of the paper, originally published in the New England Journal of Medicine, decided to retract the article and re-analyse their data. The core criticism against the paper concerned the lack of randomness in the trials, and the authors re-adjusted the data for 1,044 people, out of the 7,447 participants. After a year, they submitted their paper again, but with the same result: the Mediterranean diet is good for the heart. Nonetheless, many experts maintained their scepticism and highlighted how difficult it is to accurately and scientifically keep track of people’s diets.

This summary was produced by ECRUU

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Things are better than you think

In his book “Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think”, Hans Rosling argues that although the world is far from perfect, real progress is being made. Things are bad, but they are getting better.

He writes,

“None of us has enough mental capacity to consume all the information out there. The question is, what part are we processing and how did it get selected? And what part are we ignoring?”

We all know that keeping mankind fed is one of the main causes of environmental degradation, and it is commonly accepted that the situation will only get worse as the world’s population increases.

However, although the first part of that statement is true (things are bad), genuine progress is being made in making it less so (things are getting better). That change is occurring within the supply chain, led by companies that are making a genuine impact in how your food is produced, and how it arrives on your plate.

So in case you screened out some of the good news, here are a couple of positive articles that have been published in the past week.

The first, published by Food Navigator, is entitled, “Why Mars thinks the commodities era is over”. It is an interview with Barry Parkin, the chief procurement and sustainability officer at Mars. The very fact that the head of procurement for Mars is also head of sustainability is good news in itself – and should give a clue as to where our business is heading (but more on that later).

Mars is at the forefront of change in terms of sustainable procurement and has mapped the origin of 23 different raw materials used in their products. The company buys either directly or indirectly from around one million farmers, half of which are smallholders. Parkin tells Food Navigator,

“We are in a transparency race. As a company we had better find out where our materials are coming from, and under what social and environmental conditions they are being produced. We need to get working on fixing it before somebody else tells us what is going on. I want to be on the front foot in this race. I want to win this race.”

Palm oil is one of the hottest issues in food production at the moment with a wide supply base. Mars buys only 0.2% of the world’s palm oil supply but is connected to “half” the palm oil mills in the world, more than 1,500 mills. The company has realized that they cannot “be on top of all the conditions in all those mills, each of which is probably connected to 20 plantations” and realizes that it needs to simplify its supply chain if it wants to really know what is going on.

Wilmar International Limited, the world’s biggest processor and merchandiser of palm oil, cannot simplify its supply chain, but it is in a fairly unique position (because of its market share) to influence the way palm is grown and harvested. The company aims to “to meet demand for certified sustainable palm oil by ensuring all suppliers become sustainable”. To further this goal the company has developed an online reporting tool to assess its suppliers in Malaysia, and plans to extend it to Indonesia and Latin America.

The company’s focus on sustainability is paying off not only in terms of brand protection, it is also lowering their cost of borrowing. Last week Singapore’s OCBC Bank announced that the interest rate on their existing US$200 million (S$267 million) revolving credit facility to Wilmar International will now be pegged to Wilmar’s sustainability performance.

But how will this affect the traditional agricultural trading houses? Better for some people may be worse for others. Barry Parkin warns

“You can no longer buy at arm’s length from unknown suppliers. You can no longer buy on price.”

 He adds,

“This is the end of the commodities era. Commodities were all about buying materials of unknown origin, on short-term contracts, with price being the only differentiator. What we now know is there are big differences in terms of the social and environmental impacts of what you source. It is no longer acceptable not to know where your materials are from. There are going to be very different sourcing models in the future.”

Bloomberg last week published an excellent “long read” on Cargill, and how the company is adapting to both technology and changing consumer demands. According to Bloomberg, Cargill Chief Executive Officer David MacLennan is transforming Cargill into “less of a trading operation and more of an integrated food company betting on growing global demand for proteins.”

Bloomberg continues,

“MacLennan, who became CEO in 2013, says he decided three years ago that the company could no longer rely on the occasional crop failure, export ban, or supply shortage to save the day. “I thought, Boy, if we wait for something to change without disrupting ourselves, we’ll be in trouble,” he says. “What’s that old adage? You put a frog in a pot of water and slowly turn up the heat, and the frog doesn’t notice it’s been boiled. I didn’t want to be the frog in the boiling water.”

No one wants to be the frog in boiling water, but the real question is “How do you get out of the pot once you are in it?” There is no clear answer to that question, but as Mr MacLennan realized, the most important first step is to realize that you are in hot water in the first place.

The second is to do what Wilmar is doing: map your supply chain and work to make sure that all your suppliers are sustainable. If all food were produced in a sustainable way the “tradeability versus traceability” dichotomy would go away.

So we know where we have to go. Let’s get going!

All photos sourced under creative commons from Pixabay