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The Hidden Life of Trees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Commodity Conversations Weekly Press Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Discovering humanity in the world of trading

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

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

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

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

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

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

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

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

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

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

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

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

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

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Commodity Conversations Weekly Press Summary

Some pension fund managers are disappointed with the returns from commodities, especially given the equities market are going through a bull run. For one, Fidelity Investments Commodity Strategy Fund has lost 38% or USD 3.26 billion since 2012 from its investments in futures contracts as energy, gold and silver prices dropped and sugar and coffee supplies increased. The fund, however, said it was sticking with the commodity strategy as its managers take a long-term view. It has already reduced the share of commodities in its Freedom Funds to from USD 12 billion to USD 4 billion, or about 2% of net assets.

The US grains market has been through a tough year. Ethanol manufacturers and private grain handlers are now worried that the new tax law giving farmers a 20% deduction on grains sold to cooperatives will drive them out of the market. While Cargill and ADM said they were still evaluating the provision, many farmers are already exploring ways to sell grains kept at private elevators to cooperatives.

Meanwhile, cocoa traders are concerned about an impending crisis in Ivory Coast, where the Coffee and Cocoa Council (CCC) has reportedly resold some 100,000mt of cocoa export contracts that were going to be defaulted on. Because of falling prices, exporters have been struggling to get the financing to buy the beans for their export commitments. Last year, already, the CCC lost some USD 355 million because it had to resell cocoa at a loss.

On the other hand, the NAFTA trade negotiations could get a big boost from recent figures which showed total trade between the US and Mexico in Jan-Nov 2017 gained 6.4% and reached USD 512.2 billion. Mexico reported a surplus of USD 65.68 billion, the highest since 2007. Analysts said this was a sign that the private sector of both nations would be able to convince the White House to continue the NAFTA program, although the growing surplus in favour of Mexico could add to tensions.

Talking of revisiting trade arrangements, the UK government is likely to pay EU-like farm subsidies for five years up to 2024 during the transition period when Britain exits the bloc in March 2019. British farmers get about USD 4.06 billion in subsidies as a part of EU’s Common Agricultural Policy, and the government aims to match this amount until it comes up with a new system.

Sources say Italy-based Ferrero could be buying Nestle’s US chocolate business as early as this week, paying as much as USD 2.8 billion and outbidding rival Hershey. This would follow another acquisition – that of Ferrara Candy back in December – as Ferrero tries to gain more US market share while Nestle focuses on healthier segments. Another European group to eye the US market is French dairy company Lactalis which will buy US-based Siggi’s. Siggi’s manufactures Icelandic style yogurts, reportedly based on a recipe prepared by the founder’s mother.

Still in the US, Hershey and Cargill have quit the Grocery Manufacturers Association, joining Campbell Soup, Dean Foods, Mars, Nestle, Tyson Foods and Unilever who previously left the association. While none of the companies gave a clear cause for leaving, many of them wanted the lobby group to change its stance on a host of issues including GMO labelling.

In an interesting twist, Japan’s government has designated Coca-Cola Plus as a “Foods for Specified Health Uses.” Also known as the forshu stamp, consumers widely view the endorsement as a sign the product is healthy. The drink, recognisable by its while label, contains indigestible dextrin which acts as a laxative. Two other sodas, Kirin Mets Cola and Pepsi Special, also received the government’s health seal of approval.

China seems to be tightening its grip on food safety. The government has removed from stores 1,400 baby formula products which were not registered with the Food and Drug Administration. The move will open up the country’s USD 20 billion baby formula market to other players, a market which is expected to grow 5% annually as a result of the easing of the one-child policy.

Scientists may have found a cause behind the declining honey bee population. A recent study showed that honey bees are attracted to some types of fungicides, such as the herbicide glyphosate. The University of Illinois explained that this was likely leading to increasing levels of fungicide contamination in hives.

The UK’s Prime Minister has committed to an end to plastic waste by 2025. The plan would extend the charge on plastic bags to more shops as well as tax things like takeaway wrappers. A latte levy on disposable coffee cups and a ban from 2023 if these cups are not recycled were also proposed to try to reduce the 2.5 billion disposable coffee cups used annually. However, several environmental groups said the plan would need to be legally enforceable to have any impact.  

Olam‘s CEO has taken charge as the chairman of the World Business Council for Sustainable Development. The co-founder of Olam International is the first person from the agri sector as well as the first Asia-based and Asian CEO to head the council.

Finally, the CME Group, which owns CBOT and Chicago Mercantile Exchange, has allowed block trading in all its agricultural markets as of January 8. These privately negotiated deals are permitted in its other markets such as Black Sea wheat and Eurodollars. Futures International explained the company was trying to create more liquidity in deferred futures spreads and create some transparency. However, the National Grain and Feed Association complained block trading will decrease transparency by taking business out of the public marketplace.

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Commodity Conversations Weekly Press Summary

Cargill reported a 6% drop in their net Sep-Nov quarterly earnings to USD 924 million, mainly due to falling revenues in their grains and oilseeds trading unit. The company said that high grains inventories in the US and the rest of the world resulted in lower volatility and therefore fewer trading opportunities. The group – which spent over USD 1 billion this quarter in acquisitions, joint ventures and infrastructure investments – will continue to expand towards “more sophisticated feed additives” and to shift towards “sustainable, natural feed ingredients that improve animal health and embrace changing consumer values.”

Cargill also announced the acquisition of pet foods Pro-Pet, a move which will make the company the only national marketer of animal feed and pet foods in the US. In India, meanwhile, Cargill will spend USD 236 million on its expansion over the next few years, including cocoa products and animal feed nutrition. The company is also investing USD 15.75 million in building storage capacity.

The US Department of Agriculture forecasts that people in the US will eat an average 45.72kg of red meat and chicken in 2018, more than the 2004 record. This is the equivalent of 283g/day, against the government prescribed 184g/day. Consumption declined by 9% from 2007 to 2014 because of higher commodity prices and a shift away from meat diet because of health, climate and animal welfare related concerns.

Brazil’s Port of Sao Paulo handled a record 129 million mt of cargo in 2017, beating the previous record set in 2015 by 8% and an increase of 14% on 2016. Out of the total, 49.5% was agribusiness goods, up from 47.8% in 2016. Sugar was the most exported crop at 21.1 million mt, followed by soybean with 16.5 million mt, out of which 85% went to China. The port expects to handle an even greater tonnage next year, with a 3.2% increase forecast.

Brazilian exports to China could increase as the latter is now requesting that soybean imported from the US contain 1% or less foreign materials, which renders half of the USD 14 billion annual exports ineligible and requires additional processing at Chinese ports, increasing costs for US farmers and traders.

China invested 20 billion in the ship financing sector in 2017, a 33% increase year on year as European banks pulled back due to the long down-cycle. As a result, three Chinese groups now own more than 800 ships with a value exceeding USD 23.6 billion.

Competition from green plastic manufacturers is increasingly challenging a market dominated by petrochemicals companies. Coca-Cola, for instance, sold over 50 billion plant bottles that contain 30% bioplastic. Among the companies investing in bioplastic, BASF is setting up a 50,000mt cornstarch bottle plant in Belgium, Stora Enso is testing 50% wood fibre-based plastic, and Lego put USD 160 million to research sustainable materials for its toys.

Food waste continues to be a major concern in India. As of the middle of last year, the Ministry of Food was involved in 228 projects in building pre­-cooling and chilled storage from the farm to the consumer in a bid to reduce some of the USD 14 billion food wasted every year. However, experts say progress is too slow, with fingers pointing to the inefficiencies of the public distribution system. Meanwhile, the FAO estimates that 15% of the country is undernourished.  

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Commodity Conversations Weekly Press Summary

Louis Dreyfus is selling its subsidiary LDC Metals to China’s NCCL Natural Resources Investment Fund which is owned by major copper and cobalt producers New China Capital Legend, AXAM Asset Management and China Molybdenum. Dreyfus intends to reinvest the sale proceeds in its grains and oilseeds business.

Meanwhile, Sierentz Global Merchants – which is owned by Louis Dreyfus family members, but not related to the company – registered a subsidiary, Sierentz Global Merchants Vostok, in Moscow on November 1. It will be headed by Louis Dreyfus’ ex-commercial director in Russia.

ED&F Man reported a pretax loss of USD 144.6 million for the year ending September 30, down from a pretax profit of USD 101.9 million a year earlier, partly due to the struggling sugar and grains sectors and a fraud with warehouse receipt transactions. Performance in the coffee and liquid segments, however, was good and the firm said its resources would ensure its operational existence in the foreseeable future.

Cargill has launched a website called FedByTrade where its 155,000 employees, communities and customers share stories of how they benefited from free trade agreements. The new initiative will help the company send a message to the White House which is looking to move away from multi-country trade deals like the 11-nation Trans-Pacific Partnership and NAFTA.

Cargill also announced it is tying up with Techstars and Ecolab to set up a startup accelerator in Minneapolis which would allow the company to invest in future farm technology to address challenges faced by the food system. The first batch of 10 startups will arrive in the summer of 2018 for a 13-week programme which will focus on developing technology to shape the food industry.

Talking of tech, Unilever has started a pilot project to develop a sustainable tea supply chain using blockchain technology. The one-year-long project will track Malawi farmers supplying sustainably-sourced tea.

According to Olam, increasing cocoa consumption in emerging markets has reduced the global surplus to just around 50,000mt this year from the record 371,000mt in 2016. The demand is higher in Asia, particularly in the Philippines, India, Indonesia and China and is expected to increase by 5% globally. However, global cocoa processing is predicted to grow by only 3% compared to 5% in 2016/17. Olam is raising its capacity to make cocoa powder in Asia and considering a new mill in the US.

Nestle’s Purina PetCare group is reducing headcount by 300 across US facilities as it focuses on cost competitiveness and right-sizing the organisation. The aim is to increase investment in high growth areas and grow market share. Meanwhile, the Water Resources Control Board of California has asked Nestle to limit the withdrawal of water in San Bernardino National Forest unless it proves it has legal rights to extract it. A board engineer said a 20-month probe found that the company does not seem to have the valid rights. The board has set the limit at around 8.5 million gal, which is about 25% of what the company extracted in 2016.

In the UK, Tesco plans to stop wasting human edible food by March 2018. The CEO said the group is using an app, FoodCloud, to inform the local charities to come and pick up the surplus food at each of its stores every day. Tesco has signed the voluntary Courtauld Commitment 2025 to reduce food waste by 20% in 10 years.

On the other hand, fossil fuels companies have invested USD 180 billion in 318 projects since 2010 in the plastics industry by establishing cracking facilities across the US – a move which will increase plastic production by over 40% in the next decade. The American Chemistry Council explained that the drastic increase in plastics facilities is due to the shale gas boom, which brought down prices of the natural gas liquids used in making plastics by nearly two-thirds.

The war against sugar continues in the US, with Seattle implementing a USD 0.0175/ounce tax on sugar sweetened beverages as of January 1, 2018. Meanwhile, there is increasing demand for by-products from cane. For instance, Telstar 18, the official ball of the 2018 Football World Cup, will use Keltan Eco rubber which is the first biologically based ethylene extracted from sugarcane. Adidas said that Keltan Eco rubber has a much lower carbon footprint compared to fossil fuel-based polymers.

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Commodity Conversations Weekly Press Summary

Cargill is looking at investing USD 212 million to build a new river port terminal in Brazil’s Para state which could handle 6 million mt of grains via barges from Mato Grosso. If the project goes ahead, the port could be operational by 2022-25.

The company continues to bank on growing meat demand in Asia and has opened its first animal nutrition premix plant in the Philippines at a cost of USD 12 million. Cargill is also investing USD 15 million to start manufacturing piglet feed products at its premix and nutrition plant in Tianjin, China. The new production line will use a traceable barcode management system as part of the group’s wider sustainability and traceability goals.  

Cargill has said it would stop buying palm oil from Guatemalan producer Reforestadora de Palmas del Peten (Repsa) until it meets their sustainable oil policy. Cargill explained it had asked Repsa to make some changes following complaints by environmental NGOs in the middle of 2017, but that these demands had yet to be met. The International Forests Program for Friends of the Earth said the move will send a strong message to the industry, and that other companies which also buy from Repsa, such as Wilmar, could follow suit.

This is not all that surprising given that in the US, a survey by Nielsen showed that 45% of consumers are more inclined towards buying a product from a brand committed to being sustainable and environmentally friendly. Not only that, but 66% of consumers will pay a premium for what they consider to be a sustainable brand, a share of the population which will continue to increase given that 73% of the millennial generation is willing to pay extra.

Similarly, the US meat industry is witnessing a structural shift, with the sales of fresh grass-fed beef rising to USD 272 million in 2016, up from USD 17 million in 2012, while the sales of ‘traditional’ beef are falling. This is because more and more consumers prefer healthier, environment-friendly and grass-fed meat.

Louis Dreyfus – which ships some 81 million mt of agriculture products annually – has joined the Sustainable Shipping Initiative (SSI). Dreyfus’ head of freight said the move was part of the group’s intention to have more sustainable shipping operations.

​T​he newly launched CME Black Sea wheat cash-settled swap contract traded for the first time last week.  One of the counter-parties, Swiss-based trading company, Solaris Commodities S.A., welcomed the contract saying it was the best derivative option available for participants involved in the Black Sea market as the correlation is better than futures contracts such as Matif or CBOT

Thai sugar producer Mitr Phol will shell out USD 100 million to buy a 50% stake in Olam’s Indonesia-based Far East Agri. The aim is to set up a sugar mill in East Java by 2020 which will process 1.2 million mt sugarcane in a bid to help reduce the domestic supply deficit.

Still in the sugar market, Brazil’s Centre South could lose between 9 and 20 million mt of sugarcane processing capacity in 2018/19 due to producers idling capacity. Producers are struggling financially, and unable to invest in fields and mill modernisation, making it necessary to reduce operating costs and run more efficiently.

Unilever has agreed to sell its margarine business – which includes brands like Rama, Flora and Blue Band – to the US-based private equity firm KKR for EUR 6.8 billion (USD 8 billion). The deal is expected to be completed by mid-2018 and is a part of efforts to restructure the business.

In the US, Dunn’s River Brands, a drinks portfolio management firm of Texas-based PE Fireman Capital Partners, will buy for an undisclosed amount two of Nestle Waters’ ready-to-drink iced tea brands. One of the founders of Dunn’s River Brands said the company will add more brands to its portfolio in next 90-120 days.

Food companies are increasingly using Blockchain technology to identify fake ingredients and track the cause of contamination in recalled products. The technology will also reduce fraud and eventually lower the costs related to documentation, which currently are estimated at 7% of the USD 16 trillion worth of raw materials traded every year.

Finally, if you are planning to celebrate the New Year with seafood, recent research from Norway found that mussels in the Arctic waters contained even more microplastics that mussels in coastal waters. All the mussels tested had microplastics, a strong indicator of the worsening pollution levels in the sea where an estimated 8 million mt of plastic ends up every year. However, scientists say that our exposure to microplastics is probably higher when wearing a fleece jacket or playing with a toy, than by eating seafood.

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The value of sustainability standards

In 2015, ISEAL Alliance conducted a survey of over 100 business leaders as to how they perceived the benefits of environmental and social sustainability certification to their businesses.

In terms of the business value of certification, the interviewees referred most frequently to the final benefits of improved reputation (60%), improved profitability (53%), cost reduction (30%), growth in production (30%), and improved supply security (23%)

The survey found that certified businesses found value in:

  • Improved working conditions with positive impacts on worker’s health and livelihood, as well as attention to sustainability in the supply chain
  • Reduced conflicts with local communities
  • Improved performance of (small-scale) producers and improved short and long-term supply security
  • Enhanced sustainable forest and fishery management which contributes to the preservation of the resource and thus long-term supply security.

However, last month Andre de Freitas, the executive director of the Sustainable Agriculture Network (SAN) wrote that it is time to recognize that certification has its limits in agriculture.

Earlier this year his organisation came to the conclusion that although they have seen many positive impacts from certification for workers, producers and the environment, it was not the best way to improve the sustainability of most farmers in the world. SAN took the decision to stop working with certification in agriculture.

Mr de Freitas argues that certification has four main interrelated limitations:

  1. Certification standards are complex. This means that the gap between producers’ reality and what is required by certification is often too wide. Most farmers in the world lack the technical and financial resources to be able to bridge this gap.
  2. Certification can be costly. This pushes certification to higher-end products and developed country markets, which usually can better absorb the increase in the price of raw materials. The author cites coffee as an example: certification can be feasible for the more niche premium products, but not be attractive for the higher volume used in price-sensitive categories. Another example is rice, a staple food in much of the developing world, where certification is virtually nonexistent.
  3. The high complexity and cost hinder the ability to scale up and go beyond low double digits in terms of penetration in a given sector. This is a typical low-hanging fruit situation, where, after an initial period of fast growth, every subsequent increase in uptake becomes more difficult than the previous one.
  4. SAN found that in their experience certification had been shown to have limited effectiveness to deal with some of the more intractable problems in agriculture, such as child labour, poverty, sexual harassment, sanitation, and others.

The author argues that these limitations mean that certification will work for farms that are already reasonably well-managed, have access to resources, have markets that are able to better value their products, and encounter fairly well-functioning local governance structures. He adds that these conditions are very specific and are not the reality most farmers in the world live in.

How we can reconcile these two opposing views was one of the main topics of debate at last week’s Sustainable Sugarcane Forum in London.

One of the biggest challenges highlighted at the event was in getting consumers to pay a premium for certified products.  If consumers refuse to pay a premium, producers have no choice but to recover the cost of certification through the productivity and reputational gains that ISEAL listed in their report. If producers can’t recover their certification costs, then they actually end up worse off financially.

One of the presenters at the event presented a possible solution to this conundrum: an actively traded credits market where industrial food manufacturers, in their efforts to reach their 2020 sustainability goals, buy credits rather than sugar. Credits already provide some limited extra income to producers and this is likely to expand significantly over the next few years.

Having said all that, Bonsucro’s increasing number of certified mills and our expanding membership suggest that stakeholders do find value in certification. There appears to be a real momentum building.

Not only that, but  in discussions with stakeholders at the event, and at other times over the past year,  both producers and consumers have highlighted to me many of the benefits that the 2015 ISEAL survey also highlighted. Of course producers would consumers like to pay a premium for certified product, but even without one, certification is worth it.

But what about SAN’s other criticisms? Many are valid, but you need to remember that voluntary sustainability standards are just one of the tools in the development toolbox. They cannot do everything. They are not the silver bullet that will kill the vampire twins of human rights abuse and environmental degradation. But they do help to keep the monsters at bay.

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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.

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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.