Five Questions for Sumit Gupta

1/ You worked nine years with Cargill, one year with Olam and have been with McDonald Pelz for nearly ten years. Could you tell me about the company?

McDonald Pelz is the world’s largest agricultural brokerage house with offices in ten countries. We cover the supply chain from the farm gate to the consumer, focusing on soybeans, grains, pulses, and oil seeds. The company sees a significant opportunity to connect India to the world market.

In addition to being a physical commodity broker, we act as an information provider. We do crop surveys and economic and market analyses on a subscription basis. If a client wants a specific report on a particular supply chain, we do that on a paid consultancy basis.

2/ What are the issues in India regarding the domestic production of grains and oil seeds?

India has 100 million farmers with an average landholding of 1.43 hectares. Ours is a weather-dependent agriculture system where a slight change in weather leads to a significant spike in local prices. India is the last country in the Northern Hemisphere to plant and harvest wheat. Small temperature changes make a substantial change in wheat production.

Supply is fragmented, and the opportunity to increase production is limited.

3/ How will rising incomes affect food demand?

Average per capita income is around $2,200; we expect it to increase to $5,000 in the next ten years.

In 2008, China’s per capita income was $2,200 per year, and the country imported around 30 million mt of beans. Today, their per capita income is around $14,000, and the country imports around 100 million mt of beans. There is a good correlation between bean imports and per capita incomes.

In contrast, India’s population is 20 per cent Muslim and 80 per cent Hindu. We don’t eat beef or pork. Poultry and pulses will drive the expected 6 to 8 per cent annual growth in protein consumption.

India produces 25 million mt and imports 3 to 4 million mt of pulses annually. The country will become an even more dominant player in pulses worldwide.

We saw a shift from wheat to rice in China as incomes grew. Still, I don’t expect to see the same in India. North India and the central part of the country dominate wheat consumption, while rice is consumed in the coastal areas. I don’t see these preferences changing. I do see a shift from a cereal-based diet to a protein-based diet.

The government will continue to play a role. Imagine you are prime minister of a country with 1.4 billion people and 900 million living in villages with an income of less than $5 a day. India is a democratic country with a free media. A small change in food prices can become a big political issue.

The government must ensure the rural economy’s health by offering farmers high prices and keeping consumer inflation low. It has a thin line to tread.

4/ What is the status of India’s ethanol programme?

The country has a 20 per cent blending target by 2025, but I doubt we will achieve it. We need around 12 billion litres of ethanol to meet our current 12 per cent blending target. Out of that, 50 per cent comes from sugar and 50 per cent from grains. We now use around 15 million mt of grains for ethanol.

In a country like India, the fuel versus food debate will always tend towards food. The government introduced this ethanol policy when we had huge surpluses of wheat and rice. Rising ethanol demand will put pressure on the grain supply. We have imported almost half a million mt of corn this year—a record. In an average year, we are an exporter.

I don’t see the current ethanol policy as sustainable, and I expect the government to eventually say that ethanol can only be made from sugar cane.

5/ What messages will you deliver to the GrainCom24 conference in Geneva?

Probably too many.

One: India’s time has come on the world stage. People are still focusing too much on China, and I fear that they may miss the once-in-a-lifetime opportunity that India provides.

Two: South Asia’s agricultural consumption will thrive. It will increasingly tie the region’s two billion people into the world supply chain and significantly impact global trade flows.

Today India imports around 18 million mt of vegetable oil – 80 million mt of bean equivalent. China imports 100 million mt of beans. What would happen to South America’s oil sector if India stopped importing oil and imported beans instead?

India has already had a considerable impact on world agricultural flows. It has not been as pronounced as China’s, but it will grow.

Three: Do not look at India solely as a trading hub but as a country where you can connect and invest. Our food processing industry will grow in leaps and bounds, with immense investment opportunities in processing, branding, and the entire supply chain.

Four: Don’t expect immediate results. Look at a typical horizon of 3 to 5 years.

Five: Government intervention will stay high. They must care for both farmers and consumers. Still, there are opportunities within those constraints. India is a private enterprise success story. The government will always be there, but not as a direct participant.

Six: India is a democratic country with a rule of law. Even without a local language, you can cover the length and breadth of the entire country.

Seven: Act internationally but think locally. When McDonald’s came to India, they had to change their menu to suit Indian tastes. You must do the same.

© Commodity Conversations ® 2024

A Conversation with Serge Varsano

I met Serge Varsano on a miserably cold and rainy Monday in Paris. I explained that I wanted to interview him for the CEO section of my new book, but he immediately told me that he was not the CEO of Sucden; he was the President of the company’s ‘Directoire’.

The concept of a Directoire dates back to the French Revolution, and the nearest translation is ‘Management Board’. It is an unusual arrangement that less than 5 per cent of French companies follow – and probably unique in trading companies.

In Sucden’s case, the board consists of five people, with each member having a right of veto. Decisions must be unanimous. Every board member must agree before the company undertakes a strategy on the markets or invests in a sector or a person. If, for example, the financial director does not agree, they do not do it.

A supervisory board oversees the management board. Serge explained that although he is the company’s majority shareholder, he operates within certain limits, first with the management board on ‘day-to-day’ trading decisions and, second, with the supervisory board on more strategic decisions. He needs authorization to exceed these limits. They ensure that the group is never put in danger.

Serge introduced the dual system to protect shareholders and the group after the company nearly went bankrupt in 1990. He told me that when Sucden bought Cocoa Barry in 1982,  the company’s best financial and risk controllers moved from the trading side of the business to the industrial side. It left a gap in the trading operation when the company expanded into different commodities such as rice, cotton, and energy.

“Everything exploded at the same time,” he admitted. “We had to sell Cacao Barry and Sogéviandes, owner of the Charal brand, dramatically reduce headcount and concentrate on sugar, our core product.

“Max Benamo, the former president who took over after my father died in 1990, came back to help me,” Serge told me. “We made a lot of money with a whole series of operations worldwide, especially in Russia, Cuba and Brazil. We had an outstanding team, a very tight team.”

“In the 1990s, we began our agroindustrial activities in Russia,” he said, “Buying four beet processing factories and the land with them. In 2010/12, we returned to cocoa and then coffee. Later, we added rice and sea freight by purchasing ships. We are also a market-maker in the London metals market. It is an activity that is doing very well, but it experienced difficult times with the nickel crisis two years ago.

“Brokerage accounts for around 15-20% of our revenue,” he continued. “Our agroindustrial activities account for 30-40% and trading for the rest. But I include distribution in the figure for Russia. I include shipping in the trading.”

Although Sucden bought beet factories and land in Russia, the company did not invest in sugar cane in Brazil. Other trading companies lost a lot of money purchasing Brazilian factories. I asked Serge how he avoided the trap.

“It’s not that we were brilliant,” he admitted. “It was just that we didn’t have the money to do it. It was luck.

“The cane mills were expensive,” he continued. “We never understood why all these people dived in. We didn’t believe in the ethanol stories, and the sugar market was around 11-14 c/lb, which was insufficient to justify the prices. It was hundreds of millions of dollars plus debt.

“We got involved in logistics operations in Brazil with port terminals but did not enter production.”

“But you do production in Russia,” I said. “Do trading and production make a good mix?”

“We do not trade in Russia,” he corrected me. “We sell our sugar locally, especially to major brands like Coca-Cola, Nestlé, etc. We export a little to Kazakhstan and Kyrgyzstan. It is not trading; it’s production and distribution.”

Cocoa trading was responsible for a significant portion of the 1990 losses. In preparing for this interview, I reread La Guerre de Cacao. I admit that I didn’t understand everything. I asked Serge if he could explain what happened.

“We were expecting a big harvest and shorted the differentials between the physical and futures markets at £20-30 per tonne. It was a significant operation but nothing extraordinary.

“President Houphouët-Boigny of the Ivory Coast banned exports – he thought the price was too low – and the differentials rose to $300-400 per tonne. We had a huge potential loss on our books. Other traders went to the Ivory Coast to convince the President to reallow exports. He said he preferred to destroy his cocoa rather than export it at such a low price.

“We went to him with a different idea: accept his price and buy 400,000 tonnes, store 200,000 tonnes in Europe for one or two years, and sell 200,000 to our customers. He accepted the operation. For that, we needed FF400 million. The French government had a structural fund that was not fully used, and they wrote a check for FF 400 million to be distributed to the Ivory Coast.

“With the storage cost and the 200,000 tonnes we sold, we emerged from the operation almost unscathed.

“We had asked the President for exclusivity on the deal for a certain time and not to sell to others. However, he sold 400,000 tonnes to Phibros, and the market collapsed. It was a disaster for us. It was also a disaster for Phibros who were long in the market. They exited cocoa soon afterwards.”

“Of the commodities you trade,” I asked, “Which is the most difficult and which is the most fun?”

“Sugar is in our blood and our genes,” he replied. “Sugar is complex because it is a fob contract, unlike coffee or cocoa. You need a robust physical department to trade in sugar. You also need to have a good physicals department for cocoa, but the cocoa is already in Europe when you take delivery.

“You need a robust global network to trade sugar: Brazil, the Middle East, Thailand, China, etc. Cocoa is mainly produced in Ivory Coast and Ghana and exported to Europe and a little to the United States. Overhead costs are less expensive.

“Coffee is between the two. We are relatively small in coffee, with 7 million bags per year, compared to the big companies, which trade 12 million bags. We are among the leaders in sugar, with around 10 million tonnes per year. We are among the first in cocoa, trading around 100,000 tonnes of beans each year and the equivalent in products.”

Serge Varsano has a reputation for being a speculator. Still, talking with people who know him well, I understood that he built the company on personal relationships and trust, for example, with Cuba and Russia, rather than by taking significant speculative positions on the market.

“I am more of a deal maker than a speculator,” he told me. “My goal has always been to gain the trust of our customers and find solutions for them. Everyone has problems to resolve, whether financial, logistical, or pricing. That is what interests me.”

“Speculation doesn’t interest you?” I asked.

“Not really,” he answered, “Especially on the flat price. We are not very good at the flat price, and we do very little for the size of the group, including cocoa and coffee.  We prefer ‘relative value’ to flat price.”

“Is this Sucden’s secret to success?” I asked.

“No, he replied. “The secret to success in this business is to have great teams and excellent people.

“As I explained earlier, if one of our traders wants to carry out an operation, he must have the management board’s agreement. And if the board agrees, we support the trader 100 per cent. Our decisions are collective. We make mistakes—it happens—but we don’t fire a trader if he loses money on a transaction that we all approved.

“We have a strong team spirit, and our traders have stayed with us for a long time. It is our secret to success. It is our way of trading, our way of managing teams.”

“Each company has its way of working,” I said. “Can partnerships work in trading?

“We have few structural partnerships,” he replied. “We do joint accounts, but for one-off operations. Interests can change in life and business, and getting married structurally is risky. Marrying a producer is challenging because we don’t have the same interests. Traders want to buy as low as possible, and producers want to sell as high as possible. It’s hard always to agree.”

“I imagine it wasn’t easy to take over the company from your father,” I said.

“Contrary to what you might think,” he replied, “It was easy. In 1975, when my father found out he had cancer, he asked me to come back from the United States. I was 20 years old. The market was dropping dramatically from 66 c/lb, and I wondered, ‘What is this thing – what is happening?’

I quickly integrated myself into the company and started doing small businesses. I had contacts in Venezuela, and we made some significant deals with them when the country became an importer in the late 1970s. I worked with my father and Elie Coriat, my father’s right-hand man. My father died in 1980.”

“How are you preparing your two sons to succeed you?” I asked.

“My desk is in the trading room with the traders. My two sons work three metres away, one to my left on sugar and the other to my right on cocoa. It’s nice.

“They participate in the management board meetings. They are not management board members but will officially join when I retire in 3-4 years.”

“What are the biggest challenges they will face?” I asked.

“Grain is our biggest challenge today,” Serge replied. We have just begun grain trading. We are small, with 2 million tonnes this year. We do not have any ambition to compete with the big trading companies, but we will find niches in complicated countries for less common products. We initially aim to distribute in Eastern and Mediterranean countries. Can we stay small? We’ll see, but we might have to move to a higher level one day.

“Russia is another challenge. It is impossible today to predict what will happen. Will it normalize?

“Cocoa is always a challenge. We cannot increase our bean volumes. Exporters have built factories and export products. However, we can expand cocoa products, such as butter and cake. There will be quite a few things to do.

“There is a lot to do in coffee. It’s a complex market at the moment. We had a bad year two years ago, but we slowly began to understand and anticipate the situation and had an honourable result in 2023. This year, 2024, is off to a good start for Arabica.

“Do you need more capital?” I asked.

“We have around $1.5 billion in capital, and our debt is less than our equity. We would need more capital if we wanted to buy factories or grain elevators. Still, we are happy to remain in trading and brokerage in London and agri-food and distribution in Russia. We live well and obtain excellent results relative to our funds.”

“You enjoy doing big deals in sugar, cocoa, etc.,” I said, “But do you get bored when there are no big deals?

“Not at all !” he replied. “It’s always interesting to follow the teams. The markets move constantly; there is rarely a year when nothing happens between sugar, coffee, and cocoa.

“I rarely get bored,” he added. “But I have another great passion, which is show jumping.”

Serge is a keen rider and competes in show jumping at an international level.

“I started at 10-11 years old in Neuilly,” he told me. “I didn’t do badly and was part of the French Junior team. But, I left for the United States at 17 to study, and I never got back on a horse until I was 50.”

“Was it easy to restart?” I asked.

“No, it was challenging,” he replied. “It was easy at first – like golf, the first shot is easy – but it’s hard to do well. Now I’m happy with what I do. I’m having a lot of fun.”

“Do you ride every day?” I asked.

“No! I’m still working,” he replied with a smile. “I ride every Wednesday morning and at the weekends. Competitions usually last four days, Thursday, Friday, Saturday and Sunday, so I sometimes have to take Thursday and Friday off to participate.”

“Are there any similarities between trading and show jumping?” I asked. “You can be an experienced trader or rider and have a good plan, but there is always an element of luck.”

“The two are similar,” he replied. “The stress is about the same between show jumping and trading.

“There is always something you can’t control. You can have a faultless course if you calculate and respect all your horse’s strides.

“Unfortunately, something always happens. The horse can swerve, add, or remove a stride, and, voilà, a bar falls.

“It’s the same in trading! You can calculate everything perfectly, but something unexpected can happen. It might rain too much or not enough, or a delivery might have more sugar than expected. You can make a bad decision; things can go wrong, unexpected things.

“If you make a mistake in trading, you cut the position and start again the next day. It’s the same with show jumping. There is always another competition – another opportunity. It’s the same in trading. The market will always give you another chance.

“So, it’s pretty similar. We never master everything in trading or show jumping. But that is what makes it interesting and fun.”

Five Questions for Harm de Wilde

1/ Could you tell me a little about Cefetra?

We are a European company and part of the publicly listed BayWa Group, a German company.

Cefetra was initially owned by the Dutch cooperative compound feed producers, which sourced feed ingredients for the country’s compound feed industry. In the 1990s, we expanded that model into the rest of Europe.

The EU produces 160-165 million mt of compound feed annually, but its growth potential is limited.

Highly populated countries in Northwest Europe want to reduce livestock herds to reduce nitrogen emissions. Some project the EU compound feed production to remain unchanged, but we could see a shift within Europe, with production declining in northwest Europe and growing, for example, in Spain, Poland and the Balkans.

Eight years ago, we reviewed our business and decided to move into what we call “Beyond Compound Feed.” We have grown in the food ingredient business and are no longer just a company that sources feed ingredients for the European compound feed industry.

I have been with the company for nearly 16 years and, along with another colleague, am responsible for market research within the Cefetra group. We forecast price direction for the broad range of commodities we trade, including grains, oilseeds, meals, vegetable oils, biofuels, co-products like beet pulp pellets, citrus pellets, and, nowadays, dairy products.

We initially provided research exclusively for Cefetra, but we invested in our team to be good in research tomorrow. We hired data engineers, quants, and biofuel specialists. As the quality of our research increased, we experienced a growth in demand for our research from our supply chain network. Based on this growing demand, we decided to sell some of our market research to external parties under the name of Ceras-Analytics. We launched our platform in October 2022 at the ECE in Valencia.

We offer standardized research on a one-stop-shop platform with weather and crop forecasts and detailed S&D balance sheets for grains, seeds, meals, vegetable oils, and biofuels. We then translate our S&Ds to fundamental fair values. As fundamentals are not the only price drivers, we also provide technical and seasonality analysis—and much more.

We are experimenting with AI and using it to improve specific components of the models, but we want to avoid AI producing a forecast that we can’t explain.

2/ You’re speaking at GrainCom24 in Geneva on the outlook for EU and Black Sea grains and oil seeds. What will you bring to the table?

I attended the conference last year for the first time and felt that although it covered the global markets well, it focused insufficiently on the EU and the Black Sea.

Despite the war in Ukraine, US exports as a percentage of world exports have declined sharply in the last ten years for critical commodities like wheat, corn, and soybeans. Therefore, the US corn and wheat prices depend more on the US domestic situation. The US still plays a crucial role in price-setting, but we must relate it to the international situation and what it means for Europe and the Black Sea.

I aim to translate global events into how they could impact the EU.

3/ What are the current issues facing the European grain and oil seed markets?

Weather and politics are our key focus today. Dutch farmers started protesting in 2019, but since early this year, we have seen widespread protests from farmers across the EU. As a result, we have seen a recent change in EU policies – for example, the proposed import duties on oilseeds, oilseed products and grains from Russia and Belarus and the withdrawal of the ban on certain insecticides.

Weather is getting more extreme in recent years. For example, North EU has been extremely wet since October last year, hampering spring planting and resulting in disappointing winter crop conditions.

4/ Would Trump’s re-election significantly change your price forecasts?

I am a fan of making scenarios. When you make a forecast, you limit yourself to the current status quo. If you create scenarios, you become more open-minded about what might happen and the potential implications.

We have had Trump in office before, so we know what to expect to some extent. In his current campaign, he has already threatened to impose import tariffs on Chinese goods, and it’s not unthinkable that China will retaliate against US agricultural exports, as they did in 2018.

Interestingly, one could argue the Chinese have been building government stocks over the last two years, and that they may have been preparing for an eventual Trump re-election.

Trump is threatening to be less supportive of Ukraine. However, it is not only Trump who is showing less support. We also see less support from some European countries.

The resilience of the Ukrainian people is inspiring. Before the Russian invasion, the country exported 300,000 mt of agricultural products via the EU. Everybody thought they could increase that to one million mt, but they increased it to three million mt. It is truly impressive.

The same applies to the Ukrainian farmers. It is incredible how they managed to grow their crops in the face of immense challenges. The Ukrainian wheat yield last year was close to record.

5/ What are you hoping to get out of the conference?

We are proud of what we do at Ceras-Analytics and would like to share this with a broader audience.

Furthermore, we always like catching up with our network and discussing markets.

© Commodity Conversations ® 2024

 

Melanie Williams

For the past half-century, non-governmental organisations (NGOs) such as Greenpeace and Oxfam have played a positive role in alerting public opinion to the damage we are inflicting on our planet and our fellow human beings.

Over time, the NGOs developed a strategy of naming and shaming food companies into cleaning their supply chains. This strategy reached a climax in 2010 with Greenpeace’s campaign against Nestlé’s use of palm oil in their Kit Kat chocolate bars; a short video showed an office worker unwrapping a Kit Kat chocolate bar only to find the severed, bloody finger of an Orangutan.

Agricultural commodities have historically been defined by physical properties: weights, moisture content, foreign matter, broken pieces and other physically verified attributes. Suddenly, consumers began asking commodity traders to address the social and environmental issues in their supply chains and to verify traits they had never verified in the past.

The food supply sector had long argued that governments in producing countries should implement social and environmental standards: no child or slave labour, no deforestation, minimum pollution, etc. It quickly became apparent that many governments—especially in developing countries—could not do this effectively—or at least to the standard now demanded by consumers and NGOs.

The food industry was unsure how to react to these new demands and turned to outside participants for help. Gradually, a range of voluntary sustainability standards and certification agencies emerged, stepping in to fill the role that governments, traders and food companies were ill-equipped to play. The trade houses and the NGOs, most notably WWF, supported and encouraged these agencies.

At Kingsman, we were often involved in developing these standards, particularly in the biofuels sector. When I retired, I was briefly Chairman of Bonsucro, the certification scheme for sugar cane. During this period, I often turned to Melanie Williams for advice.

Melanie has a PhD in chemistry from the University of Cambridge. She got into sustainability after thirteen years in process development in the refinery and chemicals industry (BP and BP Chemicals) and ten years at the UK’s National Physical Laboratory, mainly in certified environmental measurements. For the past ten years, she has worked as an independent sustainability consultant, helping companies implement sustainability schemes and write standards for some schemes themselves.

I contacted Melanie to discuss certification schemes in light of new EU regulations, but first, I asked her to explain what certification schemes do.

“Certification schemes develop sustainability principles and standards containing specific requirements that can be audited for compliance,” she explained. “They train and approve auditing companies to carry out independent audits within the supply chain and certify those who pass those audits.

“Although certification isn’t perfect, it has had a beneficial effect. It allows concerned consumers, NGOs and commentators to ask questions about the provenance of commodities. It has brought the issues of deforestation and people’s rights to a broader audience. It allows consumers to choose more sustainable products.

ISCC (International Sustainability and Carbon Certification) was launched in about 2011 and is the most significant, meaningful, and influential of the EU-approved biofuel sustainability schemes. It has since expanded into food, feed and materials.

“There are also single commodity schemes, such as RSPO, Bonsucro, and RTRS, and those targeted at higher value food commodities, such as Rain Forest Alliance. (The ITC Standards Map gives a good idea of the scope of the different schemes.)

“The EU is trying to reduce the number of certification systems,” she continued. “They are bringing in a registration requirement that excludes schemes without third-party auditing. However, auditing companies are developing their own standards for responsible agricultural practices and supply chain traceability to comply with the EUDR (The EU Deforestation Regulation).”

“Some argue that complying with certification schemes increases production costs for farmers,” I said. “Will EUDR increase them even further?”

“The EU believes it won’t,” Melanie replied. “The EC (European Commission) argues that increased transparency will reduce the number of operators in the supply chain and free up more money available for farmers. Retailers and supply chain operators will pay for the geolocation data, and taxpayers will fund verification by EU countries.

“It will still leave farmers with extra work, and it may be that only the large farmers can afford to comply,” she added.

“Only a small percentage of agricultural production is certified,” I argued. “Many importers (China, MENA) don’t care about certification, which makes it difficult for certification to gain critical mass. Is the certification industry losing momentum?”

“It is a problem,” she replied. “But the developed world can only control its own production and its imports. There will be more developments, such as the CSDDD (Corporate Sustainability Due Diligence Directive), which will require companies operating in the EU to assess the risk of their suppliers impacting human rights or the environment. It applies to agriculture and other sectors, too. These types of measures should boost the demand for certification.”

“Food companies often leave certification logos off their retail packaging,” I said. “I never understood why.”

“Some don’t want the schemes to gain recognition as this increases the risk that suppliers will ask for a premium,” she replied. “Others don’t want to reduce the visual impact of their corporate logos, or they think too many logos will confuse consumers.”

“Traders often argue that certification reduces trading opportunities and substitution,” I said. “Does it result in a less efficient supply chain?”

“The world is moving towards shorter supply chains in general,” she replied. “Mutual recognition of certification systems increases flexibility, but inevitably, there will be more friction.”

“How can we be sure that production comes from certified farms and not their neighbours?” I asked.

“Geolocation data helps, and some providers offer services to interpret satellite data to show, for instance, land use change. You can prevent other types of fraud with national databases that track transaction volumes between operators.”

“Big companies such as Starbucks and Nestlé set up in-house sustainability programmes,” I said. “Do company-based systems work better than commodity-based ones?”

“Company sustainability programmes can be effective,” she replied, “particularly when the company bears the operational costs. However, I don’t think they are better than independent schemes. Moreover, they will likely disappear when the EU’s Green Claims Directive comes into force, as they are not multi-stakeholder schemes with third-party auditing.”

“Mass balance” was your expression of 2023,” I said. “What does it mean – and why did you choose it?”

“Mass balance describes a system in which sustainable and conventional commodities are mixed during storage, processing, and transport. Some sustainability schemes indicate this with the terms ‘Mix’ or ‘Mixed’, but they are not referring to real mixtures. They have had sustainable content attributed or allocated to the mixture. The sustainable component is not guaranteed to be physically present in the’ Mix’ product.

“Most consumers do not understand this concept. I chose ‘Mass Balance’ as my ‘word of the year’ because consumer brands are becoming more transparent, and the EU will require accuracy in green claims. The words’ Mass Balance’ will increasingly appear on products and packaging.”

“Hopefully, consumers will ask what it means and why their products can’t contain real mixtures. It may prompt brand owners to buy more sustainably certified commodities.”

“The new EU regulations, such as EUDR, exclude mass balance,” I said. They are what I call ‘all-or-nothing regulations.’ Some argue that the mass balance method allows a gradual move to sustainability rather than an all-or-nothing approach. Is that better?”

“The EU has been brave to exclude mass balance,” she replied. “It sends a message that the EU is serious about reducing its impact on the world’s forests, so I hope it succeeds. Also, the EU is a large importer of commodities and has the power to force through change. Time will tell if there are unintended consequences.”

“If you were the world’s dictator,” I asked, “What measures would you take to deal with deforestation, declining biodiversity, and global warming?”

“I would educate and support the world’s women,” she replied. “It would lead to a more just society and population stability. Better decisions happen when politics and business are mixed with an equal representation of both sexes and with people from different backgrounds.”

“Are you optimistic or pessimistic about the future?” I asked.

“I am optimistic that we will overcome the challenges of climate change, mainly with new technology but also with some changes in behaviour.”

“Last question,” I said. “What would your 18-year-old self think of your career so far?

“She would be pleased that I had been able to work and pursue my career when childcare was not the norm and some employers discriminated against women. She would also be pleased I was an example to my children.”

© Commodity Conversations® 2024

Five Questions for Steve Wateridge

1/ The media is blaming climate change for the cocoa deficit. But aren’t there other reasons, such as El Nino, disease, lack of land tenure, periods of low prices and a lack of investment in the fields?

The predicted global deficit of 400,000 mt, or 10 per cent of global production, is as large as we have ever seen, but the climate change story is nonsense in cocoa. I’m seriously concerned about climate change in coffee, but it has nothing to do with the problems in cocoa.

El Nino has had a minor impact on the Ecuador crop due to excess rainfall, but we’re talking about a loss of 50,000 mt. El Nino doesn’t explain the problems in West Africa; they result from long-term issues.

Following a price increase, the production area in Ivory Coast and Ghana significantly expanded in 2008-10. However, these trees are now relatively old, and their yields have declined.

The Swollen Shoot Virus is a more significant factor. The disease decimated the crop in Ghana in the 1960s and 1970s, reducing production by 50 per cent at a time when Ghana was the world’s largest producer of cocoa. The Ghanaians are trying to control the current outbreak. Ivory Coast is doing nothing.

We first identified the Swollen Shoot Virus in the Ivory Coast in 2008. It spreads slowly, and once it infects a tree, it will kill it within 5 to 10 years. There is no way to prevent it other than by cutting out infected trees, burning them, and replanting. Ivory Coast has reached a tipping point. We estimate that 25 to 30 per cent of the country’s farms are infected, but it may be more.

When a farmer sees his yields declining, he cuts down the trees and moves on to a different crop or replants with cocoa. The problem is that the disease will infect the new seedlings if you replant without burning the affected trees.

Prices have been stable for the last 10 or 12 years, and with the benefit of hindsight, they’ve been too low. Farm prices need to rise above $3,000 per mt to encourage farmers to invest in fertiliser, tree pruning, or planting new areas.

Farmers in Ivory Coast and Ghana still receive less than $2,000 per mt because the farm price was set at the start of the crop year last October. Ghana and the Ivory Coast should send a signal to their farmers by significantly increasing the price of the mid-crop, which starts in April. Otherwise, farmers will only begin receiving higher prices from October onwards and will only respond once they receive the higher price. The time lags are long in cocoa.

2/ Can anything be done short term?

A new tree takes about three years to produce fruit and 5 to 7 years to reach full maturity. The short-term answer is to invest in better farm care (pruning) and fertiliser use.

Fertiliser use has fallen in the Ivory Coast and Ghana over the last two years because of the high fertiliser price after Russia invaded Ukraine.

We’re seeing the first signs of the Ghanaian government trying to improve yields for the 24/25 crop. They plan to prune trees, spray against disease, and distribute fertiliser. It could be beneficial if they get their act together over the next 3 to 6 months. But the best incentive to better farm care would be to pay the farmers more.

If everything is done correctly at the right time, yields could increase by 30 to 40 per cent. The problem is that the window for applying fertiliser is when the rains return from March to June. Anything later than that will not impact the main crop. You might impact the next mid-crop, but it is much smaller.

Both countries have a central marketing board that fixes the price. The boards sell forward, and this sets the farmer’s price. That’s one of the problems. The 30 per cent drop in production this year has surprised both countries; they found themselves oversold. The governments of Ivory Coast and Ghana never default, but they roll forward the contracts. They’ve had to roll forward low-price sales from last year into next year. It means that they are well sold for 24/25 without being able to take advantage of the higher world prices.

Ghana and Ivory Coast account for 65 per cent of world production and are not yet passing on the higher prices to farmers.

3/ Swiss chocolate manufacturers were in the news last night saying they won’t increase prices this year. How will the market match demand and supply? Will there be shortages?

Many chocolate manufacturers have forward price cover and wouldn’t usually pass on today’s cocoa prices until the back end of this year. Still, they have other ways of mitigating against price rises.

They could reduce the amount of cocoa in their chocolate or promote filled bars with fillings such as wafers or fruit and nuts. They could still sell the same volume but use less cocoa. We will probably also see some shrinkflation.

Cocoa demand is price inelastic. It’s a recession-proof snack – a luxury but a low-price one. One way or another, we’ve got to reduce the amount of cocoa we consume. The easiest way of doing that is to price chocolate higher than alternatives such as snack food, cereal bars, etc.

The only comparable situation was 1977, when the world ran out of cocoa. The price spiked to a record high of $5,000 per mt in New York. If you apply the US Bureau of Labour Inflation Statistics back to 1977, $5,000 then equals $25,000 now.

4/What’s behind the explosive move in cocoa this year? Is it speculation?

The chickens are coming home to roost. I remember attending an industry event last November and was surprised at how complacent people were. Some felt that cocoa may move to $4,000 per mt, but no more. They thought it was a weather issue and not a structural one. They have probably revised their views this year.

Some physical cocoa users may be forced to buy back their short-term hedges due to margin stress.

The funds have been long cocoa for quite some time but have significantly reduced their positions since the market took off this year. Managed funds are pretty much out of cocoa. You can’t blame hedge funds for squeezing the market. They’ve been doing the opposite.

5/ Three companies, Barry Callebaut, Cargill, and Olam grind two-thirds of the world’s cocoa beans. I have seen suggestions that they control the market and are behind the price rise.

I don’t think they do. Even with this reasonably high concentration, they are price takers rather than price makers. If you look at Barry Callebaut’s share price, for example, you will see that it has fallen significantly in the past twelve months. It should have rocketed if they were controlling the market.

© Commodity Conversations® 2024

Steve Wateridge is the senior coffee and cocoa analyst for Tropical Research Services.

Five Questions for Sacha Prost

You recently took over as CEO of Agflow. What’s the biggest challenge you have faced so far?

We’ve had several challenges.

One was to revamp our pricing strategy. It was the first thing I identified. CEOs have different backgrounds, but I consider myself a marketing person. I like to sell things. I believe I am sensitive to understanding what clients will be satisfied with. I won’t relent until they are.

I saw that our churn rate was too high, not because the product wasn’t right, but because our pricing was skewed.

I said, let’s look at how we could do our pricing. We need to be entirely transparent about our pricing model because pricing should not depend on who the client is. You can’t charge different people different prices for the same product.  We revised the pricing model, fragmenting everything by product and commodity. If you are looking at soybean meal and only want tenders and quotes, you should pay for that. You shouldn’t pay for the entire platform if you’re not using it.

We also had to improve our customer relations. I told the team we must be the Four Seasons of customer care. I recommended they read a great book, Four Seasons: The Story of a Business Philosophy, by Isadore Sharp, the hotel chain’s founder. He understood that a happy customer brings in more customers.

You may have an issue with a product or a product that flops. It’s what happens in business. We don’t live in a fairy tale. But we must communicate correctly with our clients, listen to them, and understand their needs.

We have adapted our approach and have had excellent feedback. We have cut our churn rate by half. We have improved our ease of conversion and shortened the timeline to close.

There have been some tough choices, and we have had to let some people go, but the team must fit correctly. It’s like a football team. Sometimes, it’s not about having only star players. You need players who can play together.

On the personal side, it has been challenging to understand what is essential in the data and what isn’t. It has taken me at least 4 to 6 months to fully understand when people were telling me something had potential when it didn’t.

Businesspeople often invest heavily in marketing the wrong product and ignore a more profitable product that is quietly selling itself. You must identify and focus on the right products. We’re in that phase now.

What is your elevator speech for the company?

You may have heard about some of our competitors, but we have a completely different methodology and are in a blue ocean of our own. We work with a network of more than 150 contributors and can give you a view of what the market is doing at a particular time and place for a specific commodity. Our methodology is our differentiator—it differentiates us from our competitors.

We are not analysts, and we stay as impartial as possible. However, our AI-powered market intelligence chatbot arm drives rapid insights from our database.

Okay, so you’re an accumulator of data which you distribute. I recently interviewed Vosbor and CM Navigator. Are they doing the same thing?

Every company is a little bit different. I don’t think we are competing because the idea driving these companies comes from a different place.

CM Navigator was initially a facilitator for the group and their clients, but it is not, at its core, a technology company. We will compete in certain areas but have the upper hand in the number of commodities. If we go down to the subclass of the subclass, we’re covering about 280 commodities.

Vosbor is different. They are less a data provider than a digital exchange for physical commodities.

How is Agflow using AI now, and how will you use it in the future?

We use AI to parse the data as we receive it, and we have automatic outlier detection. Our technology speeds up the process so that the client gets the data as soon as it arrives.

For the last year and a half, we have been working on a new project, which we will probably launch as Agflow AI. It’s a chatbot, like Chat GPT, that can prompt reports within our database. Our clients can access the reports we aggregate, but instead of reading them all, they will be able to ask the chat box a specific question. We will limit it to our database to ensure it doesn’t hallucinate. It will tell you where it got the information and won’t give you an answer if it doesn’t have the information.

It’s a massive win for us because we see that we will be able to leverage AI in a reliant, constant, and scalable way. We are now linking our entire quotes database to it.

I see a world where clients will have an app and be able to ask questions. We are working to be ready for that. However, the commodities industry is not as fast-paced as some other industries. Clients still ask for an Excel sheet emailed to them every day. We can still do that.

AI isn’t going to give us data; our methodology is still going to do that. AI will help us acquire, clean, and deliver the data to our clients.

Instead of working your way through a table with different origins, delivery months, qualities, and price quotes, AI will do the work for you, and the chat box will answer immediately. It will take time to be 100 per cent reliable, but we will get there.

What do you see as your growth drivers?

I believe price discovery will drive our business forward. Working with many contributors and looking at many bids and offers gives us an edge.  We do not assess our prices in a journalistic way. These are the actual market prices, with an algorithm to create the forward curves. It is a different methodology.

Our basic model is yearly subscriptions. We also have a data services arm that offers consulting services to help small or midsize firms create internal systems to drive insights from their data. We then add in our data. We have had two mandates so far, but it’s not something that we see as a significant lever of growth. We view it as another service that we offer.

We see many new applications for our data. We currently have about 75 clients, including some of the ABCDs, and there is still a large pool of potential clients for our existing services. Our clients, ranging from FMCG companies to hedge funds, are extremely fond of our data because they use it to build the best models.

By the end of Q2 next year, we expect to be in profitable waters. We are close to achieving right now.

© Commodity Conversations®2024

Sacha will present at the Grain Com 24 Conference in Geneva on 14-16 May 2024

A Conversation with Robin Shaw

The first time I met Robin was in 1982, just after S&W Berisfords, the parent company of J H Rayner, had bought British Sugar. Robin hosted sugar traders to a buffet lunch to celebrate the purchase, and I remember briefly chatting with him. I also remember that they had put enormous sugar beets on the lunch tables. It was the first time that I had ever seen sugar beet.

“Ephraim Margulies was the head trader at J H Rayner,” Robin told me. “But he was more interested in cocoa than sugar. Everyone called him ‘Old Man Marg’. He was a hard taskmaster. When he took over British Sugar, the then chairman was heard to say: “The next time he comes round here, we will switch off the lifts so that the bugger has a heart attack climbing the stairs”.

“I remember once,” Robin continued, “Our little sugar team were bullish, and we went to see Marg to ask him to extend our trading limit. He said, “So you think this market’s got a bottom, do you?” “And we all said, “Yes, that’s it. It’s at the bottom.” And he replied, “The only bottoms I’ve ever seen had holes in them.” He was completely right. The market then collapsed. He was very, very clever.”

“I had joined Rayner in 1980,” he said. “It was a bitter experience which drove me to drink. I drank to celebrate success and to drown the pain of failure. I returned to Sucden after five years, but Sucden had changed out of all recognition. And so had I. I had become an alcoholic. It was a hard-drinking atmosphere in London at that time. I don’t know how we all survived. I only did, thanks to Alcoholics Anonymous.

“But why did you leave Sucden in the first place?” I asked. “You had been there for eight successful years.”

“It was a pure misunderstanding,” he replied. “Maurice Varsano had started trading coffee and moved me to the new coffee desk. He viewed it as a promotion. I viewed it as a demotion. I wanted to stay in sugar and left to go to JH Rayner in London.”

“And you went back to Sucden in 1985?” I suggested.

“Yes,” he replied. “Maurice had died, and his son Serge had taken over. It was all about Cuba and Russia. Serge had a genuine relationship with Mr. Krivenko from Prodintorg in Russia and Mr. Lezcano in Cuba. They liked each other, and they trusted each other.

“Serge was never a speculator. He didn’t like speculating, so he let us do it almost as a hobby. Sucden made money by doing big deals. We gave the Russians what they wanted: the safety of knowing they would get enough sugar to supply their domestic demand. We gave Cuba finance that kept them stumbling on.”

” Colt Bagley, previously head trader at Cargill and Philipp Brothers, started physical brokerage in 1990,” he said. “He came to Paris, and we had lunch. One of the head traders asked him who he had the best relationships with as a trader.

“He said, “What do you mean? We didn’t have relationships. If we were cheaper, we sold. If we were more expensive, we didn’t.”

“No, no,” she replied. “That’s not how it works. Trading works through friendship. We genuinely became friends with the Russians.”

“I left Sucden in 1992,” Robin continued. “I set up Czarnikow Rionda with Danny Gutman. We resurrected the name. It’s a sombre story. We quickly made a lot of money. We thought we were clever, and then we were foolish.

“We lent money to Brazilian mills against future supply, but they didn’t supply. We bought put options from a Chinese company, but they failed to honour the contracts when the market collapsed. Czarnikow Rionda went into bankruptcy in 2000, and I downgraded to becoming an analyst.”

“But didn’t you trade for yourself at one stage as an independent?” I asked.

“I sold my house in London and speculated with the proceeds. I learnt a useful lesson: I am a bad speculator. Robert Kuok once said that good speculators are born, not made. It is a question of character. To be a good speculator, you must be quick to change your mind. You must not be married to your opinions. Vain people don’t make good speculators, and I’m rather vain. I think I’m right, and the market’s wrong. Humble people make good speculators. Maurice Varsano always used to say that sugar is a school of humility.

Marex approached me, and I joined as a trader,” he continued. “I proved for a second time that I was a bad speculator. But they kept me on as an analyst. Once I’d sold my house in London, I was practically destitute. I made much more money from houses than I ever did out of sugar.”

It made me think of my grandfather on my mother’s side. One of my earliest memories was catching a bus with my mother every Wednesday to Hastings, where her father and mother lived in a one-bedroom flat above a newsagent.

My mother’s parents were constantly moving, and she attended sixteen schools before she was sixteen. She lived in cities as diverse as Buenos Aires and Buffalo in New York and used to tell me stories about living in vast houses with maids, cooks, and chauffeurs one day and the next day having to share a bed with her sisters when they moved the next day. Her parents were married in Manaus, Brazil, and he (and his father) made and lost fortunes in the rubber trade.

My great-grandfather was a sea captain. San Francisco awarded him the freedom of the city when he turned his ship’s hoses on the fires that sprung up after the great earthquake in 1906. Her father finally lost all his money when the Argentinian leader Peron threw the British out of the country and nationalised the British-owned railways after the Second World War. My grandfather had put all his money into the railways and a British project to build the Buenos Aires underground system.

That’s all I know – and, unfortunately, all I will know – about him. Even so, I still considered him a role model. When I left university, I had a choice between two careers: banking and commodity trading. I chose the latter because I thought it would be more exciting: I liked the idea of alternating between rags and riches, but I would have hated the reality of it. It seems that this was what Robin had done throughout his career.

“When I started at Cargill,” I told him, “they put me on the futures desk in Minneapolis, managing big positions. Everyone talked about beating the market, but I quickly learned it wasn’t about beating the market. It was about beating my emotions.”

“Right,” he said. “And with one addition: a good speculator regards the market as his friend, something he loves. I used to regard the market as my enemy. I wanted to prove that it was wrong and that I was right. It was the wrong approach.”

“What advice would you give somebody wanting to become a speculator?” I asked.

“Find out quickly if you have the right character,” he replied. “And if you don’t, get out quick. There is nothing sadder than seeing intelligent, hardworking people losing money and being swept aside by some brash young idiot who makes money. So don’t fight that you may not be a good speculator. Learn about yourself.”

I always felt that the job satisfaction of being a trader was terrible. If you get the market right, you either get out too early or too late, or you don’t have a large enough position. And if you get it wrong, then you lose money. Robin agreed.

“It’s just awful,” he told me. “When my son left university, he was looking around, unable to decide about a career. I said, “Why don’t you do my job?”  And he said you must be crazy. You come home green every night.”

“What’s the difference between being an analyst and a trader?” I asked.

“You don’t have to pay for your mistakes if you’re an analyst. You merely have to say you got it wrong, that you’re very sorry about last week’s report, and then move on. The two emotions, greed and fear, that drive markets apply much less to analysts. You are not as emotional as an analyst. You look at the market in a more cold-blooded way and weigh it up more rationally.”

Listening to Robin, I realised he and I have a similar trajectory. I started as a trader and became a broker and then an analyst.

“It’s a bit like teaching,” Robin said. “Those who can’t do, teach. And those that can’t teach, teach teachers.”

“Now that you are an analyst and not a trader,” I asked Robin, “Would you recommend your son today to go into commodity business as an analyst?”

“I think it helps to have been a trader if you want to be an analyst,” he replied. “It is almost better if you’ve been a bad speculator because you can probably understand better what works. It would condemn him to ten years of misery, losing money as a speculator before entering that calm haven of analysis.”

“But do you think you must have traded sugar to be a good analyst?” I insisted.

“It certainly helps,” he replied. “The only thing that matters is what will push the price up and down. And if you’ve been a trader, you instinctively know it’s the money. You follow the money. An analyst tends to get involved in intellectual conjectures and likes to prove a point or looks at it from an economic point of view.”

“How did you get into commodities in the first place?” I asked him.

“I studied Russian and French at Oxford,” he replied, ” I was a Trotskyist by the time I left. I wanted to get to know the working class and got a job in a factory in Leeds, where I learnt that the working class didn’t like me, and I didn’t like them. I decided to get a proper job, and my father helped me get one in the City in vegetable oil brokerage. My father was a diplomat.

“I wanted to use my language skills and applied for a job with Sucden in Paris. At the time, the sugar trade houses never traded with each other – they concentrated on brokering government-to-government deals between exporters and importers. Vegetable oils were more about trading – and the various trade houses traded with each other. I had the bright idea that this could be applied to sugar. I went to Paris for an interview and got the job.

My daughter, Charlotte, recently interviewed Robin for her ECRUU podcast and asked him to describe a typical workday as an analyst.

“I don’t want to,” he told her. “I’d get the sack.”

© Commodity Conversations ® 2024

Click here to listen to Charlotte’s ECRUU podcast with Robin

 Anders Valentin Vogt and Mads Frank Markussen – CM Group

I recently caught up with Anders Valentin Vogt and Mads Frank Markussen, two young Danes who look so similar they could be brothers. By some strange coincidence, they share the same birthday, although Anders is a year older than Frank.

Anders and Frank work within the Copenhagen Merchants Group – CM Group, a second-generation family-owned company involved in commodity brokerage and trading, shipping, logistics, terminals, production, and market intelligence. Anders heads the newly established entity CM Navigator, and Frank works as a freight trader in Navi Merchants.

Anders has been with the group for over eight years, working initially in the Agri and Biomass (wood pellets) markets. His roots in agriculture run far back, having grown up on a farm.

Frank was a freight trader for ten years, most notably in Denmark with DS NORDEN but also with Louis Dreyfus in Switzerland, where, incidentally, he read the Sugar Trading Manual (now, unfortunately, out of print).

CM Navigator is a subscription platform with S&D analysis, trade flows, physical prices (nominal and actual bids & offers), and dry bulk freight rates. Its freight calculator runs 360,000 freight rates, updated daily (approximately 30.000 voyages 12 months forward). Navi Merchants is a shipowner and charterer that trades freight, taking market positions, mostly on European trades and primarily in European short sea routes.

I began the interview by asking the duo if the two entities were legally separate and what the relationships and synergies between the two were.

“They are separate entities,” Anders explained, “But owned by the family company. There are 78 companies in the group, some wholly owned, others co-owned with, for example, Bunge, Viterra or USTC group. There are a lot of synergies between the different entities.”

I asked him how he generated 360,000 freight rates. It seemed an incredible number.

“We have a team of programmers, economists and mathematicians who produce them via our proprietary models,” he told me. “We realized that advantages in computing technology meant that what had previously been done by hand could now be done faster by computers.”

“We looked at all the theoretical ways you can calculate a freight rate on every commodity from coaster to capesize,” he continued. “We built a model incorporating them all. Then we used our contacts to validate the inputs for, for example, marine insurance, speed versus fuel consumption, and our grain knowledge to build a database of grain tradeflows. We add live data that we buy externally – and update every two hours – for, for example, carbon or fuel prices.

“As we are physically present in freight and grain, we can feed the machine with what is happening in the spot markets, which means we are as close to reality as possible.”

I asked him if a client could charter a ship or trade an FFA (Forward Freight Agreement) on the platform.

“Currently, you cannot trade anything on CM Navigator,” he replied. “However, if you want to charter a vessel, we can put you in contact with the right person within the group.”

As well as freight, CM Navigator tracks trade flows on ten cereals – wheat, corn, barley, durum, wheat, triticale, oats, rye, rapeseed, and peas – and is currently adding soybeans and soy meal. I asked Anders if the platform tracked every vessel by commodity.

“We distinguish between tradeflows and vessel lineups,” he answered. “We aggregate import/export volumes by country. On the lineups, we’re strongest in the Baltic Sea on wheat and barley.”

“Do you do containers or only bulk?” I asked.

“Only dry bulk. It is our specialization and our expertise. Container freight rates are challenging as the top nine carriers control 83 per cent of capacity. In dry bulk, the largest three companies don’t even control ten per cent of the ships.”

So far, I have been talking mainly with Anders, but I also had some general freight questions for Frank.

“For our non-specialist readers,” I asked him, “Could you explain how the FFA market works – and can you charter a vessel on a basis against an FFA?”

“The FFA markets work the same way as other derivative markets – FFAs are swaps cleared via exchanges with brokers acting as go-betweens. Freight sellers like ourselves can lay off their flat price risk via FFAs; in that sense, it is similar to basis trading in many other markets. The main difference between FFAs and wheat futures is that the MATIF or CBOT settles through physical delivery, while FFAs are financially settled based on an index of global routes.

“It makes FFAs more volatile than other futures because you cannot take delivery of ships against an FFA, forcing physical and derivatives to converge. If I am not mistaken, the FFA market is one of the world’s most volatile derivatives in percentage swings.”

“Are hedge funds active in the FFA market?” I asked.

“Yes, very much. I would love for you to interview some hedge funds that have entered FFA markets in recent years,” Frank replied. “My gut feeling is they put too much money into a relatively illiquid market. The ensuing volatility means shipowners and freight traders must constantly revise their bids and offers as customers buy an all-inclusive price, not a premium to a financial product. It is, of course, an opportunity for the smart traders!”

“Can you charter a vessel on a basis against an FFA?” I asked.

“Yes,” he replied. “You can charter a ship on index-linked pricing, the same index that FFAs settle on. It is a popular way for traders who want to add physical presence without incurring huge flat price risks. It has other risks, though. There is no free lunch.”

“How far out can you charter a vessel on a voyage basis?”

“The best thing about global dry bulk freight markets,” he answered, “Is that as long as all laws are adhered to, there are no rules. You can contract whatever you want.”

“One model we operate here in Navi Merchants is for dry bulk freight customers looking to hedge their forward freight exposure. They need the flexibility not offered by traditional voyage contracts, so  they can get a financial stake as a silent partner in a one-year time charter where Navi Merchants commercially manages the ship, and we split the profits/loss.”

Do traders usually charter vessels on a Time Charter or Voyage basis?

“Large traders focus on time charter as they need flexibility. Smaller traders usually do voyage charters because they do not have the skill set to run a fleet and because it reduces their risk, as voyage freight is an all-inclusive price.”

How big an issue is counterparty and default risk – and how do you manage it?

“It is an integral part of any trading company, commodities or shipping. Effective management involves rigorous risk assessment. Staying informed about market conditions is vital, and diversifying customer portfolios helps spread risk. Strong contractual safeguards are essential, while continuous monitoring of counterparties is crucial.“

“Do you use AI in your programming, and how do you see it changing your freight world? I asked.

“I will leave the freight trading part to Frank, Anders replied. “But in a  CM Navigator context, we rely on old-fashioned fundamental analysis. We see the potential for AI to increase the accuracy of lineups and S&D forecasts using satellite imagery.

“However, AI could significantly impact market dynamics regarding the speed with which the markets react to disruptive events and capture opportunities. It may give the bigger trade houses an advantage or introduce new players into the industry, shaking things up a little, as in other industries.”

“I am part of a network in the Danish Technical University,” Frank told me, “where we try to combine business knowledge with students and academics, funded primarily by Maersk Foundation”.

“Ships operate under the constraints of physics,” he continued, “making them suitable for modelling and optimization. Whether it’s engine performance, hull design, or port logistics, AI-driven solutions are on the horizon.

“Some shipowners are exploring AI-driven trading models, and companies like Cargill use systematic trading models to generate trade recommendations. While these models exist, their effectiveness can vary widely. However, AI’s current limitations in price prediction shouldn’t overshadow the fact that humans also have limitations. While top traders excel, not everyone in the shipping industry consistently makes profits. The future likely involves a combination of human expertise and AI.”

“What does the future look like for the freight trading sector?” I asked.

“I think the next step is consolidation – amongst shipowners, freight traders and data providers,” Frank replied. “We are already seeing consolidation among major players in the freight trading sector, driven by the desire to achieve economies of scale, improve operational efficiency, and enhance their ability to weather market volatility. You need serious IT, data subscriptions and human resources to compete with the best.”

I couldn’t interview two Millennium-generation Danes without asking them about diversity and sustainability.

“Diversity is on our agenda,” Anders told me. “Diversity of ethnicity and nationality comes naturally in a global industry. However, when it comes to gender, it is not so easy, especially within these traditionally male-dominated industries like tech, commodity trading, and shipping. For example, last time we advertised for a software developer, 1 of 20 were female. In CM Navigator, we are a team of five nationalities based in three offices with around 40 per cent women.”

“Sustainability is essential,” he continued. “Customers must have it, and they ask for it to be free. We calculate carbon costs and emissions on the freight along with every freight rate. We aim to combine our data into a full carbon data solution.”

Do Danes have shipping in their blood,” I asked. “Are you modern Vikings?

“There’s certainly a unique connection between Denmark and the shipping industry, Frank replied. “What struck me in Switzerland was that very few locals seemed interested in pursuing careers in shipping or commodities. In Denmark, it’s a different story altogether. Shipping, especially through companies like Maersk, is a matter of national pride.”

“You could say maritime traditions run deep in our veins,” he added. “My family has ties to the industry – my parents were part of the Maersk family when they met.”

“You mention Switzerland,” I retorted, “But a Swiss company, MSC, is currently the world’s largest shipping company, just ahead of Maersk.”

“That’s true,” he replied. “But MSC has a Danish CEO!”

“Last question,” I said. “Tell me one thing about you that isn’t on your LinkedIn profiles.”

“I did amateur car racing when I was younger,” Anders confided. “I have a racing simulator at home. My girlfriend hates it, but she can also see that I don’t watch football games or anything, so that’s my thing. And then she gets some quiet time when I sit there because I’ll focus on that for a couple of hours, and then she has everything to herself.”

“And you?” I asked Frank.

“I love Lego,” he replied. “And somehow, my son also loves Legos. It probably helps I give him Lego sets for every occasion. We do a lot of Lego together. My daughter has also taken to Legos but prefers to use them as dolls and likes changing their hair and clothes.”

“Lego is a Danish company with a Danish CEO,” I replied.  “Thank you, both, for your time and input.”

© Commodity Conversations® 2024

Commodity Markets, a return to normality (almost).

By Corinna Olearo,

Head of Commodity Research & Price Risk Management, Nestlé

Please note that this article is intended to be descriptive of historical events and the content should not be interpreted as projections of future outcomes. All opinions expressed are solely my own and do not reflect the views of my employer.

The turbulence that defined the commodity markets between 2020 and 2022, where many markets reached their highest levels in a decade or even surpassed historical peaks, now appears to be a distant memory. However, two markets stand out as exceptions to this trend: the price of robusta coffee is currently at its highest level in 30 years, and the cost of cocoa has reached unprecedented levels.

A return to normality

The factors contributing to exceptional commodity supply and demand shocks in 2020-2022 have gradually diminished, resulting in a noticeable market decline over the past 18 months.

The global pandemic has ended, as has the supply chain congestion caused by various lockdown measures. According to the USDA, trade from the Black Sea region, which accounts for 30% of global grain exports, has nearly returned to pre-Russian invasion levels in Ukraine. Despite ongoing geopolitical conflicts, global trade has demonstrated resilience, even in the face of the recent crisis in the Red Sea region.

Expectations of a robust economic recovery in China following the COVID-19 pandemic have disappointed, leading to limited imports of raw materials, particularly metals, by the world’s largest commodity importer. Moderate economic growth in Europe and mild winters experienced in 2023 and 2024 have also contributed to lower prices for energy and energy-intensive materials, such as fertilizers.

Currently, the prices of cereals, vegetable oils, natural gas, and metals have fallen close to the average of the last ten years after peaking in 2022. Even the prices of those commodities required for the energy transition, lithium and nickel, are well off the 2022 peak.

Even price volatility has returned to historical levels after a record high in 2022.

Given that the main macro-factors that previously drove sustained and general growth in commodity prices have faded away, what is happening to the coffee and cocoa markets?

The coffee and cocoa market

Robusta coffee prices have been rising steadily since the beginning of 2023, reaching their highest levels since 1995 in January 2024. Arabica coffee is also at historically high levels, although 30% lower than its peak in 2022.

The current dynamics in the robusta coffee market can be attributed to the elevated prices of Arabica coffee, which have widened the structural price difference between the two types of coffee. Over the past three years, the cost of robusta has averaged $2,000 per metric ton less than Arabica, resulting in a gap of $3,500, compared to an average of $1,450 over the previous ten years.

This significant price disparity and reduced purchasing power in countries heavily affected by inflation have shifted demand towards more affordable coffee options. Vietnam, Indonesia, and Brazil have not been able to meet this increased demand with a sufficient increase in production, leading to an imbalance between supply and demand.

In the cocoa market, on the other hand, a decrease in production triggered the rise in quotations to record levels in New York and London. Ivory Coast and Ghana production (70% of world production) was limited by unfavourable climatic events, the reduction of fertiliser use due to high prices in 2021-22, the spread of a virus affecting cocoa bean trees, the low yield of plantations in Ghana due to the general advanced age of the trees.

The resulting supply and demand imbalance for three consecutive seasons triggered the run-up in quotations, which have risen 150% since early 2023 and 50% in the last two months.

Commodities are historically characterized by unexpected shocks in demand or supply, which market dynamics usually correct in the short or long term. However, this period may be relatively more prolonged in the case of cocoa. The supply response to high prices is slower than for crops such as cereals, which are sown every season.

Cocoa trees are replanted about every 25 years, and producing their first fruits takes 5-6 years. Production is mainly concentrated in West Africa, where the government sets farm-gate prices at the beginning of each season. Farmers have not yet felt the price increase since October, limiting investments for the next harvest.

The EU Deforestation Regulation

A Conversation with Nicko Debenham 

Good morning, Nicko, and welcome to Commodity Conversations. Please tell me a little about yourself.

I come from a horse racing family, and all the children went into racing. In those days, the best place to go was the US; it was good money and easier than in the UK or Ireland.

I broke my collarbone in the US, came back to the UK to repair it, and met my wife in London. I took her back to the US, and we got engaged there, much to the horror of both her parents and mine. My future father-in-law decided to take me under his wing. He told me I should own horses, not be paid to ride them.

He had worked as an expat in Nigeria for 35 years, and my wife was brought up in Lagos until she was twelve. He sent me to Nigeria in 1986. That’s how I moved from horses to cocoa.

I went to work for his best friend, Chief Bakare, in Ondo State at the heart of Nigeria’s cocoa production. It was a chaotic period because the government had privatised the cocoa board under an IMF structural adjustment program.

The Bakare family began trading, buying cocoa and selling it to Europe. They built a processing factory. I worked for them for about six years and learned an enormous amount. I then moved to an old-fashioned London trade house, trading everything from tallow, gum Arabic, and sesame seed. I brought cocoa to them and set up a business in Nigeria and Cameroon. The company owner wanted to sell the cocoa business to Anthony Ward, who was setting up Amajaro. I was unhappy because I said it was my cocoa business and I should have a share in the new enterprise.

I left and set up my own business, originating cocoa from Nigeria, Cameroon, Ghana, and the Ivory Coast. It worked well for five years, but it was the era of bank consolidation, and my bank facilities dried up. My capital base was too small. I went to work for Armajaro, staying there for twelve years.

My role at Amajaro was to set up traceable supply chains across Africa, Asia, and Latin America, mainly Ecuador and Peru. We ended up with an excellent trading book. By the time I left to join Barry Callebaut in 2014, 85 per cent of our cocoa was sustainable – and we were the largest trade house in cocoa.

I worked for Barry Callebaut for eight and a half years as head of sustainability, with a mandate to turn the company from a laggard to a leader in sustainability. We created a strategy called Forever Chocolate. We committed to getting 500,000 cocoa farmers out of poverty, being carbon and forest-positive, 100 per cent sustainable, and eradicating child labour in our supply chain by 2025. So, they have one year left.

I stayed with Barry Callebaut till December 2021, when I set up my own company, Sustainability Solutions.

What does Sustainability Solutions do?

I work for government entities to help Ghanaians and Ivorians raise the cocoa price to a level that generates meaningful value for farmers. To solve child labour and deforestation, you must first solve smallholder poverty.

I also work for commercial companies on sustainability, helping them comply with all the new regulations and build a social value strategy.

Could you tell me about these new regulations?

There is a saying that Americans invent, Chinese copy, and Europeans regulate. Europe is a printing machine of new regulations.

We have recently had CSRD, the Corporate Sustainability Reporting Directive. We now have EURD, the European Union Deforestation Regulation. The next one is the biggie, the CSDDD, or the Corporate Sustainability Due Diligence Directive.

What is the difference between the EUDR and the CSDDD?

The EUDR regulation covers seven commodities: soy, cattle, palm oil, timber, cocoa, coffee, and rubber. It targets deforestation, but other forms of illegality have been sneaked into the regulation.

CSDDD means that companies must perform due diligence on everything in their supply chains and prove they have done so. We expect the CSDDD to be passed as a directive in 2024 and transposed into national law by the Member States by 2027.

When does the EUDR come into force?

It’s already in force. It entered into force on 29 July 2023, with an 18-month preparation period before its application on 30 December 2024. It relates to deforestation generated since 31 December 2020.

The EUDR uses the FAO’s definition of forest, which is half a hectare with a 10 percent cover of five metres of trees or higher. If a forest existed before December 2020 and no longer exists, then that’s deforestation.

A recent news article on Reuters suggested that EUDR will lock Ethiopian coffee out of the EU market. Do you agree?

I disagree.

Among the seven commodities, cocoa and coffee present the most significant challenges as they rely most on the EU market. More than 60 per cent of global cocoa production enters the EU, much of which is processed and reexported. The figure for coffee is between 25 and 30 per cent. The statistics for palm and soy are less than 10 per cent. Europeans can choose where they buy their palm or soy, making it easier to conform to the regulations.

If traders want to ensure that their coffee and cocoa are not devalued—if they want to bring them into the EU—they must comply with the regulation.

Can the cocoa sector comply?

Cocoa is a product consumed by children in rich countries and grown by children in poor countries, often in abject poverty. It is an incredible product that everyone loves, but it is emotive because of poverty and child labour. In addition, Ivory Coast and Ghana have seen massive deforestation over the last 20 to 30 years.

NGOs and the media have targeted chocolate brands on these issues for 25 years. The brands and the supply chain companies have had to stand and defend themselves. They have developed sustainable supply chains, collected data, and done the due diligence.

Consequently, the cocoa companies look at EUDR and say, “Yeah, it’s a bit of a pain, but we can do this.”

What about coffee?

The coffee industry has thrown up its arms in horror. “It’s impossible,” they say. “It can’t be done. Our supply chain is unique.”

I’m sorry, but how is coffee different from cocoa? Okay, coffee has washing stations. You have collection stations in cocoa, and you must still clean and dry the cocoa. It’s the same.

The EU is simply asking for the sector to collect data. To do that, you download an application on your smartphone and survey the farm. While there, you ask the farmer about other forms of possible illegality. You make sure you understand the risk of that farmer not having the right to farm that land, illegally using his children on the farm, not paying labour, using forced labour, or having other issues with labour rights. It’s not that difficult. You then follow the coffee up the supply chain. It’s perfectly possible.

I started digital traceability at Amajaro in 2007. When I left in 2014, we had 80,000 farmers on a database supplying Lindt and Sprungli with 45,000 tonnes a year with barcoding on every batch.

Ethiopia says they can’t do it. It’s not that they can’t do it. They can do it. It isn’t easy and requires investment and resources. That’s the issue.

Starbucks, Nespresso and Nestlé do it already, don’t they?

Correct. If some companies can do it, why can’t everyone? It’s perfectly possible.

Does EUDR favour big companies? Will small or medium companies say, “Oh, this will be way too expensive for us. We don’t have the footprint to do it.”

Every company has a mix of direct and third-party supply. A direct supply is where you are closely engaged with your co-op or aggregator and have access to farmer data. You support the farms and have impact programs around certification, productivity, deforestation, etc.

Indirect supply is buying from a third-party shipper, often because you cannot operate inside the origin country, as in Ethiopia for coffee or Cameroun for cocoa. These guys need to be supported with logistics, software, and training.

If I’m correct and there’s a two-tier market, traders will be incentivised to take the necessary steps to achieve that higher end of the two-tier market. That’s the motivation. Most people view it as an opportunity, but some are digging their heels in. They haven’t yet seen the light.

But they need to see the light. EUDR is a stalking horse for CSDDD. If people dig their heels in on EUDR, CSDDD will be an anchor around their ankles.

How much does traceability and due diligence increase cost – and who pays for it?

We put the cost for collecting and managing the data at between $10 and $15 per tonne of cocoa bean equivalent product. It’s similar in coffee.

There is the additional potential cost of the remedial activities required to mitigate any risk of deforestation or other illegality. You may need to invest in raising awareness around child labour and deforestation.

Another potential cost is preserving your product’s traceability. If you deal in both compliant and non-compliant products, you will need to segregate the two in the warehouse, which means a less efficient use of your warehousing space. Remember, EUDR doesn’t allow for mass balance—you must maintain the product’s identity all along the chain.

But it is worth it. A conforming product should trade at a premium exceeding the cost of establishing its conformity.

How can you ensure that the cocoa you buy from a compliant farm comes from that farm?

When you perform due diligence, you must do a reasonable calculation on the volume that is coming from the farm. If it’s a four-hectare farm and the average productivity in that region is 500 kilos a hectare, you’ll start getting anxious if that farmer supplies four tonnes.

The challenge is that you don’t necessarily learn that until a significant portion of the season has passed. Farmers never deliver their entire production in one go. They generally deliver 6 to 12 times a year. You need a digital system totting up the total as the farmer delivers.

You can rely on your aggregator to keep everything honest, but it’s often the aggregator causing the problem. A farmer rarely takes cocoa from another farmer to sell as their own, but the aggregator might add illegal cocoa to a batch of legal cocoa.

The EUDR will stop that from happening because traders will have to prove that they have established that there’s no – or a negligible – risk of deforestation or other forms of illegality. If you don’t even know where it’s coming from, how can you say you’ve done your due diligence?

I understand that in the Ivory Coast, children older than twelve sometimes can’t attend school because their parents don’t have the required registration document. And if they can’t go to school, they work for their parents on the farm.

Sadly, national child labour monitoring and remediation systems are not solving the problems. The solution would be for governments to establish rural infrastructure development with schools, electricity, water, and registration of every rural resident, including their children.

In the absence of government action, companies undertake remediation activities. A company may pay for birth certificates for unregistered children so that they can attend school.

Other companies may supply school kits; a child can’t go to school without a school uniform or rucksack. I mean, who the hell decided that? You’re telling me I can’t bring my child to school just because they don’t have the right coloured shirt or pair of shorts. It’s ridiculous, but that’s what you’re up against.

Farmers need a living income that allows them to pay their workers, send their children to school and attain grades that give them a choice in the future.

The only way you’ll get there is for farmers to have a decent income and for communities to have electricity, water, and communications with schools, health centres, etc. The first thing you’ve got to solve is income, but the second is rural infrastructure.

There is progress, but it might slow if people focus only on due diligence. The danger with EUDR is that money goes into due diligence rather than dealing with the root causes.

Derek Chambers – the famous cocoa trader – told me cocoa farmers were just as poor or even poorer when he retired than when he started his career 40 years earlier.

I would agree with him.

The cocoa price is at a historic high, but it doesn’t help Ghana or the Ivory Coast because they sell their crop a year in advance. The farms still have low prices from the previous selling that they did. They will get better prices next crop.

The challenge we all face is that if you optimise the outcome from a farm – and achieve the capacity and capability of trees on that farm – you should be able to double or triple its production. If farmers did that, the world cocoa price would be not even half what it is today; it would be a quarter.

NGOs and governments want to help farmers increase productivity and yield, which drives the price down. Every complex problem has a simple solution that doesn’t work.

That’s precisely where I’m coming from. It’s about transforming the agricultural policy in a country to obtain a more balanced mix of crops. It’s as much about teaching farmers not to grow cocoa as it is about teaching farmers to grow cocoa. But it needs to be backed by government policy.

Neither Ghana nor the Ivory Coast are self-sufficient in food. Maybe their governments should use the tax from cocoa exports to subsidise the production of vegetables, chicken, pork, etc.

You mentioned that Ghana and Ivory Coast have already been severely deforested. Is the EUDR too little, too late?

No, I don’t think it is. It is essential to protect whatever is left. Countries like Cameroon have a lot of forests to preserve.

What worries me about the regulation is how the EU will implement it.

Why?

There’s lots of noise now, but there could be a mystic silence once the regulation is applied. We’re all blindfolded, standing up against the wall, wondering which one of us is going to get shot. But what if no gun goes off, no one is shot, and everyone carries on as usual?

It is what happened with the US Tariff Act. In 2017, Congress amended Section 307 to prohibit the imports of any product mined, produced, or manufactured wholly or in part by forced or child labour. In the seven years since then, no “withhold and release order” has been issued for cocoa.

What is a hold and release order?

If US Customs suspect your cocoa comes from farms that use forced or child labour, they can withhold it until you prove it didn’t. The burden of proof reverses; you are guilty until you can prove you’re innocent.

In the beginning, everyone made sure that the cocoa going into the US was certified as sustainable and that they could ensure traceability. But then time passes. And it’s like, is that certified? No, never mind, give it a go. Nothing’s happened to anyone yet, so it probably won’t happen now.

Why hasn’t it been enforced?

The US Customs Board of Protection, CBP, is tasked with implementation. However, I don’t believe CBP has the capacity, funding, or resources to do so.

Will the EU do any better?

Each Member State must appoint a National Competent Authority, an NCA, to implement the EUDR. I don’t believe they will have the capacity or the capability to do it.

There is a historical precedent. The EUTR, European Union Timber Regulation, was adopted in December 2010 and came into force in March 2013. It prohibits imports of illegally harvested timber or timber products and requires operators to exercise due diligence to ensure that their timber and timber products comply. The EU appointed NCAs to implement the regulation.

When I asked one NCA about their resources, they told me they have three full-time and two part-time employees to cover all seven commodities. They’re supposed to inspect nine per cent of all relevant products entering their border from high-risk countries, three per cent from standard-risk countries, and one per cent from low-risk countries. There is not a chance in hell that will happen if you’ve only got five people in a country’s NCA.

Some countries may be stricter about implementation than others. Won’t cocoa and other commodities enter the EU via less strict countries?

We are already hearing about different interpretations of the regulation. To clarify matters, the EU has published FAQs. There are 90 or so of them, subdivided into different sections.

One NCA told me they would use EUDR as a window against human rights infringements. Remember, the regulation doesn’t just cover deforestation; it also includes other forms of illegality according to the national laws in the country of production. But then another NCA said they would only focus on deforestation.

If the EU rules that a trade house hasn’t respected national laws at origin, does the trade house have a right of appeal, and to whom do they appeal?

It’s unclear whether you have the right to appeal, but it would be to the National Competent Authority if you do.

Deforestation will have different interpretations depending on which mapping technology you use and how accurate it is. It will cause arguments where the software shows an area as deforested, but a trader will say it’s not deforested and that they have checked it on the ground – it’s just a bit of tree pruning.

Is it a problem that coffee and cocoa both grow under forest canopy?

It is a huge problem. It’s easier in coffee because it’s less under canopy. I don’t think anyone has succeeded in distinguishing between cocoa and shade trees using satellite imagery. We tried it at Armajaro, but the satellite couldn’t differentiate between the two, and the software couldn’t learn what was a cocoa tree and what wasn’t.

There will also be problems with corrupted data – data that has been wrongly inputted.

You must have checks on the ground.

One trader I talked with believes the EU will delay the legislation.

EUDR is a European Parliamentary regulation agreed upon under a trialogue of the Council, the Commission, and the Parliament. They agree on the wording and the timelines, which are then published, translated, and entered into force. A parliamentary vote would be required to delay it, but it won’t happen.

However, the EU is delaying the risk categorisation of the origin countries/regions. As I mentioned, the EUDR calls for origin countries/regions to be categorised as high, low, or standard risk. The NCAs must inspect one per cent of regulated commodity imports from low-risk countries, three per cent from standard-risk countries and nine per cent from high-risk countries.

The EU recently announced that it will temporarily categorise each country/region as standard. This means that NCAs will be obliged to inspect three per cent of all regulated commodity imports regardless of origin. This does not change what companies need to do; it only changes the likelihood of being inspected by an NCA.

Do you have any final messages for traders and food companies?

First, if you’re a brand company and cocoa is your core raw material, you must be stupid if you haven’t learned that you’re handling a hand grenade with the pin out. Cocoa has everything there is that can go wrong. Child and enslaved labour, deforestation, abject poverty, and even potential corruption are all wrapped up in a parcel of cocoa. And that’s why I say, for God’s sake, don’t let go of that pin. Run your business correctly, do your due diligence and do what you should do.

Use digital technology to understand and engage with your supply chains and capacity. Work with your supply chain partners. There is a massive opportunity if you do that.

We are moving to a world where people need to pay a fair price for a product which provides a livelihood for the people who produce it. Is it a human right to be paid a fair price or get a fair income for doing a job? It’s going to be a debate, and it’s going to happen. Historically, with all these issues, the companies that lent into it and tackled it first came out of it best.

Lean into it, identify how you can make a difference and tell the great stories around it. It’s what I call proud marketing.

Thank you, Nicko, for your time and input.

For more information on EUDR, please click here.

© Commodity Conversations ® 2024

This is part of a series I will include in my next book, Commodity Professionals – The People Behind The Trade.