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New York conversations

The family at the next table were stocking up enough food from the hotel breakfast buffet to last them for weeks. Admittedly it was a big family, three generations of them, but there wasn’t a square inch of space on their table that wasn’t covered in food. Every time a plate was emptied, the grandmother went back to the buffet to get a refill. None of the family members was overweight, and there was no way that they were going to eat all of the food they had piled onto their table. I guessed that at least half would be thrown away, if not more.

As I finished my coffee a businessman sat down at the table on the other side of me and started to tuck into a plate piled high with fruit: melons, pineapples, huge red strawberries and grapes. I estimated that he had more than a kilo of fruit on his plate. He saw me looking at him and smiled. “I am on a diet,” he explained. “I only have fruit for breakfast now.” I thought about telling him that fruit were carbohydrates and heavy in calories but he had already got up to fetch a pint glass of apple juice.

The grandmother walked past my table again with what could only be described as a bucket of scrambled eggs. She piled some of them onto her grandchildren’s plates, but they were more interested in the chocolate brownies that she had amassed earlier. The grandmother wasn’t eating anything; she was just making sure that her grandchildren were well looked after. I realised that she was expressing her love through food—and I thought once again how complex our relationship with food really is. Food is life and love, but it is also guilt and self-depravation.

The previous day I had dropped in to meet the editorial team at New Food Economy. The online magazine had recently run a series of articles about farmer suicides in the US. Farmers borrowed heavily the last time crop prices were high, and they had invested that money in new equipment and more land. With crop prices down again, farmers are now unable to meet their interest payments; as a result, farming now has the highest suicide rate of any profession in the US.

We discussed how low food prices mean that producers can’t cover their costs while at the same time they encourage consumers to overeat and throw away a large percentage of what they buy. While high food prices attract most attention from the media, the social and environmental costs of low food prices are always underestimated.

The next day I was talking with a Bloomberg journalist about how low food prices were impacting farmers, but she wasn’t impressed. “Maybe food prices are low in the US”, she told me, “but what about the currency effect? Russian wheat producers are doing just fine, as too are Brazilian soybean farmers. ”

She made another good point about low prices. “Perhaps,” she suggested, “the improvements in seed technology and farming practices—drones and the like—have reduced production costs while at the same time made crops more resistant to poor weather, pests and disease.

“Is it possible,” she asked, “that bad weather and disease has less impact on production now than in the past? It is possible that technology has taken some of the volatility out of the agricultural markets? If it has, then crop prices could stay lower for longer than in the past—especially if the US dollar stays high.”

Technology and innovation were the main subjects of conversation when I met a friend for lunch, but this time we focused on AI—artificial intelligence—and the way that the algorithmic funds (according to him) now dominate the futures markets.

“They are so secretive,” he told me, “none of my contacts know how they work. We all try to guess how they are programmed, and how they might react to, or to create, market moves, but it is impossible. Perhaps they change their trading strategies too quickly, or perhaps they have many variants of a particular trading strategy.”

“What about market fundamentals,” I asked him, “don’t they impact the markets?”

“Yes they do,” he replied. “Supply and demand will always drive medium and long term trends. But there currently aren’t any trends in these range-bound and over-supplied markets. For the moment I am just trying to survive. I call it “death by a thousand cuts”—all these tiny short-term moves just pick away at my equity. Algorithmic funds love these markets. And to be honest, they will probably also love trending markets. Perhaps computers are just better at trading than humans.”

My final business conversation of the trip was with another old friend in the business. I told him about the pessimism that I had encountered and he laughed. “It’s just that phase in the cycle,” he reassured me. “Cycles turn and when this one does farmers and traders will be able to make money again. It will then be the consumers’ turn to complain. The last time food prices increased, everyone blamed traders and speculators; no one blamed the poor weather or the preceding period of low prices that had driven farmers off their fields.

“Give it two years,” he laughed. “Traders and producers will once again be making money—and everyone will hate us. It’s been like that since the beginning of time, so you might as well get used to it!”

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Commodity Conversations Weekly Press Summary

Cargill reported a 24% decline in net profit to USD 495 million for the Dec-Feb (Q3) quarter, mostly due to a USD 161 million adjustment cost to comply with the new US tax law. The firm said profit would have been up 1% without the tax change, while sales increased by 2% on year to USD 28 billion. The biggest growth contributor was its animal nutrition and protein segment, followed by the food ingredients unit, although it was impacted by low ethanol prices in North America and high manufacturing costs in its European sweetener and starch business.

Cargill is investing USD 20 million to double egg processing capacity at its Minnesota plant. The company explained that Americans seemed to increasingly prefer eating out for breakfast, instead of lunch or dinner as it used to be the case. The company already spent USD 900 million in its North American protein business in the last two years to meet the growing demand for animal protein which it attributed to a growing middle class.

Cargill said India  was an important growth market for the group and hopes to turn the country into an export base for products like corn. However, the company’s CEO for the Asia-Pacific region said India must first promote free trade and adopt technology such as GM seeds to meet its target of doubling the income of farmers.

Olam reported a post-tax profit of USD 551.65 million in 2017, up from USD 339.10 million in 2016. The COO attributed the increase to improved efficiency as it invested to make its supply chain more digital. The company foresees important changes in people’s eating habits, including a move towards ethical eating which requires increasing traceability. With this goal in mind, it will be implementing a Living Landscapes Policy at its farms and its network of third-party suppliers, which include around 4 million small and big farmers. The policy is designed to attend to ecological and social problems which affect its agricultural supply chain.

Louis Dreyfus announced a USD 50,000 grant to World Coffee Research to work on areas such as low yields, impediments in improving quality and impact of climate change on the commodity. An LDC official said the grant is part of its sustainability efforts to achieve positive and long-term impacts on the coffee value chain.

Meanwhile, Netafim Mercosul, a Brazilian irrigation company that allows farmers to buy their irrigation systems against some of their production, has seen an 116% increase in coffee irrigation projects in 2017. The company also saw revenues grow by 109% as more farmers, struggling to get bank financing, turn to this barter system.

ADM Arkady, ADM’s UK feed distribution arm, has entered into a long-term deal with the Peel Ports Group which will develop its Glasgow port facilities with a view to improving the handling of animal feed shipments. The managing director said the deal was aimed at combining regional feed shipments and improving supplies to the north of England and Scotland markets.

The UK’s grain trading market is likely to see consolidation soon as small and regional grain traders struggle to stay profitable amid falling margins. Several groups have already exited grain trading in the past year. A Dalmark group director argued that the entry cost was too low while high volatility and reduced crop volumes have pushed up expenses and lowered margins.

Brazil-based Marfrig Global Foods will acquire 51% stake in Kansas-based National Beef Packing Company for USD 969 million to become the world’s second-largest meat producer. The Kansas-based National Beef is the fourth largest beef processor in the US.

The UK launched its sugar tax last week. The government is apparently already considering bringing other products, such as added-sugar flavoured milk drinks under the tax to tackle obesity. Food manufacturers and bakers have voluntarily agreed to lower sugar content in cakes, biscuits and cereals by 20% in the next four years. On the other hand, Coca-Cola launched a marketing campaign for its original Coke highlighting the fact that the recipe hasn’t changed – which means the price has gone up due to the tax.  

Coca-Cola India will launch its first sugar-free drink in India to meet changing consumer tastes. An official explained that people in cities were increasingly concerned about their health, adding that the sugar-free beverage segment was growing fast. In the same vein, Nestle will spend USD 27 million on modernising its prepared foods and noodle-based soups plant in Ukraine. The modernisation plan, which would be completed by 2021, aims at reformulating recipes to reduce fat content in line with WHO’s dietary recommendations.

Nestle also announced a target to only have recyclable or reusable packaging by 2025. Some NGOs complained, however, that the announcement amounted to “greenwashing” given the lack of clear quantitative targets. The company CEO admitted that “plastic waste is one of the biggest sustainability issues the world is facing today” but that the company’s ability to deal with that problem also depended on each country’s recycling infrastructure.

Similarly, Unilever has joined hands with the world’s top PET resin maker Indorama Ventures and a Dutch start-up Ioniqa to develop a technology that transforms PET waste into new food packaging material – a technology that could revolutionise food packaging and reduce waste. The technology has cleared the pilot testing phase and will now be tested at an industrial scale.

Finally, the not-for-profit advisory firm Ceres has said that not enough food companies are committed to end deforestation. It found that less than 50% of the 469 food manufacturers that have deforestation commitments in 2018 have made official plans to improve traceability across their palm oil supply chain, and less than 20% plan to make it completely transparent – the way Nestle and Unilever have done.

This report was produced by ECRUU

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Ten Questions for the Agtrade

Agricultural commodity traders are asking themselves key questions about the future of their businesses. Here are ten that we heard recently (with tentative, perhaps controversial, answers).

1/ How can we improve profitability in the supply chain?

At present the only way is to cut costs. This can be done by reducing headcount and by introducing new technologies and processes. Increasing traded volumes and the general scale of operations can also help. However, when everyone fights for increased market share competition gets tougher and margins suffer.

2/ Why is consolidation in the sector happening so slowly?

The main players are looking to increase scale to reduce their costs and diversify their risks. However once you get to a certain size you run into issues with the competition authorities. Consolidation is happening in the middle tiers. COFCO bought both Nidera and Noble Agri, but those two acquisitions show how tough it can be to integrate a business once you have bought it. Most M&A deals destroy rather than create value—and not just in the agtrade.

3/ Where is the value in the agricultural supply chain?

In recent years the value has seeped out of the agricultural supply chain as market power has shifted from producer to trader to consumer. This has resulted in lower food prices at the expense of farm incomes and traders’ margins. If people want to eat, that pendulum will have to swing back, at least partially.

4/ Is a sustainable supply chain a less profitable one?

No. To be sustainable a supply chain has to be profitable. If it isn’t profitable then it isn’t sustainable. Traders will have to be paid for what they do or they will stop doing it.

5/ Does increased traceability mean less tradability?

Maybe. Traders need optionality to be able to respond to price signals (for example changing freight rates) in order to supply their customers at the cheapest price. If one origin can’t be swapped for another then the supply chain becomes less flexible and more costly. However technological progress should soon mean that all commodities are traceable back to where they were produced. Traceability and tradability will then become co-dependent.

 6/ Is efficiency the key to a sustainable supply chain?

Yes, along with improved traceability. Increased efficiency should result in reduced crop loss and and fewer GHG emissions. A more efficient supply chain should also raise farm incomes and help local communities reduce environmental degradation caused by agricultural expansion.

7/ Is there still a role for speculation in agricultural supply?

Speculators absorb price risk. Risk has a cost. By transferring price risk to speculators the other actors in the supply chain (producers, consumers and traders) can lower their costs. This raises farm incomes and lowers food prices. Speculators also ensure that price signals are transmitted quickly, leading to faster supply responses.

8/ How will technology impact the agtrade?

In many ways, but most significantly, blockchain and a wider use of electronic shipping documents should make the whole supply chain more efficient and lower costs.

9/ Does the agricultural commodity trade have a future?

Absolutely. The world’s demand for calories continues to increase and the only way to meet that demand in an efficient and environmentally sustainable way is through trade. Someone will have to move these huge crops around the world—and to be paid to do so. The future for the sector as a whole is bright.

10/ Which companies will win and which will lose?

The winners will be those that embrace change, responding quickly to process innovation and technology. As Charles Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”.

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Commodity Conversations Weekly Press Summary

Louis Dreyfus has finalised the acquisition of Chinese oilseed crushing business Sinarmas Natural Resources Foodstuff Technology and its plant in the port of Tianjin. The CEO said it was part of the strategy to focus on China and its growing domestic demand. 

ADM has been going through several waves of restructuring – the latest announced last month – as it tries to cope with a changing and more competitive environment. Meanwhile ADM’s office in Germany is facing a routine audit which may force the company to pay higher taxes. 

Bunge is having difficulty in selling its sugar trading unit with potential buyers finding the USD 75 million targeted value too high. Nordzucker and Wilmar have reportedly looked at the business. This lack of interest may make it harder for Bunge to sell its sugar milling segment, which could be valued at USD 1-2 billion.

Cargill will switch to a controlled-atmospheric stunning (CAS) system at its chicken processing facility in Ontario instead of electric stunning. The company explained this was part of the efforts to meet growing consumer concern for animal welfare and a more humane way of slaughtering animals, adding that the less stress the chicken experience the better the meat tastes.

Cargill is also helping McDonald’s find a way to feed chicken with insects and seaweed instead of soy, as part of the restaurant’s pledge to support forests. They found that chickens digest the insects better than vegetable protein which also makes them healthier.

The Parma Ham Consortium in Italy has denied allegations of poor animal welfare at several breeding farms after videos were made public by activists. The director of the organisation added that they were working on improving traceability and had put together guidelines with the Research Centre on Animal Production. A UK-based animal welfare organisation pointed out, however, that animal processing companies had the challenge of finding the right balance between taking care of animals but providing cheap meat.

Nestle has won the right to increase the groundwater extraction rate in Michigan from 250 gal per minute to 400 gal for its Ice Mountain Natural Spring Water plant which was recently expanded. The move angered environmentalists but the Michigan Department of Environmental Quality said it had reviewed the case carefully before granting the permit. Environmentalists argued that Nestle was able to get the water for free and only paid a USD 200 annual permit. In Brazil, meanwhile, Nestle decided to sell its water business – which includes the Sao Lourenço and Petropolis brands and three factories – to local company Grupo Edson Queiroz.

The soaring price of vanilla, which we mentioned in last week’s report, is leading to crop theft and deforestation in Madagascar – the world’s main vanilla producer. An investigation by The Guardian found that protected forest land was being cleared to plant vanilla as locals try to take advantage of the sky-high prices. The investigation also found that while vanilla prices have risen after a cyclone destroyed a big part of the crop last year, the price has also been inflated by speculators who are using vanilla sales to launder money made from logging and illegally exporting rosewood to China.

After much deliberation, a court in Los Angeles ruled that coffee sellers in California will have to put a cancer warning label on the coffee. The whole thing started after an organisation sued several coffee companies – including giant Starbuck – accusing them of not warning consumers about the presence of a chemical considered carcinogenic. Although the ruling only applies to California the label may eventually appear on a national level because it would cost too much to tailor packaging to one state only.

A report by NAFTA’s Commission for Environmental Cooperation found that food wastage in Canada is among the highest in the world. The estimated 396kg of food wasted per capita could cost as much as CAD 30 billion and create 21 million mt of greenhouse gas emissions. While a big part is lost before it reaches the consumer, people throw away around 170kg/year. The organisation called on consumers, as well as food industry stakeholders to intervene to reduce the waste.

In the UK, FareShare is asking people to sign a petition that would request the government to set up a GBP 15 million fund to help reduce waste by redistributing it to the hungry. The charity said this would help remove the burden from farmers and producers who currently have to bear the cost of moving the surplus around. An estimated 270,00mt of edible food is in surplus every year, out of which only 17,000mt is redistributed.

Report produced by ECRUU

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Innovation and the Agtrade

The agricultural commodity trade is as old as the hills and one of the earliest professions. It has experienced constant change over the centuries and that change has accelerated over recent decades. Technological change and process innovation will continue to accelerate; we as a sector must continue to evolve and embrace these changes.

What have been the major innovations so far, and how will innovation and new technology further disrupt the sector?

Here are five ways in which the sector has already been disrupted:

  1. Social media has transferred market power from producers to traders and now to consumers, giving consumers a mass voice to start or reinforce trends, blacklist and shame some brands or products and promote others.
  2. Communication has become instant and virtually free. In the past trade houses invested huge sums of money in, and prided themselves on, their private in-house communication networks. These have now become redundant.
  3. Information has become widespread and democratic. This has eroded the price differentials that previously existed between surplus and deficit areas. It has also eroded the “information edge” that traders once had regarding future price movements.
  4. Satellites have improved crop forecasting, giving us better information regarding harvests and weather problems. Bigger and cheaper computers have made weather modelling and forecasting less of a luxury and more accessible. (Unfortunately for the trade houses, this information is now also widely available at a low or even zero cost.)
  5. Algorithmic trading systems have become so good they can be better at trading than humans. This is making it harder for traders to make a profit speculating in the futures markets, and more expensive for producers and consumers to hedge their price risks.

However, not all innovation has made things harder for traders. Here are five ways in which it has been positive—and will continue to be positive.

  1. Containerisation has undoubtedly been the biggest disruptor ever in the way that commodities are moved around the world. It has reduced shipping costs (and cargo loss) and improved traceability. There is no reason why this should not continue. Technology should continue to reduce transport and distribution costs in general.
  2. The “sharing economy” should further reduce shipping costs. Instead of trade houses owning fleets of ships or trucks, they will increasingly outsource distribution and transport to others who can better maximise capacity utilisation.
  3. Artificial intelligence will continue to reduce costs. Machine learning and artificial intelligence is already aiding or replacing some more complex roles. This is the flip side of the algorithmic trading point we saw in the earlier list. We have already seen the first successful blockchain transaction (a cargo of Canadian soybeans to China) and we expect momentum in this area to build.
  4. Technology in the form of RFID chips will soon allow traders to track commodities from the moment they leave the farm or producer until they arrive at destination. Pretty soon each bag of, say, coffee, tea and sugar will have one!
  5. Food composition itself will change. It could be simple stuff like Nestle’s new sugar, which is hollow and contains less calories. It could also be major innovations that will completely change the landscape of agriculture – like a switch to lab meat.

By definition, the biggest disruptor to the agricultural commodity trade will be the one that we don’t foresee. Take road transport. Who really predicted how improvements in battery technology would lead to the growth in electric vehicles, the sharing economy to the growth of Uber, and improvements in AI to driverless cars?

The technology companies are already targeting agriculture, whether in the form of vertical farming or retail distribution systems (think of Amazon’s purchase of Whole Foods and their cashier-free stores.)

Who knows, maybe the next Elon Musk will start out as a grain trader!

 

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Commodity Conversations Weekly Press Summary

Olam has secured a three-year green loan facility of USD 500 million from a consortium of 15 lenders led by ING Bank. Olam will pay a lower interest on the credit line, which is Asia’s first green consortium loan, if it achieves targets of improvement in over 50 environmental, social and governance parameters every year. 

Nestle launched new Milkybar Wowsomes chocolate in the UK and Ireland which has 30% less sugar thanks to a new technology that reduces the sugar content without altering the sweetness level.

Talking of sweetness, in Brazil, a bill in the Senate proposes to allow cane cultivation in Amazon to produce ethanol. Green groups and UNICA, which represents the country’s cane sector, opposed the move, arguing that it would make Brazil’s ability to meet the Paris pact goals harder.  UNICA added that it would hurt the image of the sugar and ethanol industry in the global market.

The price of vanilla has skyrocketed to a high of USD 600/kg, making it more expensive than silver, after a cyclone last year hit Madagascar – which produces 80% of the world’s vanilla. Bakeries and ice cream makers the world over have had to increase their prices  or resort to using substitutes. Only 1% of vanilla extract which is used in food comes from the real plant, however, the rest is made from vanillin molecules found in coal tar, petroleum and wood.

Several NGOs have called on investors, consumers, supermarkets and the meat processing industry to put pressure on soy traders to improve the traceability of their soy supply chain. This follows the release of a new report which shows massive deforestation of the Gran Chaco region in Argentina and Paraguay, deforestation which is blamed on soybean demand. The NGOs conceded that some trade houses had implemented the Brazilian Soy Moratorium to improve sustainability but argued this was limited to the Brazilian Amazon.

Environmental groups in the EU are concerned that the common agriculture policy (CAP) which is up for renewal next year will continue to subsidise large industrial farms and practices that are leading to the decimation of wildlife. Recent studies showed that the population of farmland birds dropped by over half in the past 30 years in Europe, while the number of insects is also dropping because of pesticides.

Leading conservation BirdLife Europe, however, said that the EU was in a “state of denial” regarding the effect of farming on wildlife. There is also talk that EU subsidies for wildlife-friendly farming would be cut after the European Court of Auditors published a report saying they were ineffective.

But there are efforts which show that well managed commercial farming is not necessarily destructive. BirdLife Netherlands has been working with Dutch dairy farmers to develop products that are friendly to the birds, as well as make some changes – such as cutting the fields later in the year – to avoid affecting the wildlife.

The loss of fertile soil as a result of unsustainable farming is putting some 3.2 billion people at risk, the equivalent of 2/5th of the global population, according to a report by IPBES. The study warns that 50-700 million people could be displaced by 2050 due to pollution and climate change as land degradation increases. 

Using blockchain technology in agriculture is expected to help improve traceability within the supply chain. It could help crack down on the amount of fake organic food as well as speed up payments. The head of JPMorgan has said he regretted saying earlier that Bitcoin was a “fraud,” admitting that cryptocurrency was going to change the business. The bank is building its own blockchain solution – Quorum.

Another way of solving degrading land would be to eat more plant-based foods instead of using them to feed animals we then eat. Scientists have called this “opportunity food loss” or the cost of choosing a particular alternative over better options. Looking at the US, they found that growing plant-based food for human’s direct consumption could feed an additional 350 million people.

Over ¾ of ads in sports sponsorships promote unhealthy food in the US, according to a new study. In the UK only 1.2% of food advertising promotes vegetables. Celebrity chef Jamie Oliver is working with ad agencies to start a campaign to change how people perceive vegetables.  This has worked in the past. The Popeye cartoon, which encouraged eating spinach, reportedly pushed sales up by 30% in the 1930s.

This report was produced by ECRUU

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The FT Commodity Summit

The mood at this year’s FT Commodities Global Summit was more upbeat than in recent years. The summit was again mostly focused on the extractive industries, oil, gas and metals—all markets that appear to have bottomed. Indeed this year’s theme was “The Start of a New Cycle”. Excess production capacity has now been absorbed and prices are on the up.

The “electrification” of the economy was the main subject of discussion for the energy and metal guys, particularly the anticipated growth in electric vehicles (EVs). Electrification is expected to be marginally bearish for oil prices, but then only sometime in the distant future, and wildly bullish for cobalt and copper prices. Speaker after speaker took the stage to warn that there simply won’t be enough of either to meet the planned expansion in EV production.

The mood turned remarkably flat, however, when it was time for the panel on agriculture. The panellists worried about razor-thin, or even negative, margins on their physical trade flows and sadly listed all the reasons : the democratisation of data; the speed of information; greater transparency in supply chains; the advent of algorithmic funds; heavier regulation; increased traceability and reduced tradability; over-production; and an over-hang of infrastructure.

Panellists explained that agricultural trade houses have been responding to the collapse in their margins by cutting costs, particularly by reducing headcount and implementing new technology to improve efficiency. They have also been trying to increase traded volumes so as to spread their overhead cost burden more thinly. Unfortunately, this fight for market share has resulted in increased competition and even thinner margins, a vicious circle that can only be solved by consolidation.

With margins so thin it doesn’t take much of a problem somewhere along the supply chain to push a transaction, or a company, into a loss. As long as it doesn’t over stretch management, increased volume can diminish the impact any particular problem can have on the company’s finances. So increased scale can reduce risks as well as costs. The panel predicted that we would see more partnerships, such as the recently announced one between Cargill and ADM in Egypt.

However, if the sector is to thrive—or even survive—it has to do more than reduce costs or spread risks. As the President of Cargill’s Agricultural Supply Chain Enterprise so aptly put it, “We all have to reinvent ourselves one way or another to ensure that we create value within the supply chain.”

Sitting in the conference hall listening to the speakers from the energy and metals sectors it became apparent that they at least are still making money from the physical movement of their particular commodities. Yes, they all complained about declining margins; but at least they still have margins to complain about. Agricultural trade houses don’t have that luxury.

Most agricultural commodity traders gave up trying to make money from FOBS to C&F a long time back. Instead they moved up and down stream into elevators, silos, barges, port terminals, and distribution and packing plants. They also went into trade finance and risk management. (At one stage they even tried their hands at running hedge funds.) However, competition is now just as tough at both origin (from farmers) and destination (from local traders).

But wait a minute. World population is growing, as too is our demand for meat. Someone will have to move all that food (and animal feed) from where it is grown to where it is eaten. They will have to store those crops from when they are harvested to when they are consumed. And they will have to process that food into a form that can be eaten: wheat into flour, soybeans into meal etc. Governments won’t do it. So it will be left to the agricultural trade houses.

That at least is the theory. Agricultural trade houses add value to the supply chain by transforming crops in space, time and form. But they won’t do that unless they are compensated for doing it. One way or another, if the world wants to eat, traders will have to be compensated for the value they add, the work that they do and the risks that they take.

If the world wants to eat, agricultural traders will not only have to survive, they will have to thrive. And if all other avenues for revenue are closed, margins on physical flows will have to become positive.

The US baseball player Yogi Berra once famously said, “In theory there is no difference between theory and practice. In practice there is.”

Just because the sector as a whole will thrive, it does not mean that all participants in that sector will survive. The companies that do will be the most efficient ones in terms of cutting costs and spreading risks. This means either scale or agility. We could see the bigger players getting bigger; the smaller ones getting more agile (in searching out opportunistic margins where they can find them), and the medium slower moving firms, well, getting out.

But all this could take time.  Remember, the UK economist J M Keynes once famously warned, “The market can remain irrational longer than you can remain solvent”.

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Commodity Conversations Weekly Press Summary

At this week’s Financial Times Commodities Global Summit leaders of agricultural trade houses warned that their traditional business model is over. The head of Cargill’s agricultural supply chain said that the margins in trading grains have disappeared with the markets becoming more transparent and farmers more powerful and aware. ADM’s head of global trade agreed, saying the group was now focusing on adding value through “destination marketing” while other companies, like Cargill, work on offering more services to farmers.

ADM announced it was restructuring into four units: carbohydrate solutions, nutrition, oilseeds and origination, in a bid to separate its grain-trading segment from the other businesses. The trading will be part of the origination segment while the wheat milling and corn processing units will go under the carbohydrates solutions segment.

The CEO of Louis Dreyfus said the company was adapting to the demands of the millennial generation, a generation which, he said, drives consumption trends and which wants environmental friendly food. The organic market has a huge potential, with an annual growth expected at 14% by 2021, he added. The group is also looking to improve its supply chain as well as to focus on areas of strong demand, such as China.

Louis Dreyfus reported a net income of USD 317 million in 2017, up 4% on year mainly thanks to the sale of the metals unit, while its agriculture business’ s profit dropped 16% to USD 224 million. 

Cargill has acquired the Colombian company Pollos El Bucaneroas as a part of its plan to double its Central American poultry business. The group said it aims to invest USD 300-500 million up to 2022 to increase its market presence.

In Canada, the company announced that its pilot project on beet sustainability was a success and could be scaled up to produce higher volumes of sustainable certified beef. Cargill explained that the three-month project showed it was possible to trace sustainability across the entire supply chain, as required by the Certified Sustainable Beef Framework established by the Canadian Roundtable for Sustainable Beef (CRSB).

Separately, Cargill said it was looking to sell its three cargo ships and work only as a charterer. It owns three capsesizers in partnership with Mitsui.

Olam sold its 50% stake in the investment holding company Nauvu to Wilmar, which already owned the other 50%.

As part of its effort to produce locally, Nestle has commissioned a new Cremora (coffee creamer) line in Zimbabwe, a move which should help the country save USD 2 million in imports. The company will also continue to expand production capacity to export in regional markets.

The US State Department has launched a project to fight forced labour across the world by creating a registry for workers using blockchain technology. Coca Cola will be partnering in the venture, following increasing pressure to improve standards, especially in sugarcane producing countries.

The UK government is planning to introduce a bill this year which aims to restore the soil’s fertility levels throughout the country by 2030 – the first bill of its kind. Data suggests that the country’s soil fertility could be close to gone within the next 30-40 years because of industrial farming. The farm minister argued the focus should be on designing local solutions as large scale compliance programs don’t work.

In a recent report, the WWF warned that unless people make a conscious effort to eat more sustainably, climate change would have a drastic impact on what we will be able to eat. In 30 years, the quintessential British ‘fish & chips’ may have to use anchovies instead of cod, whose population is dropping due to warming oceans. The taste of meat may change too as traditional feed will become less available. Cutting back on meat, fish and dairy all contribute towards eating more sustainably, the WWF said.

Along the same lines, a study found that the 20% of Americans who have diets with the highest calorie intake and animal based food consumption were responsible for almost half of the country’s diet-related greenhouse emissions. If that 20% group changed their eating habits in line with the average US diet US emissions  would drop significantly – almost 10% of the reductions needed to meet the Paris accord targets.

McDonald’s franchises and suppliers are planning to cut greenhouse emissions by over a third by 2030, the first restaurant company to do so. The CEO explained that beef production was among its biggest source of greenhouse emissions but that some of its suppliers were also working on reducing their carbon footprint.

When asked by Greenpeace to list the name of their palm oil providers, a few food and beverage manufacturers failed to provide an answer. The firms, part of the Consumer Goods Forum (CGF), pledged to reach ‘no deforestation, no peat, no exploitation’ (NDPE) by 2020, but Greenpeace argued it was impossible to assess the success without the proper information.

In the UK, a farmer survey, conducted by Feeback, found that pressure from supermarkets was a major drive in farm waste. Farmers reported that they wasted about 16% of their crop because of the strict cosmetic requirements which they say have effectively normalised overproduction. The report noticed some encouraging actions, such as Tesco’s “wonky fruit and veg” isle.

Still in the UK, the government has invited suggestions on ways to reduce plastic waste, and it mentioned a GBP 0.25 (USD 0.35) tax on disposable coffee cups, as well as a landfill tax. And with Easter approaching, a survey by Which? found that packaging, on an average, accounts for 25% of the weight of Easter eggs, hitting a high of 36.4% in the worst case.

This report has been produced by ECRUU – Commodity Media Monitoring

 

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A conversation with Alex Stewart, co-founder of Abercore

Hello Alex, thank you for taking the time to talk with me today. First, can you tell me how you got into commodities?

After graduating from Durham University I delivered a thirty-foot sailing boat from the UK to New Zealand. There were three of us on board, it took about six months. When I got back to London I felt I had to do something that involved an element of travel. I was less interested in the financial markets, but I liked to understand how things get from A to B—physical things. That is what attracted me to the business.

Please tell me a little bit about Abercore. What were your motivations for starting up a new company?

My co-founders and I were all previously traders at Czarnikow. Over time we could see that the big sugar producers were changing the way they were doing business. They were increasingly concerned about transparency and traceability, not only in the sense of CSR (Corporate Social Responsibility), but also in knowing where their sugar was going, how the transaction was being executed and how they may be able to extract more value from it. We began to see similar trends coming from the consumer too.

However, although both sides increasingly wanted to interact directly, they didn’t always have the expertise or the tools to do it. Yes, a consumer can buy direct, but what exactly does that entail in terms of documents, accountancy, risk management, pricing, hedging etc., and also in terms of where you source the sugar from?

We set up Abercore in 2013 to help producers and consumers achieve their goals of executing direct business.

Where did the capital come from to start the business, and where does the finance come from to keep it going?

Our vision with Abercore was to establish a company that was predominantly focused on advisory services to producers but with a trading arm that could complement this advisory business. For example, we might be working in an advisory capacity marketing sugar for a European client, and a buyer in Africa would come to us with a specific requirement that our client couldn’t meet. In this instance the advisory work could translate into trading opportunities.

We each put our own cash into the company at the outset and as the business grows we have developed a relationship with NatWest, and they now finance our proprietary business. We have the financial ability to manage our own physical and futures transactions, although perhaps not on the scale of some of the trade houses. But then we don’t want to be a traditional trade house.

Why do you concentrate on Africa?

Africa is hugely exciting. By 2050 Africa’s population is predicted to grow by 1.3 billion people. That is the size of India. India consumes 25 million mt of sugar each year—so you are talking of consumption potentially increasing by that much. It is a huge growth area. There is so much opportunity.

People tend to group the fifty-four countries in Africa as one market, but each one has different trade agreements, different customs requirements, different everything. Our local knowledge gives us a huge edge over our competitors. 

What are the specific challenges in Africa?

Risk is the biggest challenge—risk in three forms: country, counterparty and competitor. You have to know your client, your competitor and your local market.

As far as competition is concerned, the biggest change we have seen in the last five years is the growth of the local traders. Local, rather than multinational, traders now capture a lot of the trading opportunities. But this isn’t just limited to Africa; it is being replicated throughout the world. This is a big issue for the multinational trade houses.

But then everything is becoming more local. Look at the consumer side and what Heineken is doing for example: they want to source as much as possible of their raw materials for Africa from within Africa. It makes commercial and social sense, and the social aspect is becoming increasingly important.

To what extent are your clients concerned about social and environmental sustainability?

Different people have different views as to what is sustainable. Sustainability is often about employing the local population, and caring for the local social and physical environment, making sure that your workers are well treated and that revenue is flowing back to the local farmer or cane cutter. That can be more important than buying sugar with a sustainability certificate.

The multinational food manufacturers in Africa will ask for certified product while local, second tier food manufacturers may be less concerned about the social and economic impacts of their buying decisions. These local companies are increasing their market share because they produce at a price that consumers can afford. So price is very important for them, perhaps more so than sustainability.

Agricultural traders have been suffering recently. Do you think this is cyclical or structural?

If you are a big trade house and see a big deficit coming you can take big positions on the market, on both the futures and the physicals in anticipation. In my mind this is harder to do in a surplus market. And with many of the agricultural commodity markets having been in surplus for the past few years this has negatively impacted the trade houses’ bottom lines.

On a structural level, other people are now fulfilling the trade houses’ traditional role in providing finance and liquidity, and managing logistics. Producers are now willing to manage finance, freight, insurance, even hedging—all the things that once only trade houses did.

So it comes down to what the trade houses have left. They have cash to speculate. They have relationships. They have a global vision. They have analysis. And they have the ability to move huge volumes around the world. That will remain the case. But the competition [both from local traders and producers themselves] is growing.

What is the hardest thing about being a physical trader – and the best thing?

The answer is the same for both – clients! The best thing about the business is that it is real. We are involved in the movement of commodities around the world, and we are adding real value in term of getting food to consumers.

So you like what you do?

I love it!

Thank you Alex.

Disclaimer: Jonathan Kingsman’s son Timothy works for Abercore

 

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Commodity Conversations Weekly Press Summary

Acquisition talks between ADM and Bunge have ended after over a month of negotiations as both companies could not come to an agreement. Sources say the talks were slow as the two companies were concerned about potential regulatory issues . In addition, JP Morgan had previously warned that an ADM acquisition would not necessarily be economically rational, taking into account Bunge’s 2017 revenues, the challenges faced by the sector, and ADM’s debt.

The big four ABCD companies all reported significant growth in the amount of grain they exported from Brazil in 2017, generally thanks to a recovery from the 2016 drought and a bumper crop. COFCO, in particular, was able to boost its grain exports by 327% thanks to its acquisitions of Nidera NV and Noble Agri, along with its access to China’s soy market, while ADM was able to increase exports by 140% thanks to its upgraded port terminals. A corn farmer in Mato Grosso said that the competition among the four firms was good news for farmers as it pushed up prices.

COFCO is keen to tie up with competitors in its efforts to feed China. The group’s president said that while the company still hoped to become one of the ABCDs in the long term, it conceded that it still had a lot to learn about the world markets and that it would rather partner with than compete against the other big tradehouses.

The Louis Dreyfus family hedge fund Sierentz has launched a new agricultural commodities trading firm – Sierentz Global Merchants. The group, which just hired  a senior execution expert from LDC, will focus on grain exports from the Black Sea.

Bunge announced that it will offer US farmers a premium for their corn crop during the three year period that it takes for them to achieve official organic certification, in a move the company hopes will encourage and help more farmers make the transition.

Cargill launched a website, fedbytrade.com, to highlight the importance of maintaining good trade relations and urge the US to avoid imposing protectionist measures. The company said the US imposing steel and aluminium tariffs could antagonise China and other trade partners into retaliatory tariffs on agricultural products. In any case, economists say there is little historical data to prove that higher tariffs can decrease the trade deficit. They argue the US should focus instead on reducing its fiscal deficit.

Olam has invested USD 1 billion in Nigeria ever since it set up in the country 26 years ago. A company official said the goal was to turn Nigeria into Africa’s agricultural hub. Investments include a rice mill and plantation which is on its way to become the biggest rice farm on the continent, as well as investments in poultry and animal feed, among many others.

Wilmar is teaming up with the Malaysian Palm Oil Certification Council (MPOCC) to help all farmers achieve a sustainable certification by the end of 2019, which Wilmar says will help it meet consumer demand, while helping smallholders achieve higher yields and income. More than half of all mills in the country should benefit from the project. In India, meanwhile, the company increased its shareholding in Shree Renuka Sugars to a controlling 39% from 27% previously.

Cocoa exporters in the Ivory Coast, such as Ferrero, Cargill or Olam, could be affected by a government drive to lower the production of cocoa from about 2 million mt to 1.7-1.8 million mt, in an attempt to stop a supply glut from depressing prices. The government is uprooting cocoa plantations and blocking companies like Nestle and Mars from distributing hybrid seeds.

In the UK, the sugar levy on sweet beverages has already been hailed a success, even though it will only be implemented in April. Many beverage companies have anticipated the sugar levy and fewer drinks will be taxed than initially expected. The government expects now to only raise half the money it had initially forecast. AG Barr and Britvic estimate 99% and 94% of their respective products won’t be taxed. Coca-Cola, too, is catering to low-sugar beverages demand from consumers by reformulating Fanta and Sprite in the UK. The company’s sales volume in the low- or no-calories variants account for 35%. The original Coke, on the other hand, has not been reformulated which means it will become more expensive.

Nestlé said it was the industry’s responsibility to improve public health. The head of the UK & Ireland operations said it was working very hard to reformulate its products and make them healthier. The company has already reduced sugar by 10% in its confectionery brands, removing 2.6 billion teaspoons of sugar.

Similarly, General Mills and the Kellogg Co. is working to make its supply chain more transparent. The group’s head of sustainability explained this was key to building customer trust, especially when it comes to packaged food. Its strategy focuses on investing at origin as well as working closely with partners such as ADM and Cargill to improve sustainable sourcing. It hopes to source all its US wheat sustainably by 2020, from 36% in 2016.

The EU announced that it was investigating the VAT tax waiver the UK extended to commodity derivatives transactions in spot, futures and options contracts. The UK was granted the authorisation to extend a VAT waiver on some commodity deals in 1977, but the EU is alleging that the government extended the waiver beyond the intended limit and that this is creating unfair competition for other EU exchanges.

The EU is considering a new law which would force retailers to reveal their profits as a part of efforts to bring transparency in the food chain business and provide more profits to farmers. Lawmakers said they expected strong opposition from the food sector, but insisted they were committed to passing a proposition they hope to publish in May.

The winner of 2017 Africa Food prize highlighted that climate change is posing a threat to key staple crops and food security globally as increasing temperatures have lowered yields.  He highlighted the need to develop a new system to feed the growing demand without harming the environment.

In California, the new buzz word is “regenerative agriculture” – a type of farming designed to rebuild topsoil as well as to encourage biodiversity. The Regenerative Organic Alliance is working on putting together a certification system built on the USDA’s organic certification. And a campaign has been launched in the state to support a law that proposes to ban the sale of pork veal and egg produced from caged animals. The petition has collected 200,000 signatures so far and a campaigner said he was confident they could reach the required 365,000 signatures by the May 1 deadline.

Did you know that Britons throw away 25 million slices of bread every day? The organisation Love Food Hate Waste has started a campaign suggesting people freeze bread, and toast it when they want to eat it, to significantly reduce that waste.

This news summary has been produced by ECRUU