Posts

Posted on

Commodity Conversations Weekly Press Summary

Louis Dreyfus is selling Macrofertil, its fertiliser business in Australia, to Agrium’s Australian unit, Landmark Operations.  Louis Dreyfus sold its African fertiliser unit earlier this year, but still owns a fertiliser business in South America.

ADM is selling  its Bolivian oilseeds business, which includes a processing facility, nine grain silos and distribution operations, to Inversiones Piuranas. Meanwhile, the company has tied up with Apollo Global Management to submit a new bid for Unilever’s spreads business valued at USD 7 billion.

ED&F Man said it will restructure its sugar business because of low prices. It also plans to divest, partially or completely, its global physical grains trading business.

Armajaro Asset Management, well known for cocoa and coffee trading, is closing its flagship hedge fund CC+. The company says that algorithmic trading is rendering physical commodity trading uncompetitive. The company intends to begin a new fund in Apr-Jun 2018, although no details have been provided. The company’s assets under management fell from USD 2 billion in 2011 to USD 254 million in 2016.

In Brazil, Copersucar will partner with BP‘s Brazilian unit to form a 50:50 logistics joint venture which will manage Copersucar’s ethanol storage facility in Paulinia.

Shipping costs for dry-bulk commodities have escalated sharply since July, pushing the Baltic Dry Index to a near four-year high on the back of China’s coal and iron ore demand. Agricultural trade is taking a hit as freight costs, which on an average make 11% of total costs, are at a 7-year high.

To feed the country’s fast growing demand for premium beer, China has doubled imports of Canadian barley in the face of disappointing crops in the EU and Australia, from where it usually sources most of its needs.

US soybean crushing capacity is expected to increase by 5% in 2019 from 1.9 billion bushels currently, the fastest expansion rate since 1997/98 as growing feed demand pushed margins up to an 18-month high. The increase in processing capacity is expected to boost demand for soybeans, which the USDA forecast will be planted over 91 million acres next year, a record high. Even so, this may not be enough. The National Oilseed Processing Association has forecast that global production must increase by 20% to fill the growth in feed demand over the next 10 years.

Countries are looking at imposing a meat tax to meet the targets of the Paris Climate Change Agreement. The director of Farm Animal Investment Risk and Return (FAIRR) said meat taxes are already being discussed in Denmark, Sweden and Germany. An Oxford University study in November mooted a 40% tax on meat and a 20% tax on milk to compensate for the damage to the environment and health.

In the US, Monsanto has announced a cash-back incentive for farmers who use its dicamba-based XtendiMax herbicide on Xtend GM soybeans in order to offset costly government legislations. Several US states have banned dicamba-based herbicides, or are asking farmers to undergo special training. Seperately, a source said that Bayer’s Monsanto takeover bid is likely to see more hurdles from the EU antitrust regulators who are concerned that the purchase would hurt competition.

Wildfires have destroyed or damaged a large part of California’s avocado and lemon crops in the last few weeks. However, consumers should not be affected as they can still source from Mexico and South America. Even so, the future may be tough for farmers in California; the governor has said that wildfires, because of climate change, are ‘the new normal’.

The World Resources Institute and Cargill have mapped 2.3 million ha of cocoa plantations in Brazil, Cameroon, Cote d’Ivoire, Ghana and Indonesia to monitor deforestation, and devise long-term solutions to the problem. 

China will no longer allow the import of plastic waste as of January 2018, a significant move given that the country took in 51% of the world’s plastic scrap imports in 2016. This is bad news because countries that had been using China’s recycling industry will have nowhere to send their waste, potentially increasing the threat of pollution. The good news, however, is that efforts are ongoing to develop edible packaging in a bid to get rid of plastic. Check it out here.

Powered by ECRUU

Posted on

Presentation to the Sustainable Sugarcane Forum

Good morning ladies and gentlemen—and welcome!

I recently finished reading The Sixth Extinction: An Unnatural History by the journalist Elizabeth Kolbert. The Guardian newspaper voted it the best non-fiction book of all time. If you haven’t read it already I highly recommend it.

Life has existed on our planet for around four billion years but mass extinctions of flora and fauna have taken place every twenty-six million years or so. There is widespread agreement that a meteor strike caused the fifth mass extinction (of the dinosaurs, amongst others), but geologists disagree as to what caused the others. Perhaps other meteor strikes; perhaps natural climate change.

Pretty much everyone, however, agrees that mankind is the cause of the sixth mass extinction that we are currently living. Geologists call our current era the “Anthropocene”.

The Anthropocene is usually said to have begun with the industrial revolution, or perhaps even later, with the explosive growth in population that followed World War II. However, the evidence suggests that this process of destruction began one hundred and twenty thousand years ago when Homo Sapiens began its migration out of Africa.

We humans destroy biodiversity in three ways:

  1. By eating it
  2. By encroaching on—and stealing—its territory
  3. By accidently transferring alien species or bacteria

By the time I had finished the book I had realized that this process of extinction has been going on for so long now it seems all but inevitable that it will continue. When it is complete the only animals that will be left on the planet will be the ones that we eat—or the ones that we can marvel or laugh at in zoos or on YouTube.

Volatire once said, “Dans une avalanche, aucun flocon ne se sent jamais responsible” – in an avalanche, so single snowflake feels responsible. Ms Kolbert puts it this way,

“If you want to think about why humans are so dangerous to other species, you can picture a poacher in Africa carrying an AK-47 or a logger in the Amazon gripping an axe, or better still, you can picture yourself, holding a book on your lap.”

And in case you believe that it doesn’t matter if the world loses a few elephants, tigers, frogs or bats, “the anthropologist Richard Leaky has warned that Homo Sapiens might not only be the agent of the sixth extinction, but also risks being one of its victims”.

Individually we as humans are all pretty good guys. We don’t want to harm our neighbours or our environment. But we do want to do our best for our families. Unfortunately, “doing the best for our families” might entail chopping down a little bit extra forest to plant some more crops to feed our children; shooting the leopard or tiger that is killing our flocks; using more water from the well; using more pesticide or herbicide that we really need—or simply taking our children out to dinner.

Our individual acts don’t have much impact, but taken together they result in the mass destruction of our biodiversity and the poisoning of our planet.

Individually there is little that we can do about it. We can stop eating meat. We can stop buying water in plastic bottles, or coffee in aluminium capsules. We can fill the kettle with only the amount of water that we need to make our tea. We can take a bus or a bike, rather than the car, to work.

All that helps, of course, but together we humans are such a destructive force—and have been for tens of thousands of years—that it is not enough.

But wait a minute. If together we humans are such a powerful destructive force, maybe together we can also be a powerful constructive force. After all, isn’t working together what is supposed to differentiate us from other animals on this planet?

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

Although we have been destroying the planet for the past one hundred and twenty thousand years it is not too late to do something about it if we all work together. And I think we can work together.

But what does working together mean for those of us involved with voluntary sustainability standards – those of us in this room?

The International Trade Centre recently published a report called Social and Environmental Standards – From Fragmentation to Coordination. The authors of the report highlighted 239 voluntary standards operating in 90 agricultural markets, many of them over-lapping.

Cocoa producers in Cote d’Ivoire currently contend with up to ten different sustainability standards. Coffee producers in Honduras have nine standards. Tea producers in China have thirteen. Soy producers in Brazil face 21 voluntary standards.

Different buyers use different standards and, in many cases, their own. This leaves suppliers struggling to comply with several voluntary standards at the same time. The associated audit processes can quickly push up costs, both in time and money.

Competition between standards can also result in what could be called “a race to the bottom”, where producers or buyers may be tempted to choose the most lenient standard.

It is a bit tough to ask a farmer to go through a whole new audit process just because he wants to grow soy this year rather than sugarcane. At the same time, too many standards can confuse consumers and undermine their trust in the whole system.

The report’s authors argued that a reduction in the number of voluntary standards would have many benefits. It would (among others):

  • Reduce audit costs, enabling more small-scale producers to become certified.
  • Reduce costs for certifying agencies and consumers through economies of scale
  • Create brand company clarity in marketing

Perhaps most importantly, a reduction in the number of standards would empower certifying organizations to go beyond certification, to focus more on supporting their stakeholders, and to have more impact where it is needed, at smallholder level. It would allow value chain partners to focus more resources on improvement rather than multi-standard compliance.

This is a case where “less is more”. The voluntary standards scheme sector is ripe for change. But how do we get from where we are now to where we want to go?

The report authors suggest that a first step would be to get everyone talking together, and conferences such as this one have an important role to play.

When we talk together, the various standard-setting organizations need to explore ways of aligning standards, audit procedures and management structures. Benchmarking and mutual recognition of standards would be an important part of that process.

Stacked audits to combine key different elements of standards/company specific audits would reduce the reporting burden.

The idea of companies working together would be unthinkable in the commercial sector; we would quickly be hauled up in front of the competition authorities. However standards agencies are mostly non-for-profit organisations. Our goal is not to make a profit, or to increase our share prices. We are not interested in market share; we are interested in “the greater good”.

Working together, whether in the form of partnerships, shared standards, benchmarking or outright mergers should therefore not only be possible, everyone in this room should welcome it.

Thank you. I wish you a successful conference.

Posted on

Commodity Conversations Weekly Press Summary

Cargill could partner with ADM, Bunge and Amaggi to bid for the Brazil’s Ferrogrão railway concession, a 1,000km railway linking grain regions to the port of Miritituba. A Cargill official explained that it would reduce logistics costs by avoiding the poor quality roads, as well as providing an alternative port to Santos and Paranaguá in the south. A Chinese state-owned group is also planning to bid.

Almost all of the 239 locks in the US waterways systems are past their “Use By” dates. The American Society of Civil Engineers has said that this is resulting in delays for almost half of the ships that use the waterways. The Ohio River has seen its worse jams ever this year with at one stage over 50 miles of ships at a standstill, many of which were carrying grains. The resulting extra costs meant that the US has struggled to compete with South American grain, causing losses all across the supply chain. Some of the locks are slowly being replaced. (Original source: Reuters)

Olam is working on building an online marketplace to allow small-scale farmers to sell their products directly, as well as to source farm inputs and find financing. The company’s CEO  explained that this is part of “Olam Direct”, a program designed to leverage its network of small farmers (some 4.3 million of them) and offer them value-added services. The program also offers better  traceability to end buyers. The group already has over 100,000 farmers from 21 countries registered in its Olam Farmer Information System mobile app, which uses big data and artificial intelligence to help farmers improve efficiency, quality and traceability.

In the US, Cargill’s head of Corporate Affairs has called on farmers to take an active role in policy making, explaining that the US threat to withdraw from trade agreements such as the NAFTA could have a disastrous effect on the country’s farm economy. She said that trade fed the world, and drove productivity and economic growth.

Barter transactions supplied over half of farmers’ crop financing in Brazil’s Mato Grosso state this year, the first time in almost a decade that barter has such a key role. The research agency Imea explained that as a result of low margins and poor revenues, trading groups and agriculture product resellers have little choice but to exchange their crops for the necessary farm inputs.  (Original source: Reuters)

Nestle has announced that it has bought Canadian group Atrium, its fourth acquisition in the last few months, and another step in its strategy to become a “nutrition, health and wellness” company. Atrium makes vitamins and nutritional supplements with sales mostly in the US.  Some sources said that Nestle might also want to buy the German equivalent, Merck. (Original source: Reuters)

France has kept its place as the Most Food Sustainable Country in the Food Sustainability Index published by the Economist Intelligence Unit. The EIU estimates that France loses only 1.8% of its total food production each year thanks to its anti-waste policies. The UAE was at the bottom of the index with an estimated 1,000kg of food wasted per year person each year. The UN FAO estimates that one third of all global food produced each year is wasted.

Powered by ECRUU, Intelligence Summarised

Posted on

Commodity Conversations Weekly Press Summary

Anec, Brazil’s grain exporters association which includes ADM, Cargill, Louis Dreyfus among others, has warned that the sector could be seeing its worse performance in 10 years amid bumper crops and poor margins. A spokesman said that merchandising companies had to really look into their risk management practices, adding, “We have to rethink what we are doing.”

Cofco International Ltd (CIL) has announced plans to double direct grain purchases from farmers to 60 million mt by 2022 in its bid to rival the ABCDs of agricultural commodities. The CEO said that CIL would have a turnover of USD 37 billion this year as it is expected to handle 110 million mt grains, of which 80% will be sourced from global traders. The CEO added that plans to launch an IPO were still on.

Bunge has increased the number of executives eligible for cash compensation (if they lose their jobs without cause within two years of a takeover) to include five top executives, from just the CEO previously. A finance expert explained that the move would discourage these executives from trying to stop any acquisition process.

In the world of vegetable oil, Louis Dreyfus is buying Golden Agri’s crushing and vegetable oil refining business in China. The move is part of the trade house’s strategy to focus on core activities such as grains and oilseeds amid declining margins.

Wilmar is collaborating with ING to convert some of its USD 150 million loan into a sustainability performance-linked loan, the first company in Asia to do so, and the first in the palm oil industry. The trade house will improve its environmental and social performance in exchange for a reduction in the interest rate. Sustainalytics will be measuring the progress.

Chinese group CCCC continues on its acquisition binge and is now looking at Brazil’s railway sector, having just bought Concremat Engenharia and the São Luís port project in Maranhão. The group, along with Japan’s Mitsubishi and Sumitomo are each reportedly in talks with Rumo about taking a stake in the 7,208km railway concession in the South Malte.

The commodity trading group Citadel has asked the Commodity Futures Trading Commission to look into the “other reportables” category on the Commitment of Traders (COT) reports. Citadel argues that the category lacks transparency yet represents a significant share of the market – for example 13.8% of the Open Interest in Chicago soft red winter wheat futures. Some say that the category includes prop trading firms and quantitative funds, among others.

US growers and processors of cranberries are hoping that the government will give them the green light to turn excess fruit into fertiliser for the first time ever. Interestingly, Thanksgiving dinner this year was probably the cheapest since 2013 given the global surplus of meat and grains, which are successfully keeping prices low. Meanwhile, a study based on computer simulation of national data forecast that 57% of children aged between 2-19 years in the US are likely to become obese by the age of 35.

Last week we talked about the increasing sea freight costs but have you ever wondered how many vessels there are at sea at any given point? Check out MarineTraffic’s screenshot to see for yourself. It’s impressive.

Finally, for our tech update, the cryptocurrency is making its way into commodity trading with Ukrainian shipping firm Varamar announcing it would now accept payments in Bitcoin. This is expected to be a game changer for countries affected by sanctions that can’t use US Dollars.

Powered by ECRUU

Posted on

A conversation with Robert Kuok

Robert Kuok’s memoirs have been released this week in Malaysia, and six extracts have been published in The South China Morning Post. The first can be found here. The book is not yet available on Amazon

Born in October 1923 in Johor Baru Malaysia, Robert Kuok (or RK as he is known) is a major figure in the world of sugar and has been nicknamed “The King of Sugar”. He has been an extraordinarily successful businessman and apart from sugar and commodities (Wilmar), he is best known as the founder of the Shangri La Hotel chain. Like many successful Asian businessmen, he is media-shy and rarely gives interviews.

I had the honour and the pleasure to converse with RK over three days in 2015. I published a small part of that conversation in my book The Sugar Casino. The Financial Times in turn published some extracts. If you haven’t yet read my book The Sugar Casino (shame on you), here is a taster:

RK welcomed me and apologised for his terrible cold and cough. He had caught it on a recent trip to London where he had been visiting the latest addition to his hotel chain, the Shangri La in the Shard Building. I started by trying to explain my book project but he seemed distracted by his telephone.

“I see I have four messages but I don’t know if they are important”, he said. “Ah yes, last night’s sugar market close.”

“You are not still trading the sugar market?” I asked, astonished.

“I watch the market every day” he replied. “I started in 1955 and this “topping up” takes seconds; if I stop I can never get on to it again. I still trade the sugar market for my claret money; so that I can afford Petrus 1989. Otherwise you would be mad to buy it. But if you are winning at the sugar casino; then why not continue? And the days I lose money, I look sadly at my wine and I tell myself, “Tonight you don’t deserve it”. I open the bottle and drink only one glass as a punishment to myself for trading badly.”

I did a quick sum in my head. RK had started in the Rice Department with Mitsubishi in 1942, the year the Japanese Army occupied Singapore and Malaya. That meant that he had been in the commodity markets for 72 years and trading sugar for 60 years; that had to be a record. I shared my mental arithmetic with him and he smiled.

“Have the markets changed much since you first started?” I asked.

“No,” he replied. “The change has mainly been the speed of information dissemination or gathering, but you have to adapt to that. So my trading volume today is one per cent of what it was. I used to trade 4,000 lots (200,000 tons) in one go; now I trade 40 lots (2,000 tons). Today I am 40 lots long, but my trading pays for the Petrus!” he said with a laugh.

“In early autumn 1963 the sugar market went against you and you almost went broke,” I prompted.

“I had enough cash, thank God, to meet margins. In the autumn of 1963 Hurricane Flora hit Cuba and the market rallied; I was saved. August that year was very difficult. But somehow I can always manage. I was 40 years old and at my best. Although it worried me I never felt like jumping off a building. Still, the position was large for me, maybe 250,000 tons of sugar, part physical sugar and part futures – a huge position for me. Anyway the market turned around. I took some profit and then more profit.”

“How did you know when to take profits?” I asked. “I find the biggest difficulty about trading is knowing when to take profits”.

“Not knowing when to take a profit is the Achilles’ heel for a trader. Take profits! Don’t wait. If you have a profit you have to take it. If you wait it will be your downfall. Also, have the wisdom to realise that you can’t take it in one go or you destroy the market for the balance. If you are a big trader it takes ten, twenty, thirty days to unload, depending on how big your footstep is.

“If you are a big trader you had better start even if you are in minus territory if the market is going up. You are long and you have been suffering: a big minus, a small minus, and then a negligible minus. At that point start liquidating. Even if you sell only 3% you still have 97% to go. You have to shed weight. Waiting to take profits is dangerous.

“What about taking losses?” I asked.

“Well,” RK replied with a sigh. “It is wonderful to take losses when you have profits under your belt. So you need some luck to build up some profits first. You have to start on the right leg. And everything, including quantity must be according to your size.

“In 1963 I took a big position,” he continued. “I was very confident. I felt that sugar was worth more than it was.

“But you know with sugar there is always over production. It is like my hotel business. I don’t know why I go into feast and famine businesses. As soon as you make money in hotels every Dick, Tom and Harry builds a hotel and then there is oversupply. And then you all cry for seven to eight years before you start to make a bit of money.

“The early 1960s were wonderful for me in the sugar market. I was hunting in a lake just teeming with salmon trout. There were only three or five predators; these sharks could eat their fill. I would swim past them and they weren’t even interested in me. Today you go to the same lake: there are giant crocodiles, giant sharks. There is not enough fish to feed these giant predators. You have to think twice before swimming in the lake.

“A lot of traders are arrogant”, I ventured. “They have big positions and have to convince themselves that they are right and therefore have to convince other people that they are right.”

“You have to be humble because you are never always right. You don’t need to convince anyone. You can trade as a very humble man.”

“Is speculation and risk taking an integral part of all life?” I asked.

“An emphatic yes!” RK replied. “When you get into your car and leave your home you are taking a risk. In the modern world there is no back-to-back trading where you can make a simple margin on a physical sugar transaction. Those days are long gone. Those opportunities when they come are like golfing holes in one. I have been playing golf since 1947 and I have never scored a hole in one. So where there is no back to back trading it means you have to lift a leg: you have to sell before you buy or buy before you sell. You have to take a risk. But you can still make good money trading.”

“Are you a businessman who started as a trader or are you a trader who applied your trading skills to business?” I asked.

“I have been asking myself that question for the past 50 years. Let’s take soccer as a parallel. You can train someone to play football but you never produce a Pele, a Ronaldo or a Messi. You have to have natural verve. We are not born equal. You either have that attribute in you, call it genius if you like, but of course different degrees of genius, and then circumstance or fate gives you the playground to exercise your skills. If you are born in the wrong community and your parents force you into the armed forces, well then how do you become a trader? But traders are born, not taught.”

“Footballers often have particular styles, as do traders”, I prompted. “What is your style?”

“When you play poker the secret is to never let the other players guess your next move. I can play a contrarian game but I can also flow with the current. I even involve superstition. In my early days I would look at a fellow trader to see if he had a lucky glow on his forehead. If he did I would spend more time with him that day.”

“Commodity trading is based on trust,” I said. “You have to start a relationship offering trust. But what do you do when someone abuses that trust?”

“Well that is just too bad. You just have to cut your losses; you have no other choice. If you want, you can keep that person as a friend but do so at arm’s length; no more business dealings. But it is better to just cut the cord and part company. If you bear a grudge you are just hurting yourself; you are not hurting the other person. It is like throwing good money after bad. Keep your wits, keep your humour and if you are a good man, luck will come your way again. You will see another opportunity and you will grasp it. I have always believed that.

“But business is about taking and not just giving. I came up the hard school. In an arena where no holds are barred you have to win. Giving is for my charity side.

“I have a simple motto in life: everything single material thing that I have in life can be traded. It is for sale. It is a question of, when, where, to whom and price. The first three are more important. If you like a person the price becomes unimportant.

“Business is quite a game but at the end you want to use your money to help those that need help. We have a very good charitable foundation that is opening the darkened skies above a little more than thirty poor and backward villages in China and adding.”

“Finally, Robert,” I asked. “What advice would you give to someone starting out in business today?

“I would tell them to go east and make their fortune. What you are seeing in China is still only the beginning.”

 

Posted on

Commodity Conversations Weekly Press Summary

Mitsui & Co is spending USD 265 million to buy 30% of the shares in ETG, Africa’s top agricultural trade house, the FT reports, as part of Mitsui’s strategy to diversify away from energy into agricultural markets.

The FT also reports that Wilmar has agreed to buy Cargill’s palm oil business in Kuantan, on Malaysia’s east coast, in a bid to strengthen its sales and distribution network. Cargill said it would continue running its other edible oil plants in Port Klang and Westport.

In what could be set back to Bunge’s plans to grow its food and ingredients businesses, the company has cancelled a plan to acquire a controlling majority in Mexican corn miller Grupo Minsa, Reuters reports. The company explained that this was a result of Minsa’s decision to outsource sales to a third party company while  authorities in Mexico examines the deal. 

Kellogg is responding to changing consumer diets and is launching a range of plant-based cereals in the UK, it’s the first step into the country’s vegan and organic market.

Similarly, Nestle has reportedly initiated discussions to acquire the US organic and vegetarian food manufacturer Hain Celestial Group. In the last few months, the company has bought Sweet Earth, Blue Bottle Coffee and invested in Freshly. In another interesting development, Nestle has launched its own voice-activated speaker in China which will be given for free to those who buy their milk powder in bulk. The speaker will provide information about Nestle products and collect consumer information.  

The world of organic food is in for a revamp as EU countries have agreed to update the rules of organic farming, most of which were 20 years old. The new rules aim to apply the same standards to all EU and non-EU farmers so that consumers across the EU get the same quality. Among the changes, crops cultivated in greenhouses can no longer count as organic. The new rules still have to be approved by the European Parliament.

Greenpeace has filed a complaint against Coca-Cola with the Advertising Code Committee for advertising that ‘Our packaging is 100 percent recyclable’. Greenpeace argued that the point was not so much whether the packaging was recyclable but whether the recycling actually happened, which the organisation said happens too rarely.

Similarly, protesters in the UK are urging people to sign a petition demanding Coca-Cola to lessen its plastic footprint as part of the UK’s national campaign against the 12 million tonnes of plastic waste that is being thrown in oceans annually,. But in an ironic twist, The Guardian reported that for the past five years, the UK’s environment department has used 1,400 disposable coffee cups on a daily basis.

Blockchain technology is revolutionising the world of farm-to-table transparency. US consumers who buy Honeysuckle White turkeys this Thanksgiving will be able to see photos of the farm where the turkey comes from, along with other information by scanning the packaging code. The project – in partnership with Cargill’s in-house blockchain platform – could be used on a wider scale if it proves to be a success. The food traceability market is expected to reach an estimated USD 14 billion by 2019.

The tech world is also changing the relationship between farmers and banks as farmers become better informed. Farmers now change lenders more often. 

Finally, Rabobank has warned that agricultural commodity prices are likely to be more volatile in 2018 because a forecast La Niña phenomenon (known, among other things, to cause dry conditions in the Americas and abnormally wet weather in Asia) could lead to a tightening global supply and demand for many crops.

Powered by ECRUU

Posted on

An interview with Swithun Still

Good morning Swithun, could you tell us a little bit about your company Solaris?

We are essentially focused on milling wheat and corn. For the past two seasons Solaris has been the largest trader of Russian corn. Compared to Ukraine, Russia is not a big exporter of corn; this season Russia will export just over five million tonnes compared to Ukraine with eighteen million.

However, Russia is a powerhouse for wheat. It was the largest exporter of wheat in the world last season. Russia is a veritable focal point for wheat prices worldwide. People really look to see the price at which Russian 12.5 percent protein wheat is trading to help them set wheat prices in other parts of the world.

We did a large programme of corn into Asia last year, namely South Korea and Vietnam. Russian corn has a huge competitive advantage in terms of quality. There is a smaller percentage of damaged kernels (often under 2% as opposed to the contractual maximum of 5%) and a similarly low percentage of broken kernels. Most important of all: it is all non-genetically modified (non-GMO), which is ironic as we are one of the largest traders of non-GMO corn in the world and are based in the same small town as Monsanto, who manufacture GM corn seeds.

The biggest challenge for Russian agriculture is the extremes of temperature – very hot in the summer and very cold in the winter. Agriculture is very weather dependent. The majority of production is winter wheat, which is sown in September-October and harvested in July. Acreage is split 50/50 between winter and spring wheat but the yield and therefore the production is higher for winter wheat. Spring wheat is sown in areas that are too cold for winter wheat. The earth is too hard for farmers to get the seeds into the ground and even if they could plant the stuff it would just die. The winter temperatures go as low as minus 30 or minus 40 degrees Centigrade in Siberia.

Are your deals based on flat price or are you hedged somehow?

Almost all of our transactions are traded flat price. We hedge some of our exposure with derivative contracts: futures or options that are traded on exchanges such as Chicago, Kansas, LIFFE or MATIF, or through ‘Over the Counter’ or “OTC” contracts with brokers in London & Chicago. We also hedge our currency exposure as we buy often in roubles, but sell in US dollars or Euros.

The correlation between Chicago and Black Sea wheat is not actually sufficient to be a good hedge. Some put the correlation at 25 percent. Russian 12.5 percent milling wheat is closer to the wheat quality traded in Kansas City, rather than the soft red wheat that is traded on Chicago. Soft red wheat is an inferior quality, low protein biscuit or even feed wheat – as indeed is MATIF – with only 11 percent protein and few milling specifications.

Nonetheless we tend to hedge on Chicago because it is more liquid than Kansas. We have also been instrumental in getting a new product off the ground, which is called a Black Sea swap, which is a non deliverable derivative based on the price of Russian 12.5% normalised to a parity of FOB Novorossisk. Brokers use the benchmark pricing of PLATTS to price this market and counterparties are approved on the same basis as counterparties in any cash traded business with the broker checking with both buyer and seller that they are approved counterparts. There is some interest to have this product cleared by an exchange and given that Russian milling wheat prices have become such a benchmark for global trade I predict that this will only be a matter of time before it comes to fruition.

However the best hedge for Russian wheat is…. Russian wheat! We prefer to hedge ourselves on the physical markets rather than the futures markets.

How does that work?

We generally only sell forward two to three months, so a lot of the trades we do are relatively spot, meaning that they will be executed within four to six weeks from the date concluded. A lot of our positions are backed up or hedged by our Russian partners or other suppliers. We buy from them on a FOB basis and often convert the sales into CIFFO and take on both the risks and rewards of providing such a service to our clients.

We often hedge our sales of Russian corn, which is a relatively illiquid market, by buying Ukrainian corn. So we might sell Russian corn for shipment in September and buy Ukrainian corn as hedge for delivery in October. Then when we finally cover our sale of Russian corn we sell out the Ukrainian corn that we bought as a hedge. We do this to reduce our risk exposure on movements in the flat price.

We are effectively trading the differentials between different qualities, geographies and different shipments. We try to be relatively cautious in taking large long or short positions on the market and we will always monitor our position limits and the amount of risk that we are taking. We try to keep risks within pre-defined limits – limits that are relatively conservative. This summer we will be implementing a new software system that tracks our positions and can calculate our profit and loss; our value-at-risk (VAR), issue invoices and keep track of our inventories.

This is not the sort of image that most people have of commodity trading, but it is what most traders do – at least physical traders. We are not big speculators. You can easily lose a huge amount of money if you go off and take flat price positions – and then fall in love with them!

How do you think commodity markets are going to change over the next few years?

There is going to be further consolidation – for better or worse. Certain big trading companies want to increase their global footprint and secure their positions as suppliers of food commodities from different origins.

There is a lot of competition in the agri-markets and trading companies are looking at ways to add value to their operations. One way is through owning processing or logistical assets, or even land. ADM for example loses money now on trading but makes it on processing. Glencore Ags recently said that less than fifteen percent of their profits come from trading, while the rest comes from assets. I think that is the future for the bigger players. They need these huge assets.

So traders are moving towards owning assets while maintaining a global trading presence at origin and destination.

Would you recommend young people to go into the commodity business?

One hundred per cent – yes! It is a fascinating industry to be involved in. It is a real business – real grain moving from real farmers to produce real food such as bread and pasta. It is not a bunch of people sitting around a computer screen betting on price moves.

What advice would you give to some one just starting?

Learn and listen and talk to as many people as you can in the business. Try to get some work experience and of course join GAFTA so as to learn about the trade by taking a course such as the Foundation Course or the Distance Learning Programme (DLP).

Thank you Swithun for your time.

The full version of this interview appears in my new book Commodity Conversations, available now on Amazon

Posted on

Commodity Conversations Weekly Press Summary

Starting with company news from Asia, Olam International has reported a 17.5 percent rise in its third-quarter net profit to S$24.1 million for the three months ended September, compared with S$20.5 million a year ago.

Revenue grew 41.7 per cent to S$6.71 billion from the preceding year, as the company’s traded volume increased to 5.8 million tonnes from 3.8 million tonnes. Olam generated a free cash flow  of S$1.11 billion in the first nine months of this year, versus a negative S$150.5 million in the same period last year.

Olam also received the Singapore Apex Corporate Sustainability Award in the multinationals category. Meanwhile, the company’s CEO has been appointed as the new chair of the World Business Council for Sustainable Development for two years starting in 2018.

Wilmar International reported a net profit of $370 million for the three months ended Sept. 30, compared with $392.2 million for the same period a year ago. A stronger performance in its oilseeds and grains division was offset by lower results in the tropical oils and sugar businesses.

Wilmar’s chairman and chief executive has forecast a “satisfactory” performance for the tropical oils and sugar divisions in the current quarter, with the oilseeds and grains business should see its “good performance” continue.

The company is looking to list its China unit on the Shanghai Stock Exchange in the second half of 2019, eight years after the initial listing plan was first announced. Wilmar’s China operations contributes half of the group’s revenue and a significant portion of the profits.

Noble Group has started talks with stakeholders to restructure its debt and secure trade finances in a bid to keep its business running. Noble has almost $400 million of medium-term debt notes due March 2018 and $1.14 billion of senior unsecured revolving credit facilities and a term loan due May 2018, according to Fitch Ratings.

But while some companies contract, others expand. COFCO International plans to increase soybean sourcing in Brazil’s Mato Grosso state to 7.2 million tonnes from 4 million tonnes currently. Mato Grosso is home to 13 out of 19 elevators the Chinese trader operates in the country.

The chief executive of Glencore Agriculture discussed merger possibilities in a presentation to the Global Grain conference in Geneva. He said, “we have looked at three or four possibilities in our core area already this year but couldn’t reach agreement with the seller”. He added that Glencore remained focused on acquisitions for growth, and saw scope for consolidation in the grain sector due to excess capacity. “Finding value is the big challenge in the industry today,” he said.

In a presentation to the Morgan Stanley Global Chemicals and Agriculture Conference in Boston the chief executive officer of Bunge said he believed the grains industry is caught up in a cyclical period. However he indicated that some pieces of the agricultural chain may be experiencing a permanent shift.

“If there is one place in the world where we do see that there’s a shift and there is a structural amount of overcapacity that somehow has to be rationalized, it’s in the U.S. grain origination and export industry,” he said, adding U.S. grains “needs fixing.”

There is also over-capacity in Brazil’s sugarcane sector.  Biosev SA, the sugar and ethanol unit controlled by Louis Dreyfus Co, is idling its Maracaju mill in Mato Grosso do Sul state for an undetermined period of time. The cane processed at the mill will be transported to two other mills that Biosev operates in the region.

Raízen will also idle two mills in the main Sao Paulo cane belt for an initial period of two years, saying there will not be enough cane in the area where the plants are located. Raízen will transport the cane in the areas where the mills are located to other plants it operates in the country.

In response to “evolving customer preferences for antibiotic-free meat, milk and egg products,” Cargill has broken ground on a new 50 million dollar feed facility in Ohio that will be focused on antibiotic-free protein production. The plant will sit alongside Cargill’s existing facility on the site that will continue to produce medicated feed products. A spokesman said, “We understand our customers have different preferences and product requirements, and this new facility will help us deliver those choices.”

Continuing on the theme of consumer trends, the percentage of people in the US who consumed a sugary beverage on any given day has fallen to 60 percent for children and 50 percent for adults in 2014, down from 80 percent and 62 percent respectively in 2003. Consumption of fruit juices also dropped in the period, while water consumption was up for all age groups.

And…well, it had to happen: a headline this week read: “Forget everything you know – sugar could be good for you after all”.

Meanwhile, the New Food Economy has written a good piece on nutrition, bad science, and even worse journalism. The writer takes particular exception to a recent claim that giving up genetically modified organisms improves your health.

Lastly, Reuters has written a long read explaining Monsanto’s challenges with the weed killer dicamba.

Notes:

Chris Mahoney, CEO of Glencore Agriculture, will be speaking at the Commodity Conversations event in London on 6th June 2018.

Jonathan Kingsman’s new book, Commodity Conversations, is now available on Amazon

Posted on

Certification and consolidation

Over the past couple of decades, voluntary sustainability standards (VSS) have taken on increasing importance in working to ensure that agriculture, and agricultural supply chains, are environmentally and socially sustainable.

The International Trade Centre, which tracks 465 eco-labels in 199 countries and 25 industries, recently published a report, “Social and Environmental Standards – From Fragmentation to Coordination”. The authors highlighted 239 voluntary standards operating in 90 agricultural markets, many of them over-lapping.

Cocoa producers in Cote d’Ivoire now contend with up to ten different standards. Coffee producers in Honduras have nine standards. Tea producers in China have thirteen. Soy producers in Brazil face 21 voluntary standards.

As the report authors write, different buyers use different standards and, in many cases, their own proprietary, non-transparent auditing scheme. This leaves their suppliers struggling to comply with several voluntary standards at the same time. The associated audit processes can quickly push up costs, both in time and money. Competition between standards can also result in what the authors call “a race to the bottom”, where producers or buyers may be tempted to choose the most lenient standard.

It has been shown that consumers trust eco-labels more than they trust brand sustainability claims. This increasingly translates into a business opportunity, especially with Millennials and Generation Z. However, too many standards can also confuse consumers and undermine their trust in the whole system.

And on the production side, it is a bit tough to ask a farmer to go through a whole new audit process just because he wants to grow soy this year rather than sugarcane.

A reduction in the number of voluntary standards would:

  • Reduce audit costs along the supply chain
  • Enable more small-scale producers to become certified.
  • Empower buyers to ensure that what they source is environmentally and socially sustainable.
  • Give more credibility to the certifying agencies and reduce their costs through economies of scale across different commodities and geographies.
  • Increase transparency and make it easier for civil society to “call out” any bad actors
  • Create brand company clarity in marketing
  • Reduce hidden transaction costs
  • Allow certification organizations to focus more on supporting their stakeholders
  • Allow value chain partners to focus more resources on improvement rather than multi-standard compliance

This is obviously a case of “less is more”. The sector is ripe for consolidation. But how do we get from where we are now to where we want to go?

The report authors suggest that a first step would be to get the various standard-setting organizations to talk with each other to explore ways of aligning standards, audit procedures and management structures.  Benchmarking and mutual recognition of standards would be an important part of that process. Stacked audits to combine key different elements of standards/company specific audits into one audit would reduce the reporting burden.

The authors also suggest that international organizations and conventions could play a key role. They rightly point out that within the sector social sustainability is less fragmented than environmental sustainability. This is largely because most schemes follow the International Labour Organization (ILO) Conventions on child and forced labour, employment, and working conditions. Although there are numerous international conventions on environmental protection, there is less of an international consensus on environmental issues.

The authors therefore suggest the development of core, universally applicable environmental criteria. Companies are increasingly pledging to go deforestation free and this could be expanded to cover key international environmental conventions, as well as the United Nations’ Sustainability Development Goals.

These are all good suggestions.

The idea of companies working together would be unthinkable in the commercial sector; anyone who tried would be hauled up in front of the competition authorities, and accused of forming a cartel. However certification agencies are mostly non-for-profit organisations. Their goals, by definition, are not to make a profit, or to increase their share prices.  Non-for-profits are not interested in market share; they are interested in “the greater good”.

Working together, whether in the form of partnerships, shared standards, benchmarking or outright mergers should therefore not only be possible, it should be welcomed. Working together would help the certification agencies to better achieve their goals, and make the world a better place.

The views expressed in this blog are my own and do not necessarily represent those of Bonsucro.

Posted on

Commodity Conversations Weekly Press Summary

In company news, the Commodity Futures Trading Commission last week fined Cargill Inc $10 million for providing inaccurate information on swaps, and for failing to supervise the company’s swap dealers. The charges date from 2013. In an emailed statement, Cargill admitted no wrongdoing, but said it was “enhancing its internal controls and employee training programs” inside its swap dealer division.

Meanwhile Cargill has announced it is investing an additional $240 million in India over the next five years. The investment will be in Cargill’s core businesses, including edible oil, cocoa and chocolates, starches and sweeteners and animal nutrition. Last year, Cargill inaugurated its first wet corn milling plant in India; set up with an investment of $100 million.

Bunge Ltd has said it may be able to get the best value for its Brazilian sugarcane milling business through an initial public offering of the unit. The company began looking at selling the mills in 2013. Bunge is already in the process of separating the finances of its sugarcane-milling unit from the rest of the company. The CEO said that this would make it easier for the company to act quickly once it decides to launch an IPO or take other measures.

COFCO International has agreed to sell Nidera Seeds, its crop seeds business that operates in South America, to Syngenta AG. Financial terms were not disclosed. Syngenta, owned by ChemChina, has said it would pursue deals to become the third-biggest player in the seeds industry.

Ferrero, the Italian food manufacturer, attracted media attention last week after a German consumer group noticed that the company has slightly changed its recipe for its Nutella spread. It has increased the content of powdered skimmed milk from 7.5% to 8.7%, and sugar from 55.9% to 56.3%. Furious Nutella fans took to Twitter to criticise the changes, using the hashtag #boycottNutella. In a statement Ferrero confirmed the changes had been made but insisted, “the quality … and all other aspects of Nutella remain the same”.

The danger of changing recipes was also highlighted in a Bloomberg article this week. In the 1980s Coca Cola responded to the “Pepsi Challenge” advertising campaign by introducing a new formula. Loyal customers said they didn’t like the new taste and sales fell. The company reacted and relaunched “Classic Coke.”

Back in the future, the UN’s FAO warned last week that global hunger is on the rise for the first time in a decade. A total of 815 million people went hungry last year, an increase of 38 million on the previous year. The FAO blamed climate change and conflict for the increase.

The organisation’s Director-General said that “About one in three people globally suffer from at least one form of malnutrition: be it hunger, micronutrient deficiencies, or overweight and obesity. Unless we take urgent and effective action, more than half of the world’s population will suffer from at least one type of malnutrition by 2030.”

The journal Nature Geoscience has published a report that argues that the world could feed an additional 825 million people, produce 10 percent more food calories, and grow 19 percent more protein by adjusting what crops are grown where. Changing where crops are grown would also reduce farmers’ use of rainwater by an estimated 14 percent. The study’s authors did however acknowledge that cultural and dietary preferences could pose a challenge in changing where crops are grown.

People’s tastes do however change; we can get used to anything. To illustrate the point Reuters reports that North Koreans now eat the dregs left over from making soybean oil, which usually go to feed the pigs. They press and roll them into paste, stuff them with rice, and top it with chilli sauce. The dish’s name, injogogi, means “man-made meat”. If not a national dish, it has become a street food popular for its taste.

Meanwhile, Russia’s 2017-18 grain harvest is expected to hit a record 133 million tonnes. Of that amount, 44.5 million tonnes are earmarked for export, up from 37.7 million last year and only 1.3 million tonnes in 2001. Russia is set to overtake the United States as the world’s biggest wheat exporter this year – regaining the top spot it last held before World War One. However analysts warn that a lack of port infrastructure could limit further export expansion.

Lastly an opinion piece in the New York Times argues that we should stop talking about food in the negative sense. By fretting about food, we turn occasions for comfort and joy into sources of fear and anxiety. And when we avoid certain foods, we usually compensate by consuming too much of others. The writer adds, “All of this happens under the guise of science. But a closer look at the research behind our food fears shows that many of our most demonized foods are actually fine for us”. He adds, “If there’s one thing you should cut from your diet, it’s fear”.

Powered by ECRUU