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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

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Screening out the noise

Traders among you will know how difficult it is to identify fundamental price trends, and to separate them out from market noise. The same applies to consumer trends: how can you differentiate a genuine trend from background noise?

This past week has been a particularly noisy one in terms of consumer food trends.

Back in October 2015 the International Agency for Research on Cancer (IARC)—the cancer agency of the World Health Organization—classified processed meat as a carcinogen and red meat as a probable carcinogen. Their conclusion was based on a review of more than 800 studies. After an initial flurry of headlines, the media largely discounted the warnings, arguing that eating processed meat only raises the average lifetime risk of developing colon cancer from 5% to 6%.

However, the story is back. The Guardian this week published a long read entitled “Yes, bacon really is killing us”, arguing that the nitrates in processed meats are giving us colon cancer. A French MEP has taken up the cause and launched a campaign demanding a ban of nitrites in all meat products across Europe.

The Guardian also published an opinion piece this week entitled, “Why what we eat is crucial to the climate change question”, arguing that “our food – from what we eat to how it is grown – accounts for more carbon emissions than transport…and roughly the same as the production of electricity and heat”.

Greenpeace meanwhile has gone on a campaign against meat consumption with a report titled Less is More: Reducing Meat and Dairy for a Healthier Life and Planet. The organisation wants to reduce global meat and dairy consumption by 50 percent by the year 2050. They argue that reducing meat and dairy consumption:

  • Fights climate change: a 50 percent reduction in consumption of animal products “will lead to a 64 percent reduction in greenhouse gases relative to a 2050 world that follows current trajectories”.
  • Means less deforestation: by eating less meat — particularly beef, which requires 28 times more land to produce than dairy, pork, poultry, and eggs combined — there is less incentive to clear cut forests for grazing and growing animal feed.
  • Protects endangered species: animals and the mono-crops required to feed them destroy the habitat for local wild species, particularly for large herbivores. Since 1970, the Earth has lost half of its wildlife but tripled its livestock population.
  • Protects water sources: studies suggest “if industrialised countries moved towards a vegetarian diet, the food-related water footprint of humanity could be reduced by around 36 percent.”
  • Makes us healthier humans: Greenpeace cites studies linking consumption of animal products to cancer, obesity, diabetes, cardiovascular disease, and more.

And as if meat wasn’t in enough trouble last week, South Africa has been hit by what has been called the world’s worst listeria outbreak; so far it has killed 180 people and affected hundreds of others. The country’s health ministry says the outbreak originates from a Tiger Brands processed meat factory in the northern city of Polokwane, something that the CEO of Tiger Brands denies.

The anti-meat movement is gaining such momentum that even Donald Trump is reported to be swapping his beloved beef burgers for salads.

However, if you are thinking of doing the same and ditching meat for a vegiburger, French media (France 5) broadcast a documentary last week on soybeans and how bad they are bad both for your health and for the environment (in terms of deforestation and agricultural expansion).

Soy products apparently contain oestrogen-like compounds that your body processes much like its own oestrogen. Women who ingest high levels of soy are reported to find changes in their hormone cycles, as soy can suppress hormones associated with ovulation.

But it is not just women that can be affected; soybeans have also been accused of reducing fertility in men. Soy-consuming men were found in one study to have only 65 million sperm in their semen, compared to non-soy-eating participants who averaged 120 million sperm per sample. However, the UK’s Nation Health Service warns that the study behind this has limitations: it was small, and mainly looked at overweight or obese men who had presented to a fertility clinic.

Rather confusingly, the French documentary went on to argue that soy not only has negative effects on human health, it is also bad for animals. This time the problem had nothing to do with hormones, but with the herbicide glyhosate that is sprayed on soybeans. Some argue that the herbicide works its way along the food chain via meat and dairy products, and causes cancer in humans. The documentary tested various dairy products sold in France and found trace elements of glyhosate in all of them, even the organic ones.

If you are getting the stage where you no longer know who to believe or what to eat, New Food Economy last week followed up on an earlier opinion piece arguing that pretty much all nutrition studies are flawed. They argue that food studies tend to be small and speculative; the effects of any given food or food component tend to be small; research designs are often faulty; and researcher bias is somewhere between rife and universal.

There is also a problem with the data. Most studies are conducted by asking people what they eat—and most people lie. All this presents a problem for health professionals looking to reduce obesity and its associated costs.

This is particularly relevant as Public health officials in the UK called last week on food sellers and manufacturers to cut calories in their products by 20% by 2024. Public Health England suggests that food producers have a number of options for meeting the target, including reformulating products, promoting healthy options and reducing portion sizes.

The report notes that children are overeating: obese boys consume up to 500 excess calories a day while girls who are overweight or obese consume up to 290 excess calories a day. On average, adults were found to consume about 200 calories beyond what is necessary in a day.

All that is a lot of noise for just one week. But can we discern any trends through the noise?

  • The way food is produced and consumed has moved to centre stage in terms of public concern and media focus. This is likely to continue: anyone involved in agriculture and the agriculture supply chain will remain in the spotlight (so get used to it!)
  • The anti-meat lobby is strengthening; plant-based protein looks as if it has much further to run. But having said that we are already seeing some push back with vegetarian (particularly soy-based) diets coming under attack.
  • One trend that may be fading is the willingness to blame particular foodstuffs for obesity or other health issues. Consumers are beginning to distrust the studies; there are simply too many of them pushing in too many directions.

But what would a trader do in such a situation? He would endeavour to screen out the daily volatility and look instead at the fundamentals.

The fundamental reality is that people are eating too much and moving too little. The market is slowly making its way in that direction.

 

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Commodity Conversations Weekly Press Summary

Sources say that ADM has approached an Asia-based company to create a consortium to buy Bunge in a attempt to bypass anti-trust regulation and to stand a bigger chance against potentially competing bidders. There seem to be further signs that Bunge is preparing for a takeover. First, SEC filings show that higher level executives at Bunge received USD 3.2 million in stocks last week. Second, investment group Continental Grain has reportedly increased its stake in Bunge to over 1% to push the company to sell itself. Meanwhile, Ontario Teachers Pension Plan Board, which manages over USD 7.5 billion, also increased its stake in Bunge.  

Bunge has completed its acquisition of 70% of premium quality oil producers IOI Loders Croklaan. Bunge’s CEO said that value-added food and ingredients segment make now to 35-40% of the group’s portfolio

ADM has acquired 50% of Russia’s largest food and beverage producer Aston’s starch and sweeteners business – including two wet corn mills. This is the most recent of a string of investments and acquisitions of corn plants in the rest of the world. ADM forecast high fructose corn syrup and glucose and dextrose consumption will rise by 6% and 9.1% respectively by 2020.

Cargill and MV Cargo’s grain terminal in Yuzhne, Ukraine, is nearing completion and should be finished by the middle of the year. With a 5 million mt capacity, it will handle 10% of the country’s grain exports.

COFCO has created a “global asset management organisation” which will manage operating assets. The group has also reorganised its top executives as it pursues a policy of global growth. A company representative said COFCO now had a “solid organisational structure” that will allow them to continue to grow.

The Chinese government announced it was stepping up efforts to fight soil pollution, caused in part by fertiliser and pesticide contamination, amid increasing worries that crops are being grown in contaminated fields. As part of the plan, 6.67 million ha of land will be converted into forests. By 2020, 90% of the contaminated farmland (estimated at 3.33 million ha in a 2013 survey) should be safe to grow food again.

Soil pollution is not China’s only problem. Experts say the government’s plan towards the Camel Economy – an economy with lower water consumption – are moving much too slow. With close to 80% of the country’s water reserves in the South, the 12 provinces in the North – home to 38% of agriculture and 41% of its population – suffer from water shortage. To significantly reduce water consumption the government might have to increase the price of water and give up on plans to become self-sufficient in food, given that 62% of the water resources go into agriculture.  

Local media reports that the first part of China’s South-to-North water diversion project – which consists of 1,432 km of mainly open water canals – has already helped millions of people since its inception in 2014. Some 13% of the diverted water can be used for agriculture.

Environmental and social groups have opposed the project, but the government has already moved on to the next phase. It continues to work on its ‘air corridor‘ which would divert water by evaporating it and then controlling its journey in the air through atmospheric interference. The Tianhe Project, which means “water in the sky”  will eventually transfer 5 billion cu m of water per year.

Water shortages might be closer to home that you suspect. A quarter of the world’s 500 biggest cities are already facing water supply issues, and the top 11 cities most likely to run out of water include Sao Paulo, London, Tokyo and Miami.

Still on the subject of water, several fact-checking websites have debunked a story, first published in a Brazilian blog, that Coca-Cola and Nestle were in talks with the Brazilian government to privatise the Guarani Aquifer. The news caused someone to start an online petition against it, which was eventually removed after it became clear this was fake news.   

What is real news, on the hand, is that Coca-Cola is launching an alcoholic drink, the first time in the history of the company. The alcopop will be launched in Japan, where the “Chu-Hi” (canned drinks with alcohol) market is thriving. The alcohol content is expected to be between 3-8%, which means it will compete with the beer segment. The company said this was an experiment which would probably only stay in Japan but was also a sign that the company is exploring new opportunities amid falling fizzy drink sales.

Following the UK Labour party’s proposal to ban selling drinks with a high sugar content to under 16s, Coca-Cola announced it was changing its existing kids education program and looking into new ways to contribute to the younger community. It will scrap its Real Business Challenge designed for children as well as Coca-Cola’s factories tours.

On the other hand, Nestle is investing CAD 51.5 million (USD 39.69 million) to expand its ice-cream plant to 60 million L in Canada. The plant is not able to keep up with demand, the company said.

Unilever has launched Growing Roots in the US. Every purchase will go towards funding and supporting urban farming throughout the country. Interestingly, the initiative was started by Unilever employees.

Lego announced that it has started using sugarcane-based polyethylene supplied by Brazil’s Braskem to make some of its elements at its Danish plant. In the UK, Deliveroo said it will now encourage manufacturers to switch to sustainable plastic packaging, such as sugarcane boxes.

The UK has only 63 small scale local abattoirs left, down from 96 a decade ago. A recent report by the Sustainable Food Trust found that the bigger abattoirs are squeezing the smaller ones out and making them unprofitable, in part because of the current ill-adapted legislation. The trust suggests setting up mobile abattoirs, something which is already working in Canada and New Zealand.

Big data is working to help eradicate malnutrition. A new map has been published showing child growth over the last 15 years in 5km by 5km scale maps of African countries. While the map shows improvement in some areas, it also shows that none of the African countries will meet the United Nations goal to end childhood malnutrition by 2030. The good news, however, is that the detailing of this map will help governments target the right areas.

Finally a Los Angeles fast food chain is experimenting replacing workers with robots. Click here to see a robot flipping burgers.

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Investing in Brazil’s sugarcane sector

As the agricultural world waits for confirmation of ADM’s proposed takeover of Bunge, attention is turning to Bunge’s sugarcane business. ADM doesn’t seem to want it; nor, apparently, do other potential buyers. Brazil’s sugarcane industry was once considered the El Dorado for investment in agriculture. Here are ten reasons why it all went pear-shaped.

1/ The exchange rate moved against investors. At the start of the inward investment boom into Brazilian sugarcane in 2005, one US dollar would buy 2.36 Brazilian Reais. Investment inflows, accompanied by widespread optimism over Brazil’s economic future, pushed the Brazilian Real higher – so high in fact that by the peak of the boom in 2008 one US dollar would only buy 1.56 Brazilian Reais. Today, one US dollar will buy you 3.25 Brazilian Reais. So if you are an international, dollar based company, that converted US dollars into Brazilian Reais in 2008 at an exchange rate of, say, 1.6 Reais to the US dollar to buy a sugar mill in Brazil you would today be looking at an exchange rate loss of close to 50 per cent.

2/ The Brazilian economy stalled. We all committed an error in believing that President Lula’s good governance would continue in terms of the macro-economy and the exchange rate. As long as China continues to grow, we argued, Brazil would grow with it. China continues to grow, albeit at a slightly lower rate, but Brazil’s economy has stalled.

3/ Costs rose significantly. Whenever there is a gold rush, costs will rise: the price of a shovel can multiply many times over. Brazil experienced its own “gold rush” between 2005 and 2010 with the rapid expansion in its ethanol and sugar sector. This led to a shortage of just about everything, including qualified labour and machinery, and led to a considerable increase in production costs. A shortage of qualified labour also led to an increase in costs elsewhere. Field inputs such as fertilizers, herbicides and pesticides were not applied in an optimal way, resulting in a drop in agricultural yields.

4/ Bad weather hit production at a critical time. Although the new, or expanded mills, urgently needed cane to crush it takes time to prepare the land, to plant the cane and then to let the cane grow to maturity. A series of bad weather events slowed this expansion in the cane area and mills were forced to run at substantially reduced capacity, sharply increasing unit costs further.

5/ New cane varieties had to be developed for new areas. Agricultural (land and climatic) conditions in the new areas that were coming under cane were not the same as in the existing areas. The cane varieties that thrived in Sao Paulo State did not necessarily thrive in the new areas.

6/ Government intervention handicapped the sector. Back in 2005 a friend of mine was warning of the danger of investing in an industry where the price of half of your production (in this case the ethanol part) was effectively fixed by the government. As long as the Brazilian government set the gasoline price, the government also caps the ethanol price. At the time, however, it was inconceivable that the government could set the domestic gasoline price below both the international price of oil and the production cost of ethanol. But that is what the Brazilian government did for a prolonged period of time, severely damaging both the national oil company Petrobras and the domestic ethanol industry.

7/ Ethanol lost credibility. The vision we all had back in 2005 was that ethanol was a green renewable fuel that had a significant role to play in the battle against global warming. We imagined Brazil exporting this renewable green energy throughout the world. We did not foresee that ethanol would fall out of favour and that the media and consumers would push back against using food for fuel. Nor did we anticipate the push back against expanding sugarcane plantations into Brazil’s underused cattle-ranching areas.

8/ Oil prices crumbled as the shale oil sector grew in the US, mineral, undermining the economic rationale for alternative liquid fuel. We all want to protect the environment, but how much are we willing to pay to do so?

9/ Finance for the sector dried up as things stated to go sour—a situation aggravated by the global financial crisis of 2008. Planting and crushing cane is hugely capital intensive. With the exception of Raizen’s parent Shell, the new owners and operators of the sugar mills found it difficult to provide the finance necessary to keep going.

10/ Traders don’t make good farmers  (or do they)? Processing cane is not the same as crushing soybeans. With cane you have to get actively involved in growing the cane; with beans they just turn up at your factory gate. Traders tend to concentrate on the short term; farmers on the long term. Traders like to quickly get out of a losing position; farmers don’t sell their farm just because of one bad crop. 

However, this is a controversial issue (and will be one of the points of discussion at our June conference.)  Trading companies have learned some hard lessons in Brazil over the past ten years, and they are putting what they have learnt into practice. This is helping a turnaround in the sector; Bunge’s sugarcane business, for example, is now profitable. 

But there other reasons why now may be the time to invest in Brazil’s sugarcane sector.  Here are five (of them.

1/ Brazilian ethanol once again has government support.The Brazilian government has recently taken its foot off the neck of the domestic ethanol industry. It has allowed domestic gasoline prices to fluctuate in line with world prices and helps the competitiveness of Brazilian hydrous ethanol as an alternative domestic fuel. At the same time, the government’s ambitious RenovaBio programme sets out guidelines for future support.

2/ Food prices have fallen over the past couple of years and ethanol has largely dropped off the radar screen of public opinion. Poor weather and poor harvests were the main drivers for the increase in food prices that we saw a few years ago. The fact that corn prices are low even with 40% of the US corn crop going to ethanol takes the sting out of the food versus fuel debate.

3/ Global warming isn’t going away. Ethanol is a green renewable fuel with a much lower carbon footprint than mineral oil and as such could see a revival of interest, or a reduction of opposition, from the environmentalists. As for the farming lobby in the US, ethanol is an important alternative outlet for corn when food prices are low. Political support may once again grow within the US for ethanol.

4/ Electricity co-generation from bagasse is profitable. The country is short of electricity and returns are likely to remain high. Brazil should also have an advantage in terms of green plastics. With world oil prices low it will be hard for green plastics to compete but (for the moment at least) consumers seem willing to pay a premium for a “green” bottle. Brazil already has a couple of green plastic plants.

5/ Ethanol in Brazil currently gives millers a better return than sugar. This should result in a shift within Brazil towards making more ethanol and less sugar and may result in sugar prices bottoming. This flexibility gives Brazilian sugarcane sector gives operators valuable optionality, something that traders love! Brazil is not only the price regulator in the world sugar market. It is the lowest cost producer for the next marginal tonne of sugar that the world will need as consumption expands. If the Brazilian Real remains weak it will be difficult for other sugar producing countries to compete.

So there are some strong reasons to be optimistic. Are they strong enough for someone to make a stand and purchase Bunge’s Brazilian sugarcane business? We will soon find out.

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Commodity Conversations -Weekly Press Summary

Market talk had suggested that by taking over Bunge ADM is looking to make  a come back in the sugarcane sector in Brazil, acquiring its 21 million mt of cane crushing capacity in the country. (ADM sold its lone mill in Brazil in 2016.) Several sources have now said, however, that ADM is instead focusing on Bunge’s soybean crushing operations in Argentina. Not only is ADM the only major trade house not to have such assets there, but the plants and elevators are ideally located next to the deep port of Parana, giving it easy access to the rest of the world.

Meanwhile, ADM and Cargill will team up to manage a soybean crushing plant in Egypt, supplying beans and commercialising soymeal and oil domestically. The plant, currently under expansion, should reduce the need for Egypt to import meal.

Separately, Cargill has been working with Precision BioSciences and succeeded in cutting down the saturated fat levels in canola oil by 35% to 4.5%.

Olam reported a 159.3% higher net profit of SGD 265.1 million (USD 201.16 million) during Oct-Dec 2017, thanks in part to the sale of its sugar refining business in Indonesia. Excluding “one-time factors,” the company reported a 7.2% increase in earnings, although that was capped by a disappointing coffee crop from South and Central America.

Danone France is planning to go completely organic by 2025. It will give financial support of EUR 5 million (USD 6.1 million) to 2,300 farmers this year to help them adopt organic farming. The group plans to do this through a crowdfunding platform that will allow the general public to lend money at a rate of 2-4%. The platform will also allow farmers to ask for donations, giving in exchange products such as honey.

An Abiove economist has said it will take over 20 years for Brazil to modernise its railway system, roads and waterways and that the country’s poor logistics, especially the bad roads, are slowing the growth of agriculture exports. This could be an issue as the country is expected to export as much corn as the US by 2040, from just 25% currently. In the short term, however, investments by China will help improve the infrastructure.

In the US, several leading food companies such as B&G Foods Inc, General Mills and Tyson Foods said they are considering a price hike to offset rising transportation expenses. A host of factors like rising global crude prices, rail and road companies not expanding capacity and a scarcity of drivers have driven up transportation costs.

Meanwhile, the USDA has asked the government to create a separate immigration route for farm workers to reduce problems linked to labour shortage.

However, the need for field labour could be significantly reduced in the medium term. UK-company Hands Free Hectare has successfully harvested two crops (wheat and barley) without anyone having to go into the field.

The world is expected to consume more and more dairy products rich in fat. A food industry advisor explained that the dairy industry, along with a flurry of studies published over the last few years, have successfully convinced consumers that dairy-fat is not, after all, bad for you. A USDA report forecast this shift will continue to boost demand for butter and cream, which should support prices for full fat dairy. The price of butter rallied to EUR 6,500/mt in September, from EUR 2,350/mt six months before.

However, this is coming at a high environmental cost. The WWF is calling on the Netherlands – the world’s fifth largest exporter of dairy products in the world – to reduce it’s cow population by 40% over the next 10 years. The 1.8 million cows produce so much dung that farmers are having to dump it illegally, contaminating groundwater and air.

While the USDA noted an oversupply of skim milk powder which is often used in infant formula, Danone announced it was doubling the capacity at its New Zealand infant formula plant. The company said its main export market continues to be Australia, but it wants to capture growing demand from China.

An investigation by The Guardian and Save the Children showed that formula milk companies have been using various methods to encourage women in the poorest strata of the Philippines to choose formula milk over breastfeeding. Four companies – including Nestle – were found to be deliberately misleading mothers in hospitals and other forums.

The UK is facing a meat safety crisis. An investigation conducted by the Guardian and Bureau of Investigative Journalism found that two-thirds of audited plants broke food safety rules. The Food Safety Authority has set up a national review of meat processing plants, but there is concern that part of the problem is within the existing monitoring system.

A similar investigation in the US found government records which showed that 47 plants had breached safety standards by, for example, using meat from sick and contaminated animals. Overall, Americans are 10 times more likely to fall sick from food poisoning that people in the UK, according to the organisation Sustain. Campaigners are worried that the situation could get worse if the government accepts a proposal – currently under consideration – to increase the speed at which pigs can be slaughtered.

NGOs are putting pressure on the EU to step up its efforts to eliminate deforestation from the agricultural supply chains. This follows a report published last week which showed that the world’s trading system continue to be major contributors to deforestation – something many stakeholders had committed to work against. The report suggests a focus on palm oil and cocoa. However, sources say the EU’s action plan on deforestation in agriculture, which was due this year, is likely to be delayed.

Using data from fishing cargoes, scientists have found that industrial fishing is being carried out in over half of our planet’s oceans. Put into perspective, fishing pollutes four times more than agriculture even though it represents only 1.2% of human’s global caloric production. Over 85% of the fishing in high seas is conducted by just five countries: China, Spain, Taiwan, Japan, and South Korea. You can check out the map here.

Millenials are the biggest contributors to Australia’s weekly AUD 76.4 million food waste. A recent report found that households with the most millenials tended to waste more, which could also be the result of buying fresher food and cooking more at home.  A similar study conducted last year by Sainsbury in the UK also found that the younger generator wasted more food. It argued that lack of planning and an attitude of “living to eat” rather than “eating to live” was to blame.

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Investing in agriculture

I was invited this week to participate in a Natural Resources Forum on Investing in Agriculture at the London Stock Exchange. Topics ranged along the value chain, from investing in farmland through logistics to consumer trends.

One speaker, an expert on farmland investment, gave three warnings to potential investors:

  • All farms are local and local expertise is essential. The quality of the land can vary from one field to another, as too can microclimates in terms of flooding and frost
  • Prolonged periods of bad weather can throw off even the most conservative revenue predictions.
  • The market for farmland is illiquid; it is easier to buy than to sell.

There was an interesting discussion as to whether  farmers would be able to meet the world’s ever increasing demand for calories. Although, as one participant put it, “they aren’t making farmland anymore”, others warned against  “Malthusian” arguments that food production is limited. Agricultural yields continue to increase and the world has plenty of under-used land. Besides, with 40% of the US corn crop and 50% of the Brazilian cane crop going to ethanol production, extra calories could relatively easily be drawn back from fuel to food.

It was my task to speak about agricultural commodity merchandising and I highlighted the sector’s three structural challenges:

  • Trading margins have disappeared as markets have become transparent and information has become instant
  • The growth of algorithmic trading systems have made it more costly to hedge and harder for fundamental traders to predict future price moves
  • Agricultural merchandising companies are in danger of losing their social license to operate

I argued that at this point in the commodity cycle there is an oversupply of food, an over supply of freight and infrastructure, and an oversupply of agricultural merchandising companies. I explained that we are currently seeing consolidation all along the supply chain as some players merge and others exit.

We then discussed the way that market power has shifted along the supply chain from producers to food manufacturers (brands) to retailers to consumers. This shift presents a number of challenges in terms of brand vulnerability, but also some opportunities if you can identify a trend earlier enough.

One trend that we discussed was the way Californians are now adding butter to coffee. Who would have predicted a few years back that butter would make such a come back?

In their Investment Outlook for 2018, Credit Suisse identified ten priorities for the millennial generation. Number three on the list (after education and affordable housing) was what Credit Suisse called “sustainable consumables”. The bank defined them as, “consumables produced in a socially and environmentally responsible way, taking into consideration the entire supply chain of goods”.

Credit Suisse highlighted “Beyond animal agriculture” as a major component of this trend. It wrote,

According to the United Nations and the Food & Agriculture Organization (FAO), raising animals for food is the primary cause of species extinction, oceanic dead zones, Amazon deforestation, and antibiotic resistance. Moreover, it has a greater impact on climate change than the entire transport sector. Our modern system of animal agriculture is one of immense inefficiencies, externalities and vulnerabilities unable to sustain the predicted doubling of meat demand by 2050, according to FAO.

With such measurable risks, two parallel and disruptive technologies have emerged: plant-based food and cellular agriculture. Today, plant-based varieties of virtually all animal products such as meat, cheese, milk, eggs and fish are sold worldwide. Investment opportunities in the private sector are abundant, as business creation in the space is growing, brands are gaining importance and acquisitions by large consumer corporates are increasing.  

Credit Suisse continues,

To end all forms of malnutrition by 2030 was one of the challenges world leaders laid down when they adopted Sustainable Development Goals at the end of 2015. Nearly 800 million people worldwide remain chronically undernourished, and over 2 billion suffer from micronutrient deficiencies, also known as hidden hunger. Another 2 billion are overweight, with 600 million of these being obese. Meanwhile some 150 million children under 5 years of age are stunted, approximately 50 million children from this same age bracket are undernourished, while some 40 million children are obese. The UN initiated the Scaling Up Nutrition (SUN) movement, now counting 60 countries, bringing together governments, civil society, UN bodies, donors, business and scientists. 

Business can contribute and play a significant role in nutrition by addressing food and nutrition across the value chain, providing more affordable, accessible yet sustainable food solutions for many, and we are starting to see initiatives in this direction. Big food companies are already offering products containing important micro nutrients to help combat under-nutrition and deliver on the UN Sustainable Development Goals.

Credit Suisse listed blockchain at number six on its list of key millennial trends, and we are already glimpsing the impact that this technology could have on reducing both risks and costs in the supply chain.

Vertical farming (proximity agriculture) was at number seven on Credit Suisse’s list. The bank defines this as “redeveloping urban space to bring agriculture to cities, using techniques such as growing plants in vertically stacked layers, indoor farming or integrating agriculture into existing structure.”

Bringing this all together, it appears now that there is a clear and increasing convergence of interest between investors, consumers, social welfare and the environment. That’s what you get when you empower consumers!

These issues and others will be discussed at our Commodities Conversations event in London’s Natural History Museum on 6th June 2018. Places are limited so register here.

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Commodity Conversations Weekly Press Summary

 

Glencore Agri reported a 7% increase in earnings last year to USD 631 million (excluding the “depreciation charge”). Glencore’s CEO said this was pretty good given the market conditions and compared to struggling competitors. He added that the group continued to look for potential acquisitions – although nothing specific has been identified yet.  

The market is expecting ADM will have to issue equity if it wants to buy Bunge. Fitch Ratings argued that a debt-only deal would likely affect the company’s access to cheap credit. Moody’s on the other hand said that – at an estimated USD 16 billion – Bunge is too expensive.

Unilever announced it would make public its entire palm oil supply chain – which includes 1,400 mills and 300 direct suppliers. This is part of their effort to become more transparent, and to help the palm oil industry become more sustainable.

Palm oil producer Sime Darby said it had put its expansion plans in Liberia on hold as it waits to see whether the Roundtable on Sustainable Palm Oil (RSPO) adopts new rules on deforestation. A company official explained that greenfield expansion in Southeast Asia has become difficult as governments don’t want to be seen allowing deforestation. Producers have been looking to expand production in West Africa to feed fast growing global demand but an ambitious ruling by the RSPO could also make expansion in Africa difficult.

Olam, which received last month the Roundtable on Sustainable Palm Oil (RSPO) certification for its palm oil mill and concessions in Gabon, is planning to use 50,000ha to expand its palm oil plantations (as well as rubber). However, it is only developing on grasslands at the moment because of the uncertainty over the deforestation rules.

After reporting disappointing quarterly results last week, Kraft Heinz recognised that changing consumer tastes and a shift from processed food to more natural options are a challenge. A piece in the Wall Street Journal argues that the group’s strategy to drive profits through acquisitions and cost cutting may not be enough, and that the company needs to generate more sales. A branding expert explained that consumers seek out products that “look handmade.”

This could explain why Kraft Heinz’ meat business is losing market share, while sales of processed meats in the US dropped from USD 21.9 billion in 2015 to USD 21.3 billion last year.  In a bid to tackle the problem, one of the plants has started repackaging in a way that highlights the natural ingredients, and has launched an antibiotic-free meat. The CEO also said the group was open to acquisitions.

Kraft Heinz are not the only facing this issue. More and more investors are calling on to companies such as Amazon’s Whole Foods and Costco to respond to shifting consumer demand. A report supported by some 57 investors representing USD 2.4 trillion in investment forecast that the plant-based protein diet is expected to reach USD 5.2 billion within the next 2 years.  

Similarly, a survey conducted by Cargill in December showed that consumers want to eat meat that has been fed with natural additives and supplements, the same kind of supplements that they themselves consume. The head of the group’s premix and nutrition explained animal health, sustainability and well being were increasingly important for consumers.

As a result, meat producers want labels to become clearer. The US Cattlemen’s Association has written to the USDA to spell out the difference between cell-cultured meat, or clean meat, and traditional beef.

Nestle announced a USD 14 million investment at one of its factories in Thailand so that it can produce a higher quality coffee with less sugar. Nescafe Gold Crema, as it is called, was launched at the same time in Thailand and Western Europe. Although Thais tend to have a sweet tooth, health concerns are driving the shift to black coffee.

Rabobank expects the wine industry will see further consolidation, especially in light of the difficult year many producers are going through. Growing regions in California, France, Italy, Spain and Argentina have all seen bad weather which has, in some areas, badly affected the grapes. The price of bulk wine on the VinEx exchange is already up 17% from 6 months ago.

The wine market will also have to adjust to changing consumer concerns. A recent report forecast that the growth in wine consumption in the US is expected to slow, in part because millennials are more “frugal.”

Amazon’s Whole Foods business is helping premium food producers reach consumers. The head of natural organic food company Hain Celestial said its sales have increased significantly in the last quarter, while its costs have dropped, thanks to sales via Amazon. He explained that consumers are moving away from shops and sourcing most of their needs online. In a bid to compete, one of the US’ biggest grocery chains, Albertsons, is planning to buy Rite Aid which would widen its reach to 4,900 locations in the country.

On the other hand, Amazon was told it had to pay a penalty USD 1.2 million for  unlicensed imported pesticide in the US. Although the selling was done by third parties, the Environment Protection Agency argued the products were going through Amazon’s warehouses. The company committed to crackdown on illegal pesticides.  

Finally, NPR started a video series called “Planet Money Shorts” and the first episode tells the surprising tale of how Germany’s duty on frozen US chicken imports led to the boom of the US auto industry. Watch it here.

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Called out: civil society and agribusiness

 

Towards the end of last year I was having lunch with an old friend in the sugar business when the subject turned to NGOs – Non-Government Organisations – and NFPs – Not-For-Profits. He told me that his daughter worked for a leading international development agency as a specialist in island economies. She had under-spent her budget allocation for the year and her boss was afraid that they would lose it the following year. So he told her to spend it.

Taken aback by the short notice, all she could do was to organize a “fact-finding” mission where she and her colleagues flew out to an island in the Pacific for what was basically a vacation.

I thought of that this week when Oxfam, a leading UK charity, came under fire for alleged malpractice in at least three countries. The British right-wing press jumped on the story, arguing that the UK taxpayer money that helped fund the charity would have been better spent at home.

This media attention is unusual. NGOs (more widely known as “civil society”) are usually considered to be “untouchable”. As my friend had put it at lunch, civil society can criticize businesses and governments, but it is “politically-incorrect” to criticize civil society.

Back in 2013 Oxfam published a damning report—Sugar Rush—on land grabs and human rights abuses in the sugar sector. The report made the headlines at the time and added to prevailing anti-sugar-industry sentiment.

My sugar business friend had been particularly upset by the report. At the time I remembered that he had called it “unfair, ill informed and biased”.

I called him up, expecting him to be pleased that the tables had been turned, and that it was now Oxfam that was under the spotlight. I found him more upset than pleased. He told me that he had been a long-time donator to Oxfam, and he was angry that a small group of employees had so severely damaged the charity’s reputation. “They do great work”, he said. “They need public support to continue that work”.

I reminded him of the Sugar Rush report and his reaction to it. He brushed my comments aside, arguing that everyone needs to be “called out” when they do something wrong, and that “it is charities like Oxfam that keep businesses honest and governments on their toes. They do us a service, not a disservice.”

“So you shouldn’t be upset when Oxfam gets called out for doing something wrong,” I argued. “Someone needs to keep the charities honest,” I added. He reluctantly agreed, and then changed the subject.

After I had hung up, I thought over what he had said. Civil society does have an important—maybe essential—role in “naming and shaming” businesses and sectors that behave badly. Civil society draws bad behaviour to the attention of consumers, leading to consumer boycotts and lost revenues. Civil society acts as the local police force in the business environment, and NGOs are particularly active in the world of agriculture. No one enjoys being criticized, but criticism can and does lead to positive change.

I decided that Oxfam, as well as other charities, should respond positively and constructively to criticism, and to learn from it. And now that criticism of civil society is apparently no longer “politically incorrect”, NGOs will have to get used to it. They must follow the example of business, particularly agricultural business, and improve the way they run themselves.

But I wasn’t happy with that conclusion, so I called my friend back and reminded him again that he had called the Sugar Rush report “unfair, ill informed and biased”.

“Yes I did,” he admitted, “and looking back we should have engaged with Oxfam on it at the time. But I have moved on. I realise now that if the Sugar Rush report was ill informed it was mainly our fault. We should have done a better job at engaging with civil society and our stakeholders to explain what we do, how we do it, and the constraints under which we operate.”

“And are you doing that now?” I asked.

“Not nearly enough. We need to explain that markets are not perfect. No one is perfect, and our sector has to continue to improve what it does in terms of health, human rights and the environment.

“We know that, and we are now working in partnership with the bigger NGOs to make this change happen. Civil society is our ally in this, not our enemy. That’s why I am saddened by this week’s news stories about Oxfam. We need strong allies, not weak ones. And we need civil society to maintain their moral authority in order to promote change.”