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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.

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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

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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

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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.

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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”.

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Sugar Awareness Week

The lobby group Action on Sugar has been promoting Sugar Awareness Week on their @actiononsugar Twitter feed. One post, below, caught my attention.

It is difficult to know how much sugar billions of people across the globe are really consuming. On a country basis you can take production plus imports minus exports, but you don’t know how much sugar has been wasted, or added to or subtracted from stocks. It is even harder on a global basis where cross-border sugar trade flows can be difficult to track.

Having said that, the UN’s FAO estimates world sugar consumption in 1987 at 102 million tonnes. That year  world population reached 5 billion people, which equates to a per capita sugar consumption of 20.4 kilos . Thirty years later, the world’s population has reached 7.6 billion people and world sugar consumption has topped 180 million tonnes. So using the FAO’s figures that equates to a per capita sugar consumption of 24 kilos per person, an increase of 18 percent over thirty years.

Possably as a result of the group’s lobbying efforts, two of Europe’s leading magazines featured sugar on their covers this week. France’s Le Point promised to tell readers “The Truth About Sugar” while Germany’s Focus wanted to inform their readers of the difference between “good” sugars that come in the form of natural products, and “evil” sugars that the food industry adds to their processed products.

As part of Le Point’s crusade for the truth the magazine included a graphic that showed that per capita sugar consumption had risen from 16 kilos per person in 1960 to 25.5 kilos in 2016. Unlike the statistics on Action for Sugar’s Twitter feed, these figures are more or less correct. World sugar production in 1960 stood at 55 million tons while world population stood at 3 billion people, which gives a per capita consumption of 18 kilos. As for 2016, the FAO’s figures suggest a  per capita number of 24 kilos, but that is close enough.

What Le Point fails to point out is that if you exclude the low-income countries of China, India and Pakistan the average global per capita sugar consumption hasn’t changed from what it was in 1960 – 25 kilos per head. Per capita sugar consumption in the USA in 1960 was around 55 kilos per head.

At the recent Platts-Kingsman Conference (no longer anything to do with me) in Miami, the American Sugar Alliance, a pro-sugar lobby group, presented the following graph showing US sugar consumption correlated against US obesity rates.  As you can see, obesity rates have been rising while sugar consumption has fallen.

If you add in high fructose corn sweeteners, the picture changes somewhat, but not dramatically.

In their presentation the ASA highlighted the fact that Americans are consuming 374 more calories per day now than they were 34 years ago. The following graph breaks down where those extra calories are coming from.

Going back to Le Point, the magazine published the following graphic in their anti-sugar piece. It purports to show a correlation between world sugar production and obesity. The correlations look impressive, but they would have looked less impressive if they had taken the increase in population into account.

All this prompted me to revisit one of my favourite websites where I managed to produce the following graphic. It clearly shows how the decline in per capita consumption of corn sweeteners in the US has resulted in a reduction in the number of pedestrians killed by motor vehicles. So that at least is good news.

It is not clear who first coined the phrase, “There are three kinds of lies: lies, damned lies, and statistics.” In his book “The Persuaders – The Hidden Industry that wants to change your mind“, the author James Garvey explains that the practice of public relations is “rarely intended to inform the population about the intricacies of an issue and is more often calculated to circumvent critical thinking.”

Well said!

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Commodity Conversations Weekly Press Summary

Low prices and thin margins continue to make for hard times in the agricultural trading business.

This week Archer Daniels Midland Co announced that their quarterly earnings had fallen 44 percent. The company handled 20 percent less grain than expected and average margins in the United States were 50 percent below expectations. The company’s CEO said that he will reduce capital spending next year by about 20 percent and reallocate funds away from oilseed crushing towards its higher-value businesses. However he added said he didn’t expect conditions to get better any time soon.

Bunge Ltd has forecast lower full-year earnings in its core agribusiness unit after posting a third-quarter profit that fell 28 percent on flat revenue. The company’s CEO was, however, optimistic about the future. He said that the company’s trading and processing next year would benefit from cost cutting and strengthening demand for oilseeds, a key driver of revenue. He added, “The third quarter was better than the second and the fourth quarter will be better than the third.”

The CEO of ED&F Man is leaving the company as part of a senior management reshuffle after “a very challenging year”. The company said that the move was part of a restructuring driven by difficult market conditions in its sugar business.

Mackprang jr. GmbH, a Hamburg-based trading house founded in 1878, is venturing into the consumer breakfast market in search for higher value businesses. The company said it will source oats, corn and raisins, then mix and pack them before shipping out to China. The company’s managing director said, “Being a grain trader is no more the place where you make your money so easily. Definitely not. Times are changing and we have to look for other opportunities.”

But at least one trading company is looking to expand during these tough times.   Sucafina, the Swiss-based coffee trader, has hired about 50 people in the past year, opened offices in Colombia and Brazil, reorganized its North American unit and is starting a business in Seattle. The company has taken out a $300 million 18-month syndicated loan to fund its expansion.

The company’s CEO told Bloomberg, “I like to consider Sucafina the smallest of the big trade houses or the biggest of the small trade houses. If we were content to stay at this size and we weren’t vertically integrated, we would eventually get acquired by someone.”

Goldman Sachs Group Inc. is also expanding their commodity operations during tough times, hiring traders from Morgan Stanley and Castleton Commodities. To be fair, though, the expansion seems to be more in energy and metals, rather than agriculture.

It is not just commodity trading companies that are facing headwinds; agricultural chemical companies have also been in the news this week.

US farmers have overwhelmed state governments with thousands of complaints about crop damage linked to weed killers that use a chemical known as dicamba. Farmers claim that the herbicides have harmed crops because they evaporate and drift away from where they are applied. Monsanto and BASF, who make the herbicides, say the herbicides are safe when properly applied.

One expert estimated that 3.1 million acres of non-targeted crops have been damaged by the herbicide. In Monsanto’s defense, the company says it investigated 1,000 such claims, and found that in 88 percent of those cases, the farmer was to blame for faulty application of the product because “the label was not followed.” However, as New Food Economy points out, the “label” is 4,500-words long.

Meanwhile, The New York Times has accused President Donald Trump of damaging people’s brains, not by his angry early morning tweets, but through his lack of action on the chemical pesticide chlorpyrifos. The newspaper claims that the chemical is found in food, air and drinking water, and that human and animal studies show that it damages the brain and reduces I.Q.s while causing tremors among children. The Environmental Protection Agency banned the pesticide for most indoor residential use 17 years ago, and was preparing to ban it for agricultural and outdoor use this spring, but the Trump administration has apparently rejected the ban.

Campbell Soup has announced it is joining the Plant Based Foods Association, acknowledging reduced consumer demand for meat and dairy food. Earlier this year the company left the industry’s top trade and lobbying group, the Grocery Manufacturers Association, citing the lobbying group’s opposition to labeling whether food contained genetically modified ingredients.

The PBFA counts more than 80 companies as members but Campbell Soup will be by far its largest., “We’re not trying to make the whole world vegan,” a spokesman for the association told Bloomberg. “All we’re doing is trying to make plant-based products available to more people.”

In a similar vein, McDonald’s Corp have announced that they will require suppliers to follow new standards for raising and slaughtering chickens. Under the new guidelines, suppliers such as Tyson Foods Inc and Cargill Inc must comply by 2024 with rules dictating the amount and brightness of light in chicken houses, provide birds with access to perches that promote natural behavior, and take other steps to improve animal welfare. Tyson and Cargill have said that they support McDonald’s moves.

And while we are on consumer trends, people are abandoning their supermarket trolleys for baskets. The annual Waitrose Food & Drink Report (which covers all UK supermarkets), reports that customers are increasingly shopping little and often. One in ten people buy what they are going to eat that night, on the way home from work. Two out of three go to the supermarket more than once a day. As the report puts it: “People treat supermarkets like giant walk-in fridges.”

Nestlé, Mars and Hershey have been accused of breaking pledges to stop using “conflict palm oil” from deforested Indonesian jungles. The Rainforest Action Network (RAN) says consumers have been “deceived” by promises from the brands to clean up their supply chains, which were subsequently delayed, revised or watered down.

Hershey’s communications director responded to the allegations by saying that, “While we remain deeply committed to pushing all stakeholders to accelerate traceability and bring full transparency to this supply chain along with our supplier partners, we realise it would take more time to achieve this goal than originally anticipated.”

Meanwhile Malaysia is bracing itself for a total ban on EU imports of palm oil as the European Parliament gears up to ratify a proposed resolution to ban palm oil imports. The European Parliament has already voted to phase out the use of palm-oil biodiesel by 2020. After India, the EU is Malaysia’s second-largest export market for palm oil. China is in third place.

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Butter up, oranges squeezed

After years of building up herds that produce low-fat milk, the world’s dairy industry is now struggling to meet a surge in demand for cream and butter. Butter prices have more than doubled over the past year, but heavy stocks of (low-fat) milk powder are pressuring milk prices. It could take years for the sector to adjust.

http://www.globaldairytrade.info

There is a saying in the commodity markets that demand is the backdrop against which changes in supply play out. Demand for most food products tends to increase by a small, but predictable, percentage each year, roughly in line with increases in population and income.

The supply of agricultural products, on the other hand, can vary significantly from one year to another. Weather is nearly always the most important factor driving supply. Price comes a close second—both the price of the commodity itself (with a time lag), and the price of alternative, competing crops. Crop diseases and pest infections can from time to time also be important drivers.

However, as I wrote last week, the demand for a particular foodstuff can sometimes change dramatically in response to the publication of new scientific—or pseudo-scientific—research. When that happens, the demand shift is almost certainly amplified through both traditional and social media. The traditional media in particular like new scientific studies that go against conventional wisdom. The most recent—and most dramatic—example is the way consumers no longer believe that both animal and vegetable fat makes you fat. Conventional wisdom now blames fructose, whether in sugar or in fruit juices, for the obesity epidemic.

Nutritional scientists—and lobbyists—will doubtless argue until the cows come home whether it is fat or fructose that is making people fat. While they argue, dairy farmers struggle to sell their stocks of low-fat milk but are unable to meet the increased demand for the high-fat milk that is needed for butter and cream. Meanwhile, Florida’s orange growers struggle with a collapse in US demand for orange juice. Butter consumption in the United States is up 7-8 percent this year; orange juice consumption is down 5-7 percent over the same period—and down nearly 45 percent over the past twelve years.

Dairy farmers and orange growers have not only had to deal with dramatic shifts in demand; they have also had to cope with bad weather. It has reportedly been too wet in New Zealand and too dry in Europe to produce quality feed for dairy cows. (Both phenomena have been blamed on climate change.)

Meanwhile Hurricane Irma hit Florida’s orange groves hard this year, further lowering production that had already been decimated by greening disease. A solution has now been found for greening disease (by inserting a spinach gene into the tree), but it will take years for the new orange trees to mature. Growers are rightly worried that on current trends there won’t be enough demand to absorb supply once they do.

It will also take years for the dairy sector to beef up supply to meet the demand for high-fat milk. Most herds now consist of Holstein cows, a breed that produces large quantities of low-fat milk, perfect to meet the global growth in demand for milk powder for products such as infant formula in developing countries, particularly China. Farmers are now replacing those Holstein cows with Jersey cows that produce higher-fat milk, but it is a slow process. In the meantime, butter prices continue to rise.

But why are there actual shortages of butter in some areas of Europe—even ironically in Normandy, the heart of France’s dairy industry? Why isn’t price rationing demand? The answer is that supermarkets have been reluctant to pass on to their consumers the increase in butter prices. As a result they have refused to pay current prices, and European producers have found better buyers in export markets in China and, strangely enough, in New Zealand.

Consumer trends can have a real impact on demand for different commodities. It takes time for supply to adjust and by the time it does, there is always a danger that the science will have moved on.

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Food for thought

 

A recent survey conducted in the UK and reported by CampaignLive showed that McDonald’s and Coca-Cola were the two brands consumers most associated with litter. Two-thirds of those surveyed said their perception of a brand was negatively affected when they saw its waste in the streets and that they were less likely to buy from them as a result.

Following in the footsteps of Danone, Bloomberg reported that Nestle was working on making its water-bottling business more sustainable through its tie-up with Alliance for Water Stewardship, as consumers become increasingly worried about the environmental problems caused by bottling water. Similarly, the World Bank is flagging the importance of water management in a new report that found that some 80 million people could be fed for a year with all the food destroyed by drought, the Guardian reports. The Bank warns that water will become increasingly scarce with growing population and climate change and that the regions the most at risk were also the areas with the highest food deficits.

Olam announced it will be managing Gabon’s Owendo’s multipurpose terminal along with Bolloré Transport & Logistics (through their affiliates STCG and GSEZ Ports), according to Stat Times. Some USD 300 million will be invested to increase the port’s capacity, a strategy that could be replicated elsewhere on the continent as both partners said they are looking to work together in developing West Africa’s agricultural commodity market.

The race to buy Unilever’s margarine and spreads business is on, with three bidders expected to be shortlisted for an auction’s second round, according to sources who spoke with Reuters. The amount could be in excess of USD 7 billion given the business’ high margins, even though consumption of bread and margarine has reportedly dropped in western countries.

Meanwhile, Cargill continues on its acquisition spree as part of its strategy to diversify, having just added Iowa-based feed maker Diamond V to its portfolio, Reuters reports. Cargill said this was one of its five largest acquisitions ever and Standard & Poor commented it made a lot of sense as the world will need plenty of proteins to feed a growing population.

More and more impact investors are looking at sustainable food and agriculture, a sector in which impact investment has grown at an annual rate of 33% since 2013, according to Global Impact Investing Network, Greenbiz reports. Projects include encouraging grass-fed beef and transitioning farmland so that it can regenerate. There are a lot of good ideas but not enough access to capital, one of funds said.

Talking of things to come, China is anticipating exponential demand for pet food. A Chinese group has just bought the majority stake in Queensland-based The Real Pet Food Company (TRPC), ABC reports. A company official commented that the global phenomenon of “pet humanisation” had already taken place in the US and Europe, and has started to happen in China.

Finally, take a look at this infographic to see how self-executing Smart Contracts on the Blockchain could eventually replace brokers, some say. 

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French toast anyone?

Still, a man hears what he wants to hear. And disregards the rest.              Simon & Garfunkel The Boxer 1969

When we had our first baby nearly thirty years ago, we were told to always put her face down in her cot to sleep. Eighteen months later, when we had our second, the nurses at the maternity told us never to put him face down to sleep, but always on his side. Two years later we had our third child; we were firmly told to always put him on his back to sleep, never on his side (because he could roll over), and never face down (because he could suffocate). By the time our fourth child was born we were back to square one. The nurses at the maternity firmly told us to always put him face down to sleep. (I don’t know the current recommendations.)

Marketing can play a role as well. When our first baby was born we bought standard paper nappies (diapers). By the second child we had a choice between boys’ nappies (in a blue box) and girls’ nappies (in a pink box). By our fourth child the nappy company was massively marketing a new breakthrough: “Unisex” nappies!

Food—what is healthy and what isn’t—is subject to even stronger trends (and fads).

I can remember as a young teenager being sent out by my mother to search the local shops for grapefruit. A “study” at that time had found that certain compounds in grapefruit burned body fat; eating it regularly could promote fat loss. My mother, along with half of the UK population, started to eat half a grapefruit before every meal. Within a couple of weeks there wasn’t a single grapefruit left in the country. Supply couldn’t keep up with the sudden spike in demand.

It may be that the water in grapefruit helps you feel full, and then you eat less. But if you’re hoping that grapefruit will melt fat, you’re going to be disappointed.

Back in 2014, two enterprising German journalists carried out a “scientific” study that “proved” that eating chocolate helps you to lose weight. The whole thing was a hoax, but they managed to get the study published in a scientific journal, and sent out press releases to all the media. Within a week it was on the front page of all the newspapers. None of those newspapers verified the story or checked on how vigorous and exhaustive the study was; they based their stories entirely on the press release.

In 1984 the US government published the results of what Time magazine described as “the broadest and most expensive research project in medical history”. The Time story introduced cholesterol to the world and was accompanied by its infamous cover photo of bacon and eggs. The study behind the article is now considered to be seriously flawed, but it led to millions of people around the world changing to a low-fat diet.

Thirty years later, Time put butter on their front cover, telling their readers, “Scientists labeled fat the enemy. Why they were wrong.” However, the study highlighted in the article also appears to be seriously flawed. The Harvard School of Public Health wrote,

“What the headlines miss is that in a meta-analysis such as this, there is no specific comparison (i.e. butter vs. olive oil), so the default comparison becomes butter vs. the rest of the diet. That means butter is being compared to a largely unhealthy mix of refined grains, soda, other sources of sugar, potatoes, and red meat…Here is the most important takeaway from this study not making headlines: Butter, a concentrated source of saturated fat, is still a worse choice than sources of healthy unsaturated fats such as extra virgin olive, soybean, or canola oils.”

An article published last week in the Journal of the American Medical Association (JAMA) adds to the criticism by arguing that many published meta-analyses have combined the findings of studies that differ in important ways, mixing apples and oranges—“and sometimes “apples, lice, and killer whales”—yielding meaningless conclusions.” Far from increasing statistical power, these meta-studies are reducing it or causing real correlations to disappear.

One of the meta-analyses they discuss was the 2014 study examining the connection between saturated fat and coronary artery disease. The authors of that study combined data from vegetarians in Oxford with meat eaters in Sweden, diluting its results with what probably amounts to a big false-negative.

In an article earlier this week, New Food Economy argues, “Journals are mostly interested in studies with new and striking results—results that go against the conventional wisdom, even if that wisdom is correct. Add in the influence of industry and you get a situation where the published research turns one-sided.

New Food Economy went on to explain that according to a US lawsuit filed in early 2016 (that was dismissed), the egg industry funded 29 percent of studies on dietary cholesterol in 1992—but 92 percent in 2013. It seems to be working. Not only is butter back, eggs are too!

Next week: The great butter shortage—how can the food industry cope with sudden demand shifts?