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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

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Commodity Conversations Weekly Press Summary

Cargill has launched the initial phase of its new grain terminal in Ukraine’s Yuzhny port, in partnership with local company MV Cargo. The terminal, which is one of the biggest investments the country has seen in a while, should be handling 1 million mt of grains by this autumn. Techagro also announced a plan to build three grain terminals at the same port that would handle 4.5 million mt by 2021.

In Argentina, Cargill hiked its stake in Glucovil Argentina to 70% by buying 40% of Ledesma’s holdings. The family now holds a 30% stake which Cargill can buy until 2023.

Bunge announced it opened a new wheat mill in Mexico. Located near the port, from where the wheat is imported, the mill will process and re-export the wheat to the rest of Latin America. In Brazil, meanwhile, Bunge announced it had completed the sale of its 49.9% share in the algae business SB Renewable Oils to joint venture partner Corbion.

Wilmar is planning to release the Indonesian version of an online system designed to help its palm oil suppliers become more sustainable. It already launched one in Malaysia ahead of the Malaysian Sustainable Palm Oil national certification becoming compulsory next year. The questionnaire, which results in a score, will give Wilmar an idea of which areas need to be addressed and develop further training or workshops accordingly. The company has also designed a similar system for Latin America.

Danone’s dairy arm, Centrale Danone, is facing losses in Morocco after a boycott from consumers caused its sales to fall by over 50%. To cope, the company has reduced by 30% the amount of milk it buys from farmers and has had to lay people off. The boycott, which also affected fuel stations, was started to protest high prices from foreign brands.

Coca-Cola aims to recycle all of its packaging by 2030. In Zimbabwe, the company is now collecting over 15% of the PET produced, up from just over 7% in 2017. Similarly, in Uganda it invested in Plastics Recycling Initiative which recycles 14mt of plastic every day while providing an income for plastic collectors.

A report from the UN showed that some 50 countries are actively working to fight plastic pollution. Additional taxes and outright bans have been, in some cases, effective, such as in Eritrea, Morocco, China and Ireland but have failed in other areas mainly because of the lack of enforcement. The head of the UN environment argued that plastic in itself was not bad, the problem was what we did with it. As such, the report suggested businesses and plastic producers needed to incentivise recycling more.

In a bid to capture more of the value chain and to control prices, Ivory Coast and Ghana are planning to work together on cocoa production and marketing. Both countries, which represent two-thirds of the global cocoa production but where very little processing happens, want to build warehouses, coordinate production and encourage local consumption. Many analysts are sceptical this will work, however, arguing that previous attempts to coordinate efforts have failed.

Ghana did send a delegation to China to try to convince consumers of the benefits of cocoa and look for a market for its premium cocoa beans, semi-finished and finished cocoa products.

Meanwhile, chocolate maker Barry Callebaut has partnered with growers in Ghana and Ivory Coast to replant trees infected with the swollen-shoot virus disease as part of a wider sustainable farming initiative.

Qatar has become a self-sufficient milk producer just a year after its neighbouring countries cut off diplomatic and trade ties and soon expects to start exporting. Before the blockade, the country imported all its milk from Saudi Arabia and had no dairy herd. The cows were flown in from the US and could reach 20,000 head-count by 2019.

Neighbouring Dubai, meanwhile, could soon be growing paddy in its desert on a commercial scale. A group of Chinese scientists have successfully grown rice in diluted sea-water in a test project which yielded 7,500kg/ha, over twice the world average. Ultimately, the aim would be to cover 10% of the UAE, although some question whether the region has enough fresh water to dilute into the seawater.

Oxford University and Agroscope researchers published a huge database of the environmental impact of 40 food products across the world, using data from 40,000 farms and 1,600 processors. Have a look at the impact of 9 animal and 6 vegetable products here.

This summary was produced by ECRUU

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As old as the hills

A friend recently sent me a link to one of the UK’s earliest-recorded “Commodity Conversations” – a letter sent by a certain Octavius to his brother Candidus in around AD 100. The letter is part of the Vindolanda tablets, a rich source of information about life on the northern frontier of Roman Britain. Written on fragments of thin, postcard sized wooden leaf-tablets with carbon-based ink, the tablets date to the 1st and 2nd centuries AD (roughly contemporary with Hadrian’s Wall – photo above).

The documents record official military matters as well as personal messages to and from members of the garrison of Vindolanda (photo below), their families, and their slaves. Highlights of the tablets include an invitation to a birthday party held in about 100 AD, which is perhaps the oldest surviving document written in Latin by a woman.

In his letter, Octavius uses a variety of financial idioms and a few technical terms. The letter shows entrepreneurial initiative; the sums of money and goods mentioned are significant. The two brothers are involved in the supply of goods, mainly animal hides and grains, to the military. There is no way of knowing whether Octavius is a civilian entrepreneur and merchant, or a military officer responsible for organising supplies for the Vindolanda garrison.

The letter refers to credit arrangements, evidence for the operation of a cash economy. He writes,

“I have several times written to you that I have bought about five thousand modii of ears of grain, on account of which I need cash. Unless you send me some cash, at least five hundred denarii, the result will be that I shall lose what I have laid out as a deposit, about three hundred denarii, and I shall be embarrassed. So, I ask you, send me some cash as soon as possible.”

He instructs his brother to

“See with Tertius about the 8½ denarii which he received from Fatalis. He has not credited them to my account. Know that I have completed the 170 hides and I have 119 modii of threshed bracis. Make sure that you send me cash so that I may have ears of grain on the threshing-floor. Moreover, I have already finished threshing all that I had.

He then writes about what appears to be a customer default,

A messmate of our friend Frontius has been here. He was wanting me to allocate (?) him hides and that being so, was ready to give cash. I told him I would give him the hides by 1 March. He decided that he would come on 13 January. He did not turn up nor did he take any trouble to obtain them since he had hides. If he had given the cash, I would have given him them.

As I wrote in my book, Commodity Conversations, commodity trading is much older than the Roman Empire:

In ancient Mesopotamia, around 1750 BC, the sixth Babylonian king, Hammurabi, created one of the first legal codes: the Code of Hammurabi. The code allowed for goods and assets to be sold for an agreed price for delivery at a future date. The code required contracts to be in writing and witnessed and allowed those contracts to be sold or assigned to others. This is the first recorded incidence of derivatives, in the form of forward and futures contracts, with trading carried out in the temples.

A few years back, Greg Page, at that time the executive chairman of Cargill, spoke at the FT Commodity Conference in Lausanne. He quoted Libanius, a Greek teacher of rhetoric, from his Orations III, written in the fourth century,

God did not bestow all products on all parts of the earth, but distributed his gifts over the different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so he called commerce in to being, that all men might be able to have common enjoyment of the fruits of earth, no matter where produced.

Greg continued with his own view of the commodity business,

“Trading, or exchanging goods, has long underpinned human progress, and the interdependence that comes from trading creates the real capacity to raise living standards. Trading across national boundaries is a necessity, not a luxury, if the world wants to better serve the needs of its citizens. And as we face a global population reaching nine billion by midcentury, an even greater proportion of the world’s food will need to move across oceans to feed the people. National self-sufficiency in food will not suffice. Trading has always been important and will always continue to be so.”

There is not much I can add to that!

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Commodity Conversations Weekly Press Summary

The White House announced on May 29 that it will publish a list of Chinese goods that will fall under new USD 50 billion tariffs on June 15, frustrating US farmers and Chinese trade negotiators who are struggling to keep up with the uncertainty and frequent reversals. Last week, the trade secretary claimed that the two countries had agreed to avoid imposing new tariffs. On the other hand, experts suggest that markets are now ignoring such announcements, while US grain farmers said they actually don’t expect the US to go ahead with the tariffs.

Bayer said it hopes to be able to start integrating Monsanto in two months, after the US antitrust regulators approved a plan for the USD 62.5 billion takeover. The new company would have annual sales of about EUR 20 billion, dwarfing sales of the two other competitors who were also recently engaged in mergers, namely DowDuPont who has EUR 12.4 billion in annual sales and  ChemChina-Syngenta with EUR 11 billion in sales. BASF, the fourth largest agricultural supplier, is also expected to benefit as it plans to purchase assets worth USD 9 billion Bayer agreed to sell as part of the antitrust approval.

Cargill plans to have a 100% transparent and sustainable palm oil supply chain by 2020, according to the group’s supplier’s global sustainability director, who said 96% of the volume was already traceable to mills and 55% traceable to plantations. The company will be using a satellite mapping tool this year to identify and improve issues in the supply chain. The director said they are using lessons learnt from the soy and cocoa supply chain.

India’s Adani Group is likely to take over Shree Renuka Sugar‘s sugar segment from Wilmar Sugar. A board member of Renuka Sugar and a senior executive of Adani group said Adani Wilmar may be interested in adding sugar to its product mix and to leverage the latter’s distribution network. Wilmar International will also launch an open offer for a 25.14% stake from June 4-15 to help its arm Wilmar Sugar increase its stake in Renuka Sugar from the current 39%. Separately, Adani Wilmar reportedly increased its offer to acquire the bankrupt edible oil refiner Ruchi Soya group.

Nestle is downsizing its workforce in Switzerland by 5% and relocating some positions to Spain and Portugal in a bid to reduce costs, in part because of the strength of the Swiss Franc. It will also close its headquarters in Kenya. The CEO said the group will spend USD 706 million in restructuring this year. The Research Centre and the Institute of Health Sciences will be merged into a single entity to speed up the development of new products. Nestle wants to accelerate research efforts amid growing competition from smaller rivals and increasing preference for organic, vegan and gluten-free products.

In Spain, the company launched its first range of organic products which should grow to represent 10-15% of the turnover within 5 years. The regional head said this was in answer to consumer demand and that “Nestle has decided to bet heavily on organic products.” Meanwhile, in China, Nestle has sold its 95% stake in a raw milk powder factory.

And Pepsi bought Bare Foods Co, the maker of healthy chips made from beet or baked apples, to further expand its health-conscious food offering.

French MPs voted down a proposal to ban the use of glyphosate, although a presidential spokesperson clarified that the government was still committed to phasing out the use of the herbicide by 2021. In another twist, the Belgian government said recent scientific research on glyphosate did not conclusively show any health risks.

An investigation by The Guardian and the Bureau of Investigative Journalism found an increasing number of industrial-scale beef fattening units in the UK – an area which is overall unregulated and unacknowledged – causing concern that the country’s agriculture is developing towards the type of industrial-scale farming common in the US. The environment secretary said they would fight against this US-type of farming but producers argue that it’s the only way to be cost competitive.

Organisations in the UK are working hard to redistribute food that would otherwise be thrown away. In 2017, the food bank Trussell Trust distributed 1.3 million parcels of food, up 13% from the previous year. Similarly, Charity FareShare gives food to some 750,000 people every week, an increase of 60% on year. Demand from food charities is increasing with an estimated 1 in 8 people experiencing hunger in the country.

In the first research of its kind, a study found that rice could have as much as 10% less protein, 5% less zinc and 30% less vitamin by the end of the century due to the increasing levels of carbon dioxide in the air. Rice represents half the calorie intake of around 2 billion people, which means the nutrient loss would have a significant impact on health.

This summary was produced by ECRUU

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One Belt One Road

I participated last Sunday in the Vogalonga in Venice. The 30km race was restricted to human-powered boats, of which there were about 3,900, with around 8,000 rowers and paddlers. It was quite a spectacle!

As we were rowing through the canal in Murano we stopped at a (random) landing stage to change our crew around. The owner of the landing stage (and house) appeared with a bottle of sparkling wine and invited us into his garden for lunch. We gratefully accepted, spent over an hour with him and his wife, and gave up any hope of winning the race—not that we had any hope of doing so anyway!

As I rediscovered Venice during the rest of the weekend I was reminded how oriental the city is; at times I felt that I could have been in Bukhara in Uzbekistan or Isfahan in Iran. The city’s architecture, and its immense wealth, came from the fact that it was at the end of the Silk Road.

A Chinese TV crew interviewed us as we launched our boats before the race, and I was struck by the number of Asian tourists in the town. One local told us that the city was “flooded” now not by the sea but by a wave of Chinese tourists who were “travelling the new silk road” to Venice.

China is indeed building a new silk road: they call it “One Belt, One Road”. It is really two projects: The Silk Road Economic Belt and the 21st-century Maritime Silk Road.

Costing as much as $8 trillion and affecting 65 countries, it will stretch from the edge of East Asia all the way to East Africa and Central Europe by the time of it’s estimated completion in 2049.

The Chinese government calls the initiative “a bid to enhance regional connectivity and embrace a brighter future,” while one speaker at the recent FT Commodity Conference in Lausanne described it as “the most important thing that is going on in the world that everyone is ignoring”.

The Washington Post recently criticised the initiative, suggesting that it might be a big mistake.  They wrote that the initiative “evokes romantic comparisons to the ancient Silk Road, but there is a more recent chapter of history that urges caution. More than a century and a half ago, the United States was a rising power racing westward, building transcontinental railways that delivered limited benefits and exacted a high cost from society.”

The first time I became aware of the One Belt One Road initiative was when I saw this sign a couple of years back above some road construction work in Central Asia,

This is a better map., originally from The Wall Street Journal, that shows the Maritime Belt stretching to Mombasa in Kenya and and the road/rail line to Rotterdam in Europe.

You can also find an excellent infographic here.

As we left our lunch hosts and headed back across the lagoon to Venice we were caught in an hour-long traffic jam as literally thousands of boats tried to enter the Canal Regio, the narrow but stunningly beautiful waterway that leads to the Grand Canal–and the end of our race in St Mark’s Square. As we inched our way forward through a tangle-mangle of dragon boats, rowing boats, canoes and pedalos, I couldn’t help thinking that if the Chinese had had anything to do with it they would have widened the Canal Regio years ago!

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Commodity Conversations Weekly Press Summary

Wilmar has secured a USD 1.5 billion syndicated loan facility to refinance its debt and working capital at a time when its sugar and tropical oils businesses are going through a slump. In Uganda, meanwhile, the group has managed to get the final go-ahead to secure more land to grow palm oil for its local subsidiary Bidco Uganda – a project that had been delayed for over 10 years. The government will also be allocating them land to develop a vegetable oil refinery. In Zimbabwe, Wilmar has made an offer to buy 50% of the Cotton Company of Zimbabwe (Cottco) which also has edible oils operations. Cottco hopes that Wilmar would help revive operations as the fall in cotton output has led to a drop in cotton-derived oil production.

US-based farmer-owned Central Valley Ag Cooperative announced it will buy out of its joint venture with Cargill in Progressive Ag Partners so that it can have full control of the grain storage company. Regardless, Cargill’s North America agriculture supply chain president recently said that “Cargill [now] has an even stronger emphasis on commodity trading and being the leading merchants of grain. The core of what we do is trade grain.” He explained that the company was focusing on providing farmers the best services, including an efficient and fast supply chain. An analyst explained that, in the grains industry, this meant being the fastest at loading at grain elevators when other smaller groups face queues. Looking forward, Cargill plans to continue adding value and serving farmers by using advanced technologies such as blockchain to solve issues like labeling and traceability.

Cargill, as well as Nestle Purina, will be working with the Nature Conservancy on a three-year project designed to reduce water usage in the beef supply chain. The aim is to use technology such as weather apps and sprinklers to help farmers reduce the water use when irrigating the crops that will be fed to beef. Eventually, the technology should be scalable to all US farmers.

Cargill, Richardson International and ADM are among the grain trading firms focusing on plant-based proteins (such as peas) to reap higher margins amid growing demand from China and health-conscious consumers in the US. Cargill has put money in a joint venture with PURIS which owns a Wisconsin plant that makes peas powder. It is also working on developing pea varieties with more protein as it is an ideal food that is plant-based and gluten-free.

Similarly, ADM is setting up a pea plant in North Dakota and getting farmers on board to grow yellow pea. The group said it was still working on solving issues with flavours and functionality, however, so that the protein could be used more in food processing. Ingredients company Roquette also announced last week it was starting a new production unit in France for speciality pea protein.

Unilever New Zealand has said that sustainable living products accounted for 70% of company’s revenue growth in 2017, and grew 46% faster than other product categories due to increasing consumer awareness. In India, the company just completed its second round of investment in the grocery delivery service Milkbasket. The startup has developed an “early morning, contactless, micro-delivery model akin to the prevalent newspaper and milk supply chain models.”

Brazil fined five grain trading groups, including Cargill and Bunge, for buying soybean produced in areas linked to deforestation. Farmers were also fined for growing soybeans in these areas. However, Bunge said it had checked databases which had indicated that these areas were in line with their best practices. Reports suggest that the amount of forest land being cleared illegally to grow soybean is increasing rapidly in the Matopiba region.

The European Court of Justice maintained its ban on neonicotinoid after finding that the Commission’s 2013 conclusion that these insecticides harm bees was valid. The ruling will give a leg-up to last month’s decision to limit the use of neonicotinoids to greenhouses, but Syngenta and Bayer said they would weigh future action. Similarly, Dutch sugar beet growers as well as their Belgian counterparts have urged their agriculture ministers to seek exemption from the ban. The Belgium agriculture minister argued that investors will be tempted to go to countries where there are fewer environmental restrictions.

Sales of frozen food witnessed growth for the first time in five years in 2017 driven by demand from millennials.  An analyst with Euromonitor explained growing preference for vegan foods and millennials having less time for cooking a full meal with meat have also spurred demand for frozen food. Another analyst pointed out that the record-high number of single people in the Americas was also contributing to the consumption of frozen food. The plus point is that there tends to be much less wastage than with fresh food.

Finally, illegal gold mining is displacing cocoa plantations in Ghana. Given that the country produces 20% of the world’s cocoa, this is expected to have a significant impact on the price of chocolate. See BBC’s investigation here.

This summary was produced by ECRUU