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Commodity Conversations Weekly Press Summary

 

Costa Rica announced last week that it will lift the ban on planting robusta coffee as climate change is making it harder to produce the more fragile arabica crop. This is a general trend in the region. Central American robusta will likely displace Brazilian and Vietnamese origins into the US. But even with this switch, Olam forecast the world will not produce enough robusta in 2017/18 – for the second year in a row.

In the longer term, a study published last year forecast that arabica area would drop by 50% globally by 2050 because of rising temperatures and a switch to the cheaper robusta alternative. For premium-brand companies like Whittard of Chelsea it is a problem as robusta does not provide the same taste experience. Some producers are working on crossbreeding arabica but any genetic modification is expected to face consumer backlash.

Following the recent volatility in equities, fund money could be moving out of equities into commodity markets. Several analysts argue that inflation and higher interest rates will push traders to look at commodities that tend to be perceived as “inflation-proof.” Others are quick to point out, however, that agriculture commodities are suffering from oversupply.

After revealing disappointing Q4 results and its worst annual profits since 2009, Bunge announced it was exiting sugar trading, adding that some parties had expressed interest in buying its sugar trading business. Bunge’s CEO explained the aim was to focus on the group’s “core”, namely agribusiness, grains and oilseeds. He added that sugar margins had been unable to cover costs for a few years. In addition to selling its sugar assets, the group is also looking at selling its share in their renewable oils joint venture. 

The fundamental fund CC+ – which focused on coffee and cocoa – closed at the end of last year, joining a number of other similar funds such as Jamison Capital Partners and Astenbeck Commodities Fund II which also closed in 2017. The head of CC+, known as “Chocfinger” for his knowledge of the cocoa market, said he could not compete with computer trading, which he accused of distorting prices. Commodities broker Marex Spectron argued that fundamental analysis was now a “waste of time.”

In the US, Republican senators from grain states are trying to remove the disadvantage to private grain traders following the 20% tax rebate mooted for farmers selling their crop to farmer cooperatives. Private grain operators are seeing fewer contracts as farmers wait to see what happens, and big grain trading companies are even looking at setting up cooperatives. Ethanol producer Green Plains has already incorporated a cooperative in Kansas, and ADM is looking for alternatives in case a solution cannot be found.

Nestle acquired a majority stake in superfood producer Terrafertil. The company, based in Ecuador, operates in seven countries and fits Nestle’s aim to diversify into plant-based and healthy foods. The group is facing some issues after a consumer filed a lawsuit in the US accusing the group of using cocoa from Ivory Coast which has been produced using child and slave labour. Nestle is also hitting back at accusations that it is using more water than allowed in California’s San Bernardino National Forest.

A debate in the Dutch poultry sector is highlighting two conflicting facets of sustainable food production: environmental impact and animal welfare. The industry has been moving towards larger living spaces for chicken, along with slower growing strains, which has in turn increased the environmental footprint. Making eggs from battery-caged chicken was banned in the EU in 2012, but commentators noted these eggs actually have the lowest carbon footprint.

And in an attempt to make fish farms more environmentally friendly, companies are looking at insects to replace the fish meal they usually feed salmon. Dutch-based Protix developed an insect-based feed made from the larvae of black soldier flies, which was approved by the EU in 2017. The firm tested the feed for four years and said the fish tasted exactly the same, while the salmon, who are famously picky eaters, reportedly enjoy the insect feed.

Consumers are apparently more worried about the impact of genetically-modified (GM) crops on the environment than on their health, according to a German survey, which was trying to assess where the resistance to GM came from.

Meanwhile, a trade spat between China and the US has grown to include agricultural products. Chinese importers are reportedly looking to lower their purchases from the US, as the Chinese government is expected to retaliate against the US decision to impose a tariff on solar panels and washing machines. Chinese traders are not taking delivery of US corn, and are looking at Australia and Brazil for sorghum and soybeans, respectively, instead of the US.

While some were celebrating the opportunity to expand their export markets, the UAE environment minister told a conference on farm innovation that the global supply chain has made every country susceptible to food insecurity and is also posing a challenge to the Middle East where the rising population is putting pressure on the ability of the countries to provide food to their people.

Penn State University is looking at a novel way to address the food insecurity issue: recycling human waste to make food. Through anaerobic digestion, scientist are growing a type of microbe from methane gas that consists of 52% protein and 36% fat. The end product, dubbed microbial goo, might need to be mixed with conventional food to make it taste better, and if that doesn’t sound appetising, don’t worry, it’s designed for astronauts who might spend months travelling to Mars.

Another, perhaps more popular, method of improving food security has also been making headlines: the effort to reduce food waste. The Italian Agriculture Minister said a 2016 law, which pushes firms to donate food instead of wasting it, has so far provided food for more than 1.5 million people. A Swedish University found that only seven products accounted for 50% of the food waste costs incurred by retailers, namely bananas, apples, tomatoes, salad, sweet peppers, pears and grapes. Aldi announced this week that it will join the Champions 12.3 coalition which aims to half the retail and consumer per capita food waste levels by 2030. Nonetheless, most of the food is wasted by households, not retailers, as highlighted by the Love Food Hate Waste campaign which has been going for more than 10 years.

And if you are still hungry for more agriculture related news, we recommend the Netflix “Rotten” documentary series. Instead of focusing on what it thinks you should not eat, like most food documentaries seem to do, it investigates allegations of crime in the food industry, such as the smuggling of adulterated honey, or the trade war between the biggest US and Chinese garlic producers.

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The wisdom of mergers

In his book, “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return”, the Harvard Business School professor Mihir Desai compares company mergers with marriages. He writes that both are fraught with difficulties, and warns:

  • Due diligence is vital
  • Filling a hole in your organization is not a merger strategy
  • Racing against the clock leads to bad decision-making
  • Synergies are always overstated
  • The costs of integration are always understated
  • Asymmetric mergers are easy but of limited value, and mergers of equals are horribly difficult but potentially very rewarding
  • Serial acquirers are problematic
  • Ultimately, it’s all about culture, “doing the work”, and execution. As Thomas Edison once said, “Vision without execution is hallucination”.

This past week brought news reports that ADM’s projected acquisition of Bunge is progressing faster than expected, and that an announcement could be soon.

ADM has revenues of $62.3 billion and a market value of $23 billion; Bunge has revenues of $42.7 billion and market value of $11 billion. ADM is the most U.S.-focused of the major grain companies and a takeover of Bunge would help it grow in South America, where Bunge is the largest exporter in the agriculture market, posting revenues of 40 billion reais or almost $13 billion.

Bunge is not only a big agricultural exporter from South America; it is also a big producer in the region, most notably of sugar and ethanol. The company owns and operates eight sugarcane-crushing mills in Brazil with a combined capacity of over 20 million tonnes, making Bunge the third biggest producer after Raízen Energia, which is backed by  Cosan and Royal Dutch Shell, and Biosev, a subsidiary of Louis Dreyfus.

The FT once described the sugarcane mills as “a financial millstone for Bunge”, although the mills are now expected to report an annual operating profit of $75m .

In November 2017 Bunge announced that it was in the process of separating the finances of its sugarcane unit from the rest of the company as part of an effort to reduce its exposure to the operations, and was considering selling the unit in an IPO. An analyst at the time valued the unit at between $1 billion and $2 billion.

Also last week, soda-seller Dr Pepper Snapple Group and coffee maker Keurig Green Mountain (owned by serial acquirer Luxembourg-based JAB Holding Co) announced that they were joining forces to create a beverage company with $11 billion in annual revenue. The combined company will be called Keurig Dr Pepper, or KDP, and is targeting $600 million in synergies on an annualised basis by 2021. Keurig’s CEO said,

“Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats. The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere.”

I have quoted that statement in full because it highlights the most important market shifts in recent decades: the transfer of power from the producer to the consumer. It also highlights the importance of distribution networks, getting products in front of consumers.

Both Keurig’s acquisition of Dr Pepper and ADM’s possible acquisition of Bunge have one thing in common: a heavy sugar component. Some analysts questioned whether Keurig’s move into soda was the right one given the trend away from sugar and sugar-containing sodas. Sales of soda drinks decreased about 1.2 percent in the United States in 2016, falling for the 12th year in a row.

One analyst wrote that from Dr Pepper’s perspective,  the merger “makes a lot of sense…they needed to diversify their business line from sugary drinks, so I think that this is a really good deal.” Bulking up is a way to boost efficiency in the business at a time when soft drink sales are falling as consumers cut down on sugar. “If your truck is becoming less full because volumes are declining, you should have other beverages to fill that spot,” he added.

Just last week a survey was published that found that most Americans now believe that sugar is more harmful to health than marijuana. The Wall Street Journal/NBC News survey found people rank cigarettes, alcohol, marijuana and sugar in that order in terms of harmfulness. A surprising 21% of respondents said that sugar was the most harmful of the four.

So what are Keurig and ADM doing buying into the sugar business? Is, as one analyst suggests, Keurig just buying empty space on Dr Pepper’s fleet of delivery trucks? And does ADM really want to buy Bunge’s sugar mills, or do they have no choice in that they are being thrown in as part of a take-it-or-leave-it package deal?

Or are both companies betting that the anti-sugar trend has over-extended itself and is about to correct? Although there is little evidence in the media to that effect, a recent study found that sugar taxes do little to reduce sugar consumption, and that even if they did the resulting reduced sugar consumption would have little meaningful impact on health.

At some stage or another, people will eventually realise that sugar is not the cause of the obesity epidemic, and that cutting sugar consumption is not the silver bullet that many people expect it to be.

As such, ADM and Keurig should probably worry less about the sugar components of their deals, and more about the other potential difficulties that Professor Desai warns about in his book.

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Commodity Conversations Weekly Press Summary

Sources say that ADM and Bunge could announce a merger by the end of this week. They warned, however, that the agreement could still be derailed – especially if other parties are interested in bidding for the group. Bloomberg writes the move could be the “biggest shake-up in a generation” and many analysts forecast this is likely to be only the beginning of a “reshuffling” of the ABCDs.

Fitch Ratings argues Cargill’s lower leverage and higher cash flow put it in a strong position compared to its competitors, especially in terms of M&A. It suggests that Cargill could pick up some of the more niche and higher margins assets that Bunge might have to sell in the case of a takeover by ADM.

COFCO is looking at buying logistic facilities – including warehouses – inside Brazil’s Mato Grosso. The head of the South American operations said they want to buy directly from the farmer instead of going through other groups. COFCO exported 7 million mt of soybean from Brazil in 2017, up from 2.4 million mt the previous year, making it the third biggest exporter behind Bunge and Marubeni. Over 50% of China’s soybean imports now come from Brazil, a demand which is expected to continue growing. In January alone, Brazil’s soybean exports jumped 70% on year.

After prolonged regulatory delays, the EU has approved imports of DuPont Pioneer’s Plenish soybeans. With Monsanto’s Vistive Gold soybeans also expected to be completely commercialised this year, farmers in the US are planning to scale up the planting of these GM varieties of high oleic soybeans. These beans produce oil with lower saturated fat and trans-fats and capture a premium of USD 40-50c/bushel. A market expert forecast that high oleic soybeans will become the fourth-largest grain and oilseed crop in the US within the next 10 years.

In other trade news, the Chinese commerce ministry announced last week that it will investigate US sorghum imports under its anti-subsidy rules. Sorghum is used as a feedstock for ethanol and animal feed, and sources mentioned that producers might switch to corn to limit the risk of an unstable sorghum supply. The US is expected to export about 260 million bushels of sorghum to China in 2017/18.

The UAE’s Al Khaleej Sugar Refinery has signed a deal with the Egyptian government to build a USD 1 billion beet factory which could be fully operational by February 2021. The 77,000ha complex will eventually have the capacity to produce up to 900,000mt of sugar from locally grown beet, as well as to grow wheat and corn and refine 900,000mt of raw sugar in the off-season. The aim is to supply the deficit domestic market and to export to other African countries.

Olam is building a cocoa powder manufacturing plant near Chicago which should be operational by the middle of the year. The cocoa for the plant will be sourced from Africa, Asia and South America, although Cargill pointed out West Africa is becoming  an increasingly big supplier to the cocoa world market, mainly because farmers elsewhere are switching to other crops.

However, a representative of the Ghana Cocoa Board complained that global cocoa prices had collapsed from USD 3,100/mt to USD 1,800/mt in less than a year, and that this was hurting producers. To try and boost the domestic industry, Ghana’s Cocoa Processing Company is looking at setting up a cocoa manufacturing group in the country so that it can process the local raw cocoa beans for the domestic market.

The pace at which cocoa plantations have spread in the region has attracted the attention of environmentalists, especially in Ivory Coast where plantations are causing deforestation. Cargill was one of the global buyers which, last November, committed to sourcing zero cocoa from newly deforested land by 2030.

Following the likes of Cargill and Wilmar, and amid a consumer backlash, Nestle has decided to stop sourcing palm oil from Guatemalan producer REPSA. Nestle said the producer has failed to implement its action plan to deal with allegations that it was violating workers’ rights and hurting the environment. Nestle has also stopped buying palm oil from the IOI Group following it’s suspension from the Roundtable on Sustainable Palm Oil (RSPO).

Meanwhile, Cargill is working on reducing maritime pollution. The company has tied up with four NGOs to help improve sustainability and accountability in the shipping industry.

Mars wants to increase its scientific transparency by publishing research standards and disclosing sponsorships. Its public affairs vice-president said the goal is to avoid linking research funds to defined outcomes, and to attempt to regain consumers’ trust.

New research found that 50% of the UK’s food consumption is now “ultra-processed,” making the country the biggest processed food consumer in Europe. Germany followed closely with over 46% while France has just 14% of processed food consumption.

Finally, shoppers in the UK spent GBP 8.6 billion (USD 12.1 billion) to buy their groceries online last year, up from GBP 8.1 billion (USD 11.4 billion) the previous year. They expect their food to be delivered faster and faster. An article written by the BBC argues that “Time wars really are the new price wars.” More outlets, including Amazon, offer to deliver groceries within the same day, and in some cases within an hour. However, this is coming at a high cost, both financial and environmental, due to the additional packaging required.

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Ten challenges for agricultural commodity merchants

We all depend on the big agricultural commodity merchants for much of the food that we eat and the clothes that we wear. Merchants move vast quantities of food and fibre from producers to consumers, from surplus areas to deficit areas. Without merchants, crops would rot in the fields, farmers would go out of business, and people would go hungry.

However we cannot take it for granted that commodity merchants will be able to meet the challenges that lie ahead. The sector is under pressure from all sides and its future is far from assured. With world population expected to reach 9.7 billion in 2050, that is a major issue that needs addressing.

Some of you may argue that these pressures are temporary; that commodity merchandising is a cyclical business; and that we are just in one of the down cycles. And you will be partly right. World food stocks are at an all time record, resulting in higher storage costs, compressed margins and reduced price volatility—all bad news for merchants.

However most of the sector’s current problems are not cyclical but structural. The ten most challenging issues for agricultural commodity merchants are (probably) as follows:

  1. Both the spread and the speed of information have increased dramatically, leading to better and more quickly informed clients, reduced price differentials and lower or negative trading margins.
  2. There has been a shift of market power along the supply chain, initially from farmer to trader, then to distributor and retailer, and now to the end consumer. Social media in particular has empowered consumers at the expense of producers and traders.
  3. This shift in power has focused attention on where food comes from, and what damage it may have caused both environmentally and socially on its way.
  4. This focus on social and environmental sustainability has increased costs (e.g. certification) for producers and traders.
  5. It has also led to a shift from tradability to traceability. Being less able to trade origins reduces merchants’ flexibility and profits. It can also increase costs if products have to be kept separate. Traceability is turning many commodities into ingredients.
  6. A greater focus by consumers on their own health can result in difficult to predict—and fast moving—trends. Sugar and fruit juice are examples, as is the pushback against GMO products in the US.
  7. Empowered consumers result in increased government intervention, whether in areas of health and safety, or in trade relations. Consumer trends can quickly change direction, and governments are rarely far behind. This increases merchants’ risks and pushes up their compliance burden.
  8. Increased consumer empowerment has been accompanied by the media’s increased hostility to agricultural merchants. This media hostility has reduced merchants’ political leverage, and made it harder for them to hire talent.
  9. At the same time, advances in Artificial Intelligence mean that computers are now better than humans at trading futures markets. As a result, agricultural commodity merchants are less able to leverage the insight that they glean from merchandising physical commodities into trading futures markets.
  10. Global climate change may increasingly make both crops and trade flows less predictable, increasing the risk when investing in infrastructure such as warehouses and port terminals.

Many of the trends listed above are “good things”. Empowered consumers, supported by fast-moving and attentive governments, are leading to changes for the better in terms of environmental and social sustainability, and health.

Agricultural commodity merchants should not try to resist or reverse these trends, but embrace them. The sector knows that if it is to survive it has to adapt and evolve. But how?

One thing that the sector can—and must—do is to improve its public image. Physical commodity merchants, rather than being seen for the good that they do, are perceived as evil speculators, accused of pushing food prices higher, creating shortages and hunger.

As a sector, we have to explain to the world what we do, to show the public that we are under the same pressures and constraints—and have the same challenges—as everyone else. And we must also explain that we are not perfect, that there is still progress to be made—and that we are trying to make that progress.

The first objective of our seminar in London in June therefore will be to discuss how we can adapt and evolve to survive: hence the choice of London’s Natural History Museum as the location for the meeting.

The second objective of our seminar in London will be to show the world that agricultural commodity merchants are human beings like everyone else. We have families; we live in communities; and we care deeply about our planet and the wellbeing of its inhabitants.

Charles Darwin once wrote, “In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed”.

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Commodity Conversations Weekly Press Summary

Coffee company Keurig Green Mountain, owned by JAB Holding, has purchased soft drinks manufacturer Dr Pepper Snapple for USD 21 billion. Analysts said the move came as a surprise, given that consumers seem to be moving away from sugary drinks. The group has made USD 58 billion worth of acquisitions over the last six years.  Bloomberg suggested that one of the reasons the coffee company is so successful is because it pays its suppliers  almost one year after purchasing beans, a move that cuts out trade houses and improves cash flow.

Bunge has bought two US-based corn flour mills valued at USD 75 million from Mexican corn miller Grupo Minsa. An official said the move would boost its Food & Ingredients business and help grow the company in other regions. However, market commentators argued the strategy behind the acquisition could be linked to the recent ADM takeover bid.

In the  soybean market Brazil is taking an increasing share of the Chinese import market. Customs data showed that 57% of Chinese soybean imports came from Brazil last year, up from 35% 10 years ago while US origin dropped to 31% from 38% in the period. This is partly because US farmers prefer high-yielding varieties which have lower protein levels while Chinese buyers want protein to feed their livestock. US soybean exports to China are expected to struggle further after the Chinese government announced last week tougher sanctions for importers who don’t follow the rules on GMO crops.

Canada has been exporting more barley to China, taking market share from Australia. Australia’s barley harvest was affected by a drought this year, but more farmers could switch to growing the crop instead of wheat. While demand for Australian wheat has been affected by competition from the Black Sea, world barley prices are now on par with milling wheat prices, compared to a 10-12% discount just a year ago. China’s barley needs should continue growing fast to feed livestock, as the government is encouraging corn to be used for its ethanol.

To become more competitive on the world market, Canada is accelerating the building of a grain terminal at Port Metro Vancouver in the hope to have it opened in 2019. This is the port’s first new grain terminal in 50 years.

The Russian government, meanwhile, said it wants to develop flour production capacity to help absorb the bumper wheat crop and create value addition. The agriculture minister wants the country to continue being a significant wheat producer as well as to encourage a shift in domestic consumption towards higher quality wheat.

Cargill is looking to hire data scientists to build an artificial intelligence that can use the company’s data to boost profits. An official said they hoped machine learning would help reduce human error and make better decisions. Cargill’s decision to take a minority stake in Cainthus is another sign that advanced technology is at the centre’s of the group’s strategy. The Irish startup has developed a facial recognition technology for cows to improve farm efficiency and help the animal’s well being.

This week, apart from announcing a new potato starch production line in Denmark with its partner AKV Langholt, and unveiling its first fish feed plant in India, Cargill has also said it is investing USD 25 million in Puris Proteins, a plant-based food manufacturer and North America’s biggest producer of pea protein. Cargill said Puris will help them meet the world’s growing protein demand whilst keeping in mind shifting consumer concerns, or what it calls being ‘label-friendly’.

Separately, Cargill is also working on reducing waste. The company said it will be giving USD 1.5 million to Brazilian non-profit organisation Gastromotiva whose focus is to help the poor and marginalised while reducing food waste through things like vocational training. This is part of what has been called the Social Gastronomy Movement.  

ADM, meanwhile, opened a state-of-the-art centre in Singapore to develop new flavours and ingredients for the health-conscious Southeast Asian customers. Similarly, a bakery innovation centre was opened in Kentucky, USA, in a bid to meet growing demand for vegetable-based, non-GMO and organic options in the fats and oils arena.

With the aim of developing a more sustainable palm oil supply chain, Unilever has joined up with PT Perkebunan Nusantara (PTPN) to help Indonesian mills and farmers manufacture palm oil in line with zero deforestation norms. It will provide resources, funds, and technical assistance. Unilever also announced support for the Cerrado Manifesto which aims to stop deforestation of the Brazilian region. Efforts are paying off – a recent report by CDP and McKinsey found that Unilever was among the companies with the greenest supply chain.

In India, meanwhile, Unilever will invest USD 3 million in grocery delivery start-up Milkbasket.

It the UK, Nestle will launch a premium chocolate bar which is already present in other European countries, moving into the gourmet market and rivalling Lindt. “Premium chocolate is one of the fastest growing areas in confectionery,” the company said. Separately, Nestle Waters North America announced it was investing in its spring and sparkling water portfolio, adding ten new flavours, as well as new packaging designs.

Coca-Cola announced it would launch three new drink brands before the UK sugar tax is rolled out on April 1. The tax, combined with slow sales, have put pressure on the group which plans to close a UK factory and distribution centre to reduce costs and boost efficiency. Britvic is going through a similar process and will close its Norwich factory.

Another unintended repercussion of the war on sugar has been a tequila shortage. Demand for agave, which is also used as an alternative sweetener, has been growing. The price has skyrocketed as a result. This should boost planting, but Reuters reports it could take as long as 2020 for there to be sufficient supply.

Sugar is not the only one to be struggling with bad press. Coffee shops in California could be required by law to warn customers of the risks linking coffee and cancer. Some argue that exposure to acrylamide, which appears during the roasting process, could be a source of cancer.  

While more brands are voicing their commitment to becoming healthier and more sustainable, a report by Kin&Co warned that too many companies are  announcing intentions before implementation, hurting the brand image. An example could be the public outcry that followed when a customer complained that a UK Tesco store did not allow him to use his own container at the deli counter. In its defence, Tesco said it would work to reduce plastic packing, but not at the cost of hygiene.

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Commodity Conversations Weekly Press Summary

 

This week’s big news was ADM making a takeover bid for Bunge. Analysts argued that  not much is expected to happen in the near term as Bunge will want to keep its options open. In addition, a deal would likely face challenges in terms of regulatory approval. It does make people wonder, however, whether ADM has changed strategy since its announcement three months ago that it would reduce capital spending on oilseed crushing. (You can see Commodity Conversations’ take of the story here.)

Credit Suisse says Glencore could make a more formal offer for Bunge after the latter’s results on February 1. Bunge is expected to reach or even exceed the goal of saving USD 100 million in 2018 as part of its USD 250 million cost-cutting plan, although this will not be enough to offset the low margins and weak environment. The bank predicted below-normal margins for Bunge and ADM in 2018, partly because of competition from Argentine exports and delayed pricing by farmers.

Meanwhile, ADM announced this week a partnership with China-based Qingdao Vland Biotech to develop and commercialise feed enzymes for animals.

The world of GMO soybean is about to get crowded. BASF SE and DowDuPont are hoping to take advantage of Monsanto’s struggles with its Roundup Ready seeds where accusations related to drifting dicamba have lead to many lawsuits and restrictions in several US states. 

Monsanto is still trying to solve antitrust issues so that it can be bought by Bayer AG. It is also facing issues in Brazil where the Association of Soya and Maize Producers of the State of Mato Grosso (Aprosoja) asked the government back in November to void one of its soybean patents.

Louis Dreyfus concluded the first agricultural commodity trade using blockchain technology in December when it sold a US soybean shipment to China’s Shandong Bohi Industry. Dreyfus said the process involved digitised documents, which reduced processing time by a fifth while also reducing the risk of fraud and human errors. However, the group’s Global Head of Trade Operations said there was still a long way to go before the technology could be really scaled up. Until then, Dreyfus is likely to use a hybrid model.

Food industrials have been talking about their commitment to sustainability and the environment. Unilever has called on other stakeholders in the consumer goods industry to adopt 100% reusable plastic packing by 2025, in line with its own goals, to reduce plastic waste in the ocean. Similarly, Coca-Cola announced it is targeting 100% recyclable packaging by 2030 and will recycle one bottle for every one it sells. The group has already reached the milestone of replenishing 100% of the water it uses in final products, five years ahead of target. Both Coca-Cola and Unilever will be using more plant-based resins to replace plastic.

In the same vein, Budweiser beers in the US will soon unveil a new packaging to show consumers the beers are now being made using 100% renewable electricity.

Cargill has announced that its plant in Germany will shift from making corn-based starch and sweeteners to producing advanced biofuel and other food-based products from wheat, including starch that could be used for packaging. The transition, which is expected by 2020, comes at a time when the EU is targeting all plastic packaging to be recyclable by 2030. You can get more information on the EU’s Plastic Strategy here.

Cargill, along with Arabian Agricultural Services Company, unveiled a new corn mill in Saudi Arabia which will be run by their joint venture, the Middle East Food Solutions Company (MEFSCO). The new mill will increase MEFSCO’s glucose and starch production capacity by 100%, and total production volume by three times as well, as adding high-fructose corn syrup to its portfolio.

Cargill sees Asia playing an important role in its quest to feed the world in a safe and sustainable way. Its Asia Pacific CEO said the company is planning a totally transparent and sustainable supply chain for palm oil by 2020. As part of its transparency efforts, the group will not only make public its plans and progress reports but also acknowledge forest fires in Indonesia and put hotspots online.

Meanwhile, more and more people are putting butter in their coffee, a trend that seems to be particularly popular in the Silicon Valley. Nestle is jumping on the trend and will introduce ketogenic creamer brand Know Brainer as a part of an accelerator programme. The  company is using consumer and market research data to develop a brain-boosting butter coffee product which will be unveiled in March 2018.

Nestlé also announced it was moving its chocolate research centre from Switzerland to England. We may see more changes within Nestle given that hedge fund Third Point, which owns 1.25% stake in Nestle, has urged the company to divest underperforming businesses and evaluate its 23% holding in L’Oreal.

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Commodity Consolidation

Last week it was reported that ADM has approached its rival Bunge about a potential takeover, eight months after Glencore proposed doing the same thing. Last summer Bunge’s CEO suggested that his company might be worth more as part of a larger organisation. Bunge, according to the FT, « has no poison pill or bylaws that would allow it to fend off an unsolicited approach, making it vulnerable to a hostile takeover ».

It is unclear how Bunge, with a market capitalisation of about $11bn compared to ADM’s $23bn, reacted to the ADM’s approach. It is also unclear how the deal might fare under US antitrust laws; the combined entity may to have to divest significant assets, especially in the US and Canada.

Meanwhile some analysts predicted that Glencore would enter into a bidding war for Bunge; others suggested that Glencore would sit back and pick up the assets that ADM might have to divest, particularly its North American grain silos and processing plants.

The offer for Bunge goes against ADM’s (apparent) strategy of diversifying away from low-margin and volatile commodities into higher-margin and more stable ingredients. In 2014, ADM bought natural the ingredient company Wild Flavors for about $3 billion, and has since also expanded into other « healthy » ingredients such as fruits and nuts.

Last week also saw Ferrero announcing a $2.8bn cash deal to buy Nestlé’s US confectionary brands, and so become the world’s third-largest seller of confectionery, behind Mars and Hershey. The FT suggested that the privately owned Ferrero was well placed to pay a premium to expand its confectionary footprint in the US at a time when publicly owned companies are under pressure over concerns about obesity.

However, some analysts warned that Ferrero would face a challenge in managing the move from a company with a small and carefully chosen premium portfolio of products to a multi-brand conglomerate more like Unilever or Nestlé.

Amazon’s $13.7 billion acquisition of Whole Foods last June was also in the news last week. The conventional wisdom at the time of the acquisition was that Amazon would slash prices, expand delivery services and pressure margins across the industry. So far at least, that hasn’t happened, for three reasons.

First, even with Whole Foods, Amazon’s annual grocery sales are tiny compared to industry giants like Walmart and Costco—with roughly 2% share of the U.S. grocery market. It is tough to transform a market with so small a market share.

Second, the deal was forged out of weakness rather than strength; both Whole Foods and Amazon Fresh were struggling before the acquisition.

Third, as an online retailer, Amazon lacks expertise in brick-and-mortar operations; it doesn’t have a model that it can stamp on to Whole Foods. As such, there seem few synergies between the two companies.

However, Amazon is known for playing a long game, and they may have technological disruption on their side. This week the company opened their first “Checkout-free” Amazon Go grocery store in Seattle. The store uses cameras and electronic sensors to identify customers and track the items they select. Purchases are billed to customers’ credit cards when they leave the store. As yet the company has no plans to introduce the technology to its Whole Foods stores.

But technological disruption is not just occurring at the retail end of the food supply chain. This week Dreyfus reported that they had teamed up with their banks to do their first agricultural commodity trade using blockchain technology–a cargo of US soybeans to China. Dreyfus said that document processing on the transaction was reduced to a fifth of the time it would normally take, and that the process reduced the risk of fraud and human error.

As such, the two (maybe three) mergers mentioned above are occurring at a time of rapid technological change–a time when the whole supply chain is being disrupted.

But what else do they have in common, and what lessons can be learned from them?

Mergers are tough to implement and quite often end up destroying value, as well as diverting management time from internal growth. Mergers are even tougher in struggling sectors: two struggling companies do not make a strong one. In addition, it is not necessarily a good idea to go into a merger from a position of weakness. Lastly, just because a company is successful at running one business, it doesn’t mean that it can be just as successful in another, even adjacent, business.

On the positive side it has become clear that companies are better at managing some businesses than others. Confectionary companies are, for example, better at managing brands than they are at managing commodity sourcing and processing. At the same time, too diverse a portfolio of businesses can put strains on management processes.

This could be particularly the case if ADM, an increasingly ingredients-focused company, expands its footprint further into traditional commodity merchandising.

One obvious solution would be for ADM to take Bunge’s more value-added downstream businesses, while Glencore would buy the commodity merchandising businesses.

It will be interesting to see how this one develops.

 

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The Hidden Life of Trees

Over the holiday period I read The Hidden Life of Trees: What They Feel, How They Communicate―Discoveries from a Secret World. The author, Peter Wohlleben, a forester from Germany, has become an unlikely media star and his book has become a bestseller, and not just among tree-huggers.

Mr Wohllben draws on recent research to argue that trees not only communicate with each other, they also feel pain and help each other out. He writes,

“Beeches, spruce, and oaks all register pain as soon as some creature starts nibbling on them. When a caterpiller takes a hearty bite out of a leaf, the tissue around the site of the damage changes. In addition, the leaf signal sends out electric signals, just as human tissue does when it is hurt.”

When a giraffe starts eating an African acacia tree, the tree releases a chemical into the air that prompts neighbouring trees to pump a toxic chemical into their leaves to make them unpalatable for the giraffes. When attacked by pests, some trees release a chemical that attracts predators that feed on the pest that is attacking the tree.

In a forest the trees communicate with each other through a “wood-wide-web” of soil fungi through which they can also send sugars that can help sustain sick relatives. One such fungus, in Switzerland, covers almost 120 acres of forest and is an estimated at about one thousand years old.

“Another in Oregon is estimated to be 2,400 years old, extends for 2,000 acres, and weighs 660 tons. That makes fungi the largest known living organisms in the world.”

 In a note at the end of the book, forest scientist Dr Suzanne Simard describes how douglas firs can live in synergy with neighbouring birch trees,

“We discovered that the exchange between the two species was dynamic: each took different turns as “mother”, depending on the season…mother trees recognize and talk with their kin, shaping future generations…These discoveries have transformed our understanding of trees from competitive crusaders of the self to members of a connected, related, communicating system.”

But what about agricultural crops, plants grown for food or fibres? Peter Wohlleben writes,

“Thanks to selective breeding, our cultivated plants have, for the most part, lost their ability to communicate above or below ground. Isolated by their silence, they are easy prey for insect pests. That is one reason why modern agriculture uses so many pesticides. Perhaps farmers can learn from the forests and breed a little more wilderness back into their grain and potatoes so that they’ll be more talkative in the future.”

 And in the preface to the English edition, Tim Flannery writes,

“Perhaps the saddest plants of all are those we have enslaved in our agricultural systems…They have lost their ability to communicate and are isolated by their silence.”

All this creates something of a problem. Anyone who watched the wonderful BBC series Blue Planet II last year will know that fish and (particularly) octopus are way more intelligent than we had thought—and way more social. We all knew that that sea mammals were social, but it was a shock to think that other sea animals, including shellfish, can have emotions and feel pain.

Consumers and legislators are already reacting. For example, the Swiss government recently banned boiling live lobsters, arguing that they really do feel pain. Lobsters now have to be “humanely” killed before being cooked.

I know some previously fishing-eating vegetarians who have now given up eating fish—or at least feel guilty when they eat it—after watching Blue Planet II. I am afraid to recommend that they now read The Hidden Life of Trees.

Join the commodity conversation at our seminar in London in June. 

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Commodity Conversations Weekly Press Summary

COFCO is planning to move ahead to gain market share from rival trading firms, a source close to the company confirmed. This echoes an earlier statement saying the company was looking to partner with overseas players, and not limit itself to being a procurement platform for China. As part of the recent team changes, COFCO hired ADM’s ex-manager to head its APAC division. In Brazil, it is reportedly looking at taking Cargill’s shares in the Sao Paulo Cevasa sugar mill.

However, an American agricultural economist argued that COFCO would not manage to win much more market share unless it bought into one of the main agricultural trading houses. An ex-employee added that its government mindset would be a challenge, as well as the wide cultural differences within the group as a result of past acquisitions.

Regardless, China’s appetite for commodities is only expected to grow. In 2017 it became the world’s first oil importer, overtaking the US. Soybean imports, meanwhile, increased 14% on year to reach a new record, and should continue to grow in 2018.

The USDA has ask Congress to accelerate efforts to correct a provision in the Tax Cuts and Jobs Act which gives tax benefits to farmers selling crops to cooperatives instead of private traders. A USDA statement on January 12 stressed the tax benefits for farmers needs to be retained, but other industry participants must not be disadvantaged.

The US is increasingly seen as about to withdraw from NAFTA, according to two Canadian government sources. Similarly, BMI’s Fitch Group pegged the probability of a US withdrawal at 30%, mainly because the US president can take this decision unilaterally. However, the President recently said he might consider extending the deadline for negotiations.

The UN’s FAO index showed that food prices fell in December, thanks to high supplies of sugar, wheat and dairy products among others. Similarly, the Bloomberg agriculture sub-index of futures contracts hit its lowest ever level in December. Even so, the FAO index showed that food prices in 2017 were the highest since 2014, but still 24% cheaper than 2011.

In the US, corn growers who had hoped to increase their revenues by cultivating white corn, usually used for food products, are being forced to sell it at a loss to ethanol and animal feed producers because of a surplus and an eroding physical premium. The premium is expected to remain low in 2018, as South Africa recovers from drought and starts exporting white corn again.

Despite the country’s grain glut, Russia’s agriculture minister said this week the government will only buy grains through its State Intervention Fund as a last resort. He argued that state intervention at the moment would be ‘harmful.’ Last month, the government decided to give USD 34 million in cash subsidies to the railway network to move grains from isolated areas to ports in a bid to boost exports. However, a shortage of wagons is still a problem.

Hedge funds saw on average a return of 8.5% return in 2017, the highest since 2013. FIR figures show this was mainly thanks to good performance of investments in equities. Confidence in hedge funds seems to be returning slowly, with an estimated USD 2.9 billion fresh capital injected in Jan-Oct 2017, compared to an exodus of USD 70 billion the previous year. The other good news is that HSBC revealed three out of the five best performing hedge funds in 2017 were human – as opposed to computer – driven.

In a bid to reduce exposure to macro risks, more hedge funds are looking into investing in so-called ‘exotic’ segments such as ethanol, rough rice or even cheese. These assets are viewed as giving higher yields. For instance, the Florin Court Capital fund said it logged a 7.6% profit after deciding to switch its focus completely to such non-traditional assets.

In the UK, Britvic will be shedding 20 billion calories from its drinks after reducing added sugar significantly ahead of a sugar tax debut in April. The move comes under the group’s new health and sustainability programme which also includes reducing plastic waste in a bid to become waste-free by 2020. It is trying to make bottles from sustainable wood fibres, among other things.

In a similar vein, Cargill has started producing and selling food-grade potassium chloride, a salt-alternative, at a new production facility which is part of its existing New York salt plant. The move responds to the growing consumer concern about eating more healthily, and aims to strengthen the group’s higher margin ingredients portfolio.

After much speculation, Nestle is officially selling its US confectionary arm to Ferrero for USD 2.8 billion. Nestle also sold its Australian chocolate brand Violet Crumble last week to a local confectioner. While the company intends to keep its non-US confectionery business such as KitKat, the sale will allow investing in healthier segments. The CEO said they are looking at pet care, water and vitamins. It is hoping to buy German drugmaker Merck, having bought vitamin maker Atrium Innovations last month for USD 2.3 billion. However, analysts at Reuters pointed out that, at an estimated USD 5 billion, Merck would only give a 4% return on investment.

More companies dealing and promoting urban farming are popping up, at a time when an increasing number of people are living in so-called food deserts. Futurism reports that thanks to the high level of technology required, vertical farming and urban agriculture tend to waste much less than traditional farming. While this could be a solution to help feed the growing global population, experts argue that crops such as grains are unlikely to ever be grown indoors.

Maersk has partnered with IBM to manage its large shipping network using blockchain. They are building a platform that can be used by all those involved in shipping. The technology – known to be well adapted to wide networks with multiple participants – will improve transparency by creating records that can’t be altered.

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Discovering humanity in the world of trading

I am currently reading The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, by Harvard Business School Professor Mihir A. Desai. As a rule I tend to steer clear of books written by teachers at business schools. I find that they are often too academic, and rarely hold up in the real world of business. This book, however, is an exception. It tries, and succeeds, in explaining finance to a wider public, and it does this by bringing in examples from the world of literature and art.

The book also tries to de-demonize the world of finance and its inhabitants. Traders generally have a bad reputation, no more so than financial traders, particularly in banks and hedge funds. Dr Desai tries to explain that financial traders do actually play a valuable role in efficiently allocating resources, and do contribute to general global welfare.

De-demonizing agricultural commodity trading was part of the reason why I wrote my latest book, “Commodity Conversations”. My goal was to explain to a wider audience what agricultural commodity traders actually do, and how markets work. I wanted to show that agricultural commodity traders are not the evil geniuses that the media often make them out to be, and that they do contribute to global welfare by moving food from where it is not needed to where it is needed. Without agricultural traders, your food would not arrive on your plate.

Although Dr Desai demonstrates that financial traders do add value to global welfare, he just as clearly demonstrates how the financial system can be corrupted. He explains this in terms of the relations between agents and clients. Does a CEO always work in the best interests of his stakeholders (shareholders, clients, employees, suppliers, and the environment), or does he sometimes work in his own interest, boosting short-term profits in order, say, to meet bonus-earning targets?

This problem of misaligned incentives is not something that I covered in my book, but in retrospect I probably should have. If you want to convince a wider public of the merits of a system, you need also to explain that system’s weaknesses and flaws. Finance as it is currently practiced does have flaws, as too does agricultural commodity trading. Incentives do not always lead to the best outcomes.

But this does not mean that we—to use an old English expression—should throw the baby out with the bathwater. If a system sometimes fails, we shouldn’t necessarily discard the whole system. Instead we should all work to structure incentives to create the best outcomes, in terms of market efficiency, as well as of social and environmental welfare. Market regulators are doing a good job at the former, while a mix of consumer awareness and civil society is making progress with the latter.

No hard how anyone tries, however, the world of agricultural commodity trading will never be perfect. There will always be inefficiencies, badly targeted incentives and a preference for personal wellbeing over general wellbeing.

Many sectors try to compensate for the bad that they do in the course of their business by doing good somewhere else. A coal-burning power plant may be the only source of electricity in a remote region of China, but it can offset the pollution it emits by investing in renewable energy somewhere else. That is what carbon credits do.

Some notable businessmen, such as Bill Gates, give back to the community once they retire. But as companies never retire, what can a company, or a sector, do to give back to the community?

A friend recently drew my attention to a public education initiative by the UK’s private equity sector. Although private equity companies do add value in ensuring that assets are allocated efficiently, the general public views them as evil asset strippers who fire workers and close factories.

But what could agricultural traders do to compensate for the occasional harm that they may do, while at the same time improve their public image? One way would be for them to help the poorer sections of their supply chains to reduce crop waste. This could be done, for example, by giving subsidised financing or grants for warehouses, packaging or refrigeration plants close to farms.

Although any individual project might not in itself be economically feasible—or it might be too risky for an individual company alone, it could result in net gains for the sector as a whole.

So maybe what agricultural trading needs is a foundation similar to one set up by the UK’s private equity sector, but with the goal of improving efficiency and reducing waste along the whole supply chain.