Category: Blog

Last week the UK’s Channel 4 Dispatches programme highlighted child labour on Guatemala’s coffee farms. Posing as researchers, the Dispatches’ team visited farms they were told supply Starbucks or Nespresso. They found children as young as 11 or 12 working long hours in gruelling conditions for as little as £5 per day.

The programme found that most of the children were working to help feed their families, and highlighted the piteously small amount of money that coffee farmers receive for their beans. The programme put the the average cost of a cup of coffee in the UK at £2.50 of which the coffee shop receives 88p, staff receive 63p, and the taxman 38p. The programme estimated miscellaneous costs at 28p and profit for the brand owner (ie Starbucks or Nespresso) at 25p. This leaves 10p for the coffee supplier, of which only 1p goes to the farmer. A fraction of that 1p goes to the coffee pickers.

You can perhaps argue whether that breakdown is accurate, but whatever the exact figures, the coffee farmer receives only a tiny proportion of the final sale price of his production. Poverty is widespread in coffee-growing areas throughout the world, and local families often have no choice but to send their children out to work at a young age.

Although it is no excuse, this situation is not new. In his book ‘Uncommon Grounds – The history of coffee and how it transformed our world’, Mark Pendergast writes, “Children begin helping with the harvest when they are seven or eight. Though many campesinos keep their children out of school at other times for other reasons, it’s no coincidence that school vacation in Guatemala coincides with the coffee harvest.’

It is not clear whether the Dispatches team filmed the children during school vacation, or whether the children were skipping school to work, but both Starbucks and Nespresso have made clear that child labour is unacceptable at any time in their supply chain.

In a statement George Clooney, Nespresso’s ambassador, said “I was surprised and saddened to see this story. Clearly this board and this company still have work to do. And that work will be done. I would hope that this reporter will continue to investigate these conditions and report accurately if they do not improve.”

Meanwhile, also in a statement, Nespresso’s chief executive said that the company had launched an investigation to find out which farms were filmed and whether they supply Nespresso. “We will not resume purchases of coffee from farms in this area until the investigation is closed,” he added.

Starbucks also said that it had launched an investigation into the claims brought by Channel 4. “We can confirm we have not purchased coffee from the farms in question during the most recent harvest season, and we will not do so until we can verify that they are not in breach of C.A.F.E. Practices – our ethical sourcing program developed in partnership with Conservation International that provides comprehensive social, environmental and economic standards, including zero tolerance for child labour.”

However, in an interview with The Guardian, the Dispatches’ reporter said that it was far too easy to to announce an investigation and halt supplies from these regions, but doing so will further punish the farmers and the desperately poor families who rely on them. “The reason these kids are working is that their parents – and the farms they work on – are not paid enough,” he added.

Unfortunately, problems in the coffee supply chain are not limited to Guatemala. A Thomson Reuters Foundation investigation published last December, uncovered extensive slave labour in Brazil’s coffee industry. The investigation found that coffee produced by forced labor was stamped slavery-free by top certification schemes and sold at a premium to major brands such as Starbucks and Nespresso.

The coffee supply chain has two problems that are common to many commodities sourced in poor countries: lack of transparency and low prices. It therefore really encouraging that the coffee industry is launching two initiatives to combat these two problems.

The first is FarmerConnect, which is built around a blockchain core powered by IBM. The second, again powered by IBM, is the Thank My Farmer app that will be launched later this year. Working in conjunction with FarmerConnect the app will allow consumers to know exactly where their coffee comes from and allow them to contribute directly to the farmer, and/or to support social and educational projects in coffee growing regions.

We will be writing more about these promising initiatives in coming weeks, and of course we give them our full support.

© Commodity Conversations ®

Image by Pixabay

Continuing on the theme from last week of government intervention, the following is an extract from my book The Sugar Casino, published in 2015:

In a freely functioning market supply and demand is, in theory at least, matched by price. If demand increases or supply falls, prices rise to encourage supply while at the same time reducing demand. If supply increases or demand drops then prices fall, sending a signal to producers to reduce output or to consumers to increase demand.

This process is what is often described as the “invisible hand”, the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. Adam Smith introduced the phrase in 1759 in reference to income distribution and then used it again in “The Wealth of Nations” in 1776. He argued that an economy works best in a free market scenario where everyone works for his or her own interest – and where the government leaves people to buy and sell freely among themselves.

The American baseball player Yogi Berra once said, “In theory there is no difference between theory and practice. In practice there is”.

In practice, markets may not always be efficient, and governments may need to interfere to correct those inefficiencies. This might happen if producers club together into a cartel to raise prices, requiring the government to intervene to break up the cartel. But even without a cartel a sugar mill might be so big in a particularly region that it could in its own right be a monopoly employer or buyer of cane, forcing down wages and cane prices, or a monopoly seller, forcing sugar prices higher.

In addition, sugar producers might not correctly price what economists call “collective goods”: these could be the environmental costs of factory pollution or heavy traffic on the roads at harvest time. Individual producers might not also correctly value the benefits of research into new cane varieties or of infrastructure investment such as railways or ports. On a wider scale governments, rather than markets, may better provide collective goods such as education and health services.

Inefficiencies sometimes creep into markets due to a lack of information. To counter that a government could encourage the setting up of commodity exchanges to facilitate trade and improve price transparency.

But governments also interfere in markets, not to correct market inefficiencies, but to obtain specific policy objectives such as the alleviation of poverty or a fairer distribution of wealth. Interfering in the market in this way can however have a cost: it can create price distortions that prevent the most productive and efficient allocation of resources. This “economic loss” has to be measured against the “social gain”, say, of a more equal income distribution.

Governments may also interfere in markets for diplomatic reasons, for example by applying a lower import tariff on sugar from one country compared to sugar from another. Lower import tariffs might be applied to curry favour from a neighbour or in exchange for lower tariffs on other goods within the framework of a Free Trade Area (FTA). Altruistic governments may also reduce or remove import tariffs on sugar imports as part of a policy to promote growth in developing countries.  Such an example would be the EU’s “Everything But Arms” agreements.

In the agricultural markets some governments, in particular China, may try to keep cane prices high in order to maintain rural incomes and to slow down the migration of the population to the cities. Other governments (or more correctly politicians) may try to keep cane prices high for less altruistic reasons: to win political votes. India is an obvious example of this; perhaps Thailand is a less obvious example.

Governments may also often interfere in markets to maintain employment. It would certainly be more cost efficient, say, for Bangladesh to close down their few remaining sugar mills and import the sugar they need from Brazil or Thailand. (The same also applies, but on a much larger scale, to China.) However, closing factories can result in a politically unacceptable increase in unemployment. Sugar industry employees in Bangladesh and China might be better off making something else other than sugar, but a reallocation of that sort takes time. It would involve short-term hardship for the employees concerned and would be a difficult “political sell” in the short term. And everyone knows that politicians operate in the short term: their time frame is the next election.

© Commodity Conversations ®

Bloomberg published an interesting opinion piece last week on the resurgence of government in our daily lives.

Since the Reagan / Thatcher era, government has been seen as `the problem not the solution`, particularly in terms of the economy. Over the past 40 years, privatisation and other market liberalising measures have reduced the role of government, leaving space for `market-based solutions`.

The international commodity trade benefited from this trend. When I started in the commodity business in the late 1970s, it was dominated by state agencies. Prodintorg was the monopoly importer in the USSR, as was COFCO in China and BULOG in Indonesia, along with a host of other government agencies in many other countries. If you wanted to buy sugar from Brazil you could only buy it from the IAA, a stage agency. And if you wanted to buy sugar from Australia you had to deal with QSC, a quasi-state agency.

Most of these agencies were dismantled during the 1980s and 1990s as governments withdrew from the international agricultural commodity trade; our business was effectively privatised.

If the Bloomberg opinion writer is correct, the pendulum is now swinging the other way. Governments now have the support of voters to be increasingly interventionist.

Once again, international agricultural commodity markets are not immune from this trend. The Chinese government, through COFCO, is an increasingly important player in managing China’s food imports. The Russian government, through VTB, is becoming an increasingly important player in Russian grain exports. Meanwhile, other countries are becoming more interventionist in imposing tariffs and other trade barriers.

What effect might this have on our business?

First, politics could become more important than price as a market driver. Although not perfect, markets do a reasonable job of sending the right signals to producers and consumers, importers and exporters. When governments interfere, these market signals become distorted: farmers end up growing the wrong crops while importers import the wrong quantities or the wrong commodities. Markets are better than government committees at balancing supply and demand all along the food supply chain.

Second, the trade in food could be weaponized. Less democratic governments have sometimes used food supplies as leverage to gain power over dissenting groups, using starvation and famine as a political weapon. More solid democracies happily no longer do that, but they do use food as a weapon in their international relations. Look at Russia’s ban on food imports from the EU, or China’s import tariffs on agricultural imports from the US. These types of intervention can distort markets and lead to an inefficient allocation of resources. 

Third, we may see the return of corruption, both institutional and local. Putting a poorly-paid government bureaucrat in charge of a country’s food imports could lead him to favour one supplier over another – or to grant an import licence to a ‘friend or relation’. 

Localised corruption is rare in advanced democracies, but institutionalised corruption is widespread. If governments become more involved in our business, the power of the lobbyists will grow. It will be increasingly worthwhile, and profitable, to lobby for or against a tariff, or for or against an import or export ban. Politicians need money to get elected even in the most transparent democracies.

If the Bloomberg article is right, it could become even harder for the world’s grain and agricultural commodity traders to make a living.

First, trading companies got out of the business of bribing government officials long ago, and for both ethical and good business reasons they won’t want to get back into it.

Second, western agricultural trade houses may be handicapped if government-owned competitors trade for political rather than price reasons.

Third, politics increases risk. Throughout 2019, for example, the price differential between Brazilian and US soybeans could – and did – change at the click of a tweet. Traders like volatility as long as it is not political.

If the world wants to feed the estimated almost 10 billion people that will be will living on this planet in 2050, then it will need international free trade in agriculture. Let’s hope that the pendulum doesn’t swing too far in the wrong direction.

© Commodity Conversations ® 2020

As I wrote in a recent post, Stalin believed that the political and economic future of the Soviet Union lay in industrialisation. He set high prices for industrially produced goods and low prices for agriculturally produced goods in order to encourage a shift from agriculture to industry. He reasoned that surplus workers in the countryside would be better employed in industry, and that a policy of cheap food would drive economic growth.

This view has not disappeared. Within the developed world, most governments keep food prices low (to placate urbanites) while quietly transferring money back to rural areas through tax-funded subsidies. And in the developing world, many classical economists still believe that industry, and not agriculture, drives economic growth.

The data, at first sight, appears to support that view. The chart below shows how workers moved from farms to factories as the industrial revolution gathered speed in 19^th century Europe.

While this chart, again from ourworldindata.org, shows that the richer the country becomes the smaller the percentage of the workforce employed in agriculture.

This third chart shows how agricultural productivity increases as countries get richer. This could be because a shortage of labour in rural areas leaves farmers no choice but to improve productivity. It could also be because farmers get better access to information, finance and technology as their country develops.

The conclusion is therefore clear. Stalin was right: a country develops when farmers migrate from field to factory. This migration leads not only to GDP growth in the cities but also to greater productivity on the farms. Everyone gains.

As a result, development economists and politicians give this process a nudge through low food prices, forcing productivity gains in the countryside while subsidising workers’ wages in the cities. (This is known as ‘urban bias’.)

However, there may be some confusion here between causation and correlation. Forcing displaced rural workers into the cities does not guarantee that industrial activity will pick up. The industrial revolution in the UK ‘pulled’ workers into the cities; displaced rural workers did not ‘push’ industrialisation. People are ‘pulled’ from farms to factories once factories offer them better wages and a better future for their families. Pushing workers from their fields may lead to an increase in poor urban dwellers – and hence a fall in urban wages – but it does not directly ensure economic growth.

In a closing address to last years FT Global Foods System Conference, Pavan Sukhdev, President of WWF International, argued that the number of people employed in agriculture in developing countries is simply too large to be absorbed by industrialisation within any reasonable timeframe. He argues for a different approach, one driven by economic growth in the countryside fuelled by sustainable agriculture. He cites the Indian state of Andhra Pradesh in India as an example, where six million farmers practise what is called ‘zero-budget’ farming.

So why then do governments continue a policy of keeping food prices low? It seems redundant in developed countries where the shift in population from farms to factories has already occurred. Meanwhile in developing countries it can drive people from their farms without helping the country’s economic growth.

The answer can possibly be found in the way that governments quietly transfer money back to farmers through subsidies. City dwellers pay partly for their food through taxes.  Governments do this because urban voters are better organised than rural ones, and there are more of them. Cheap food buys votes in democracies.

Cheap food also helps keep leaders in power in less democratic countries. Consumers protest – and riot – when food prices are increased. The Arab Spring may have started in Tunisia, but it was food price protests in Algeria that gave it momentum.

So everyone wins with cheap food. The farmers are happy; they get paid partly through the sale of their produce and partly through tax transfers. Consumers are happy: they get cheap food in the shops, blissfully unaware that they are actually paying for it through their taxes.  Governments are happy, because they stay in power.

The problem is that not everyone wins. But more on that in future posts.

© Commodity Conversations ®

“We stand now where two roads diverge… The road we have long been travelling is deceptively easy, a smooth super-highway on which we progress with great speed, but at its end lies disaster. The other fork of the road – the one ‘less travelled by’ – offers our last, our only chance to reach a destination that assures the preservation of our earth.”

Thus wrote Rachel Carson in her best selling book ‘Silent Spring’, published back in 1962. ‘Silent Spring’ is largely credited as the catalyst that began the environmental movement and (eventually) the formation of the US Environmental Protection Agency.

In the book, Ms Carson writes about the widespread use of chemical pesticides and the negative effects they can have on biodiversity. In particular she highlights how aerial spraying of DDT led to a collapse of local bird populations – hence the book title.

Although dated, the book has some useful lessons for us all. The first, and most obvious, is that if you are a hammer everything looks like a nail. Chemical pesticides largely came out of research during World War Two into chemical warfare. Once the war ended, scientists used the knowledge that they had acquired to use chemicals to kill insect pests rather than humans.

In this sense, chemical pesticides have a similar history to nitrogen fertilizers. As Michael Pollan writes in The Omnivore’s Dilemma, the US government found itself at the end of World War II with a surplus of ammonium nitrate, the principal ingredient in making explosives. Ammonium nitrate is an excellent source of nitrogen for plants, and the chemical fertilizer industry was the product of the government’s effort to convert its war machine to peacetime purposes.

In her book, Ms Carson writes of a USDA programme in 1958 to exterminate the fire ant, an insect that has a sting similar to that of a bee or a wasp. A million acres were sprayed in Florida and Louisiana with dieldrin and heptachlor, two relatively new chemicals many times more toxic than DDT. The results on wildlife, particularly birds, as well as on livestock, mainly pigs and chickens, were catastrophic. The poisons also accumulated in cow’s milk.

Spraying continued for the following two years but without any meaningful impact on the fire ant population. It appears that the pesticide only killed off the weaker fire ants but left the stronger ones alive to adapt and develop an immunity to the poisons. Ms Carlson likens it to human-induced Darwinism.

So that is the second lesson from the book: because nature constantly adapts, pesticides become increasingly ineffective. You either have to apply them in greater concentration or constantly develop new ones.

The third lesson is that everything in nature is related: try to solve one problem and you may create a worse one. As the author writes, ‘nothing in nature exists alone’. She gives the example of the US Forest Service’s use of DDT for combating the spruce budworm in 1956. The pesticide was successful in eliminating the spruce budworm but also killed off the natural predators of the spider mite, whose population then exploded to become an even worse problem.

Finally, Ms Carlson makes the point that, once they have been applied, these pesticides do not disappear, but build up in dangerous quantities in the soil, in earthworms, in the fish in the adjoining rivers and lakes, and in livestock. They then work their way along the food chain in surprising and dangerous concentrations. The spring was silent in 1962 because the birds had died after eating earthworms poisoned with DDT.

The world is a different place now than it was when Ms Carlson wrote her book 58 years ago. However, as the current ruckus surrounding glyphosate shows, the issues remain. The general public, including jurors, do not trust scientists. They believe that they are either in the pay of big chemical companies, or that they do not have sufficient data over a long enough period of time to evaluate a product’s safety. This distrust began with Silent Spring.

© Commodity Conversations ®

Our local grocery store owner has begun to put a label on each of the fresh products that she sells to show its ‘food miles’: the distance that each product has travelled between the farm and the shop.

Although popular, it is debatable whether buying locally produced food actually helps the environment.  As can be seen from this chart published last week by Our World in Data, transport (in red on each bar) only accounts for a small part of the total GHG emissions in the food supply chain. If you want to help the environment, what you eat is far more important than the distance it has travelled.

For example, a Defra study in the UK estimated the CO2 emissions of tomatoes produced in Spain and shipped to the UK at 630 kg per tonne compared with 2,394 kg per tonne for tomatoes produced in the UK. Tomatoes in Spain are grown unheated under plastic while tomatoes in the UK are usually grown in heated greenhouses.

A later study found that New Zealand lamb imported into the UK had a smaller environmental footprint than home produced lamb.

DEFRA has also looked at the road transport part of the food supply chain in the UK. They found that half of the vehicle kilometres, when measured in terms of the amount transported per kilometres, were driving the commodity from the store to the home. In other words, the best way to reduce your food miles is to walk, cycle or take the bus to the supermarket to do your shopping—and leave the car at home.

But what about bulk commodities? We as traders are often criticised for moving huge tonnages of grain (or sugar in my case) over vast distances. Surely it would be more environmentally friendly to grow the crops locally?

As most bulk commodities are transported by ship, the GHG emissions are really quite insignificant. Global shipping accounts for around 2 percent of total GHG emissions, but that includes minerals as well as finished industrial products such as cars and machinery. The total world trade in iron ore is about 1.4 billion tonnes compared to wheat, for example, at around 100 million tonnes.

A study for Canada, a major sugar importer, found that sugar accounted for about 13 percent of the country’s total food imports by weight and about 21 percent of the tonnes per kilometre (because it mainly comes from Central and South America). However, because it is shipped to Canada in big cargo vessels and transported internally by rail, sugar only accounted for 2 percent of the country’s farm to store CO2 emissions.

The concept of shopping locally and counting food miles to help the environment has therefore been largely discredited. So why then has our local shop made the move to label each of their products with the kilometres it has travelled?

I asked the owner that question and she told me that consumers want to do something positive for the environment, and they believe that shopping local does help. More importantly, she added, her customers like to feel that they are supporting local farming communities.

“Shouldn’t we also be supporting farming communities in the developing world?” I asked her. She shrugged and moved on to the next customer.

In frustration I walked down the street to the local MIGROS supermarket where I found that the vegetables and fruit pre-packaged in plastic were cheaper by the kilo than the vegetables and fruit that were displayed in bulk. Packing vegetables in plastic reduces food waste because they are handled less. This waste has an economic and environmental cost that is greater than the plastic packaging.

Perhaps we shouldn’t ditch the cling film after all!

© Commodity Conversations ®

This week, in an interview with Bloomberg, Sunny Verghese, the CEO and co-founder of Olam International, announced that his company would be splitting into two parts. The first, Olam Food Ingredients, will be made up of cocoa, coffee, edible nuts, spices and dairy. The second, Olam Global Agri, will contain the traditional commodity businesses of grains, animal feeds, protein, edible oils, rice, cotton, and commodity financial services.

Each new entity will seek to take advantage of two distinct trends. The first is the growing desire among wealthy consumers for healthy, sustainable and traceable products. (Milk farmers will be pleased to read that dairy products are included in this category.) The second trend is the dietary shift in developing countries, particularly in Asia and Africa, away from carbohydrates towards meat and fats.

In other words, the company is to be split between bulk food, feed and fibre for developing countries, and traceable, sustainable food ingredients for developed countries.

As I wrote in my recent book, traditional commodity trading companies have been struggling in recent years to reconcile these two trends: the need for traceability versus the desire for tradability.

With the exception of Glencore, the ABCD+ group of trading companies has chosen to build an active presence all along the supply chain. This has a number of advantages. It means that the companies trade more with themselves, increasing traceability while lowering counterparty risk. Moving downstream can increase profitability with less emphasis on low-value commodity businesses and more on higher value consumer businesses. Being present in the whole supply chain can also help to even out earnings. Steady profits from downstream businesses can dampen the earnings volatility of traditional commodity businesses.

A presence along the entire supply chain can also provide trading opportunities. As Brian Zachman told me, Bunge has an ‘end-to-end presence in the supply chain; that’s an inherently strong position, which is not easy to replicate. From the standpoint of risk management, our network also provides us with a lot of proprietary information that helps us optimize our value chains. In a way, our asset base is a call option on volatility in the supply chain.’

Finally, maintaining a strong commodity-trading base does not stop you growing your higher value ingredient businesses. ADM has invested massively in food ingredients, particularly flavours, over the past few years. As Greg Morris told me in his interview for the book, ADM views these investments ‘as expanding the value chain of our processing streams to create additional value for our customers. It allows us to create a stronger connection with our customer base, participate in faster growing markets and create a more stable business.’

In other words, being closer to the customer, and listening to what the customer wants, helps ADM in all their businesses.

However, Olam is not drawing a dividing line in the supply chain between upstream and downstream businesses. They are separating off the unglamorous, low-growth and cyclical commodity trading businesses from the sexy high growth food ingredients businesses. To achieve that, they are splitting the company between different commodities, not splitting it between two different parts of the supply chain.

Unfortunately, the distinction is not always a clear one. People in rich countries also need food, feed and fibre. People in developing countries also care (enormously) about food safety, and hence traceability. Coffee and cocoa can be just as cyclical as soybeans or wheat.

In addition, there is something to be said for being in a range of different commodities. Corn, say, can have a bad year while cocoa has a good one. This, in theory at least, helps even out earnings.

Olam is splitting with the aim of increasing their market capitalisation. The company argues that it will ‘unlock(s) significant long-term value’. Some investors, they believe, like the growth potential of the foodstuffs business but don’t like the cyclicality of the bulk commodity business. Other investors like the (sometimes outsized) profits that commodity trading can bring during the up cycles, and they are long-term enough to sit out the down cycles.

Even so, investors in public companies usually look for steady growth. Because of the cyclical and low growth nature of our business (Wilmar excepted), commodity-trading companies tend to have lower PE ratios than, say, food ingredient or food processing companies. In addition, investors tend to view commodity trading as not only cyclical, but also high risk.

Being in traditional commodity trading tends to act as a weight, a drag, on a company’s share price. That’s why some argue that traditional commodity-trading companies are better off as privately held, rather than publicly held, companies. But as Glencore Agriculture shows, being private doesn’t mean not having outside investors.

Both Olam and Noble went public during the commodity super-cycle. As the market cooled Noble got into financial trouble and Olam effectively took the company private, finding a white knight in Tamesek (the Singapore Sovereign, Wealth Fund) and later Mitsubishi. Splitting Olam into two may provide both an opportunity to exit.

Of the two new entities, Olam Global Agri may be the harder sell. Rather than being IPO’d, one source suggested that it could end up privately held with a couple of strategic investors; Tamesek and Mitsubishi may remain on board.

Having said that, it will take a couple of years before the reorganisation is completed. It is not impossible that by then commodities will once again be booming (sugar appears to have already turned). Perhaps Olam will once again get their timing right.

© Commodity Conversations ® 2020

In her book ‘Red Famine: Stalin’s War on Ukraine’, Anne Applebaum describes how Russia’s Communist leadership used food—or in this case a lack of food—for political ends. She describes how, across the Soviet Union, 5 million people died of starvation during the great famine of 1931 to 1934, of which 3.9 million in Ukraine. The famine was largely politically induced.

Ms Applebaum writes that the Russian Empire had been struggling with food supplies since the outbreak of the First World War. When war broke out the Imperial government had centralised and nationalised the country’s food distribution system, eliminating middlemen and traders. By doing so they created administrative chaos and severe food shortages.

When the Bolsheviks seized power they quickly realised that the fate of the revolution depended on their ability to ‘reliably supply the proletariat and the army with bread’. But instead of relaxing the food distribution system, they tightened it further. Lenin in particular denounced traders as ideological enemies, writing,

‘The peasant must choose free trade in grain – which means speculation in grain, freedom of the rich to get richer and the poor to get poorer and starve; the return of the absolute landowners and the capitalists; and the severing of the union of peasants and workers – or delivery of grain surpluses to the state at fixed prices.’

Of course Lenin gave the peasants no choice: he forced them to sell their grain to the state at fixed prices.

It was a policy that Stalin later copied, taking it to extreme lengths.  In 1928 he launched the government’s first ‘Five Year Plan’, an economic programme that mandated a massive 20 percent increase in industrial production. At a party plenum he told party members that ‘…for hundreds of years England squeezed the juice out of all of its colonies, from every continent, and thus injected extra investment into its industry’. He argued that without colonies the only way the USSR could achieve its goals was through the exploitation of the country’s peasants.

As Ms Applebaum writes, Stalin ‘had determined that the peasantry would have to be sacrificed in order to industrialise the USSR, and he was prepared to force millions off their land.’

Russia had had a long tradition of communal agriculture, and prior to the revolution the majority of Russian peasants had held land jointly in rural communities. Ukraine had no such tradition; most of the land was owned and farmed by individual peasants.

The Soviet government arbitrarily divided peasants into three categories: ‘kulaks’, or wealthy peasants; ‘seredniaks’, or middle peasants; and ‘bedniaks’, or poor peasants. The author writes that ‘very quickly, (the kulaks) became one of the most important Bolshevik scapegoats, the group blamed most often for the failure of Bolshevik agriculture and food distribution.’ They were arrested, deported or killed, their grain and their animals confiscated and their land ‘collectivised’.

Stalin believed that collectivisation and the elimination of the kulaks would lead to greater efficiency and increased output, while at the same time convert the peasantry into ‘proletarianised’ wage labourers.

He believed that the political and economic future of the Soviet Union lay in industrialisation. Politically, he believed that wage labourers could be ‘controlled’ more easily than peasants. Economically, he felt that the only way a country could grow was through industrialisation—and that that could only be achieved by redeploying the surplus, both in labour and food, from the countryside to the cities.

He used brute force and mass murder to try to achieve these aims, while deliberately setting high prices for industrially produced goods and low prices for agriculturally produced goods.

The state would fine peasants who could not deliver grain, charging them up to five times its worth. Those who could not or would not pay had their property confiscated.

it wasn’t just the rich peasants that were under attack. The government issued orders to arrest ‘the most prominent grain procurement agents and most inveterate grain merchants…who are disrupting set procurement and market prices.’ Trading grain became a crime.

In the end, his policies led, as Mikhail Gorbachev later admitted, to a new form of serfdom. They also led to a collapse in agricultural production, mass murder and mass starvation.

Food has always been used as a weapon. Even in recent history, unscrupulous leaders have used food, famine and starvation as a weapon, supplying food to their supporters and denying it to perceived enemies.

Meanwhile, most classical economists still share Stalin’s view that industrialisation is the key to a country’s economic development, and that cheap food is an important policy tool in achieving that objective. Cheap food forces farmers to become more efficient, while at the same time freeing up labourers to work in the factories where ‘real wealth can be generated’. Cheap food also transfers wealth from rural to urban areas, ‘subsidizing’ the wages of workers in the cities.

In her book Ms Applebaum clearly shows that famines are not necessarily the result of bad weather, nor cheap food necessarily an accident of market forces.

© Commodity Conversations ®

Regular readers will know that one of the recurring themes in my books and blogs is the idea that power has shifted along the supply chain first from farmers to traders, then from traders to processors, then from processors to retail and finally from retailers to consumers. The Internet and social media have empowered the final consumer. Not only that, but the gamma, the rate of change in consumer preferences, has accelerated.

I was reminded of this when I read this week that Borden Dairy Co, a major US milk processor, had followed hard on the heals of Dean Foods Co., another major US milk processor, to file for bankruptcy. Both are based in Dallas Texas, and between them they control(led) 13.5 percent of the US dairy market.

Both companies blamed the collapse in dairy milk consumption for their difficulties. Per capita consumption that has fallen more than 40 percent since 1975, of which 25 percent since the start of the century. And according to the USDA, per capita consumption continues to fall at 2 percent per year.

The reasons for milk’s fall from favour are numerous. Some people have stopped consuming milk on health grounds, concerned about its fat (and weirdly, its sugar) content, or because of their perceived lactose intolerance. Others cite concerns about animal welfare, particularly the way that young calves are seperated at a young age from their mothers. Others are concerned about the GHG emissions of livestock farming in general.

Partly as a result of these concerns milk has been facing stiff competition from the growing availability of plant-based milk substitutes such as soy and oat drinks. But it has also been a victim of a trend away from eating breakfast at home. The bowl of cereal (with milk) has lost out to the (dry) cereal bar that can be eaten on the move.

The collapse in milk consumption has forced many dairy farmers out of business. The U.S. has lost nearly 20,000 licensed dairy farms, a roughly 30 percent decline, over the past decade. In court filings, Borden said that 2,730 US dairy farms had gone out of business in the last 18 months alone. Ironically, this has increased the pricing power of the farms that have managed to stay in business. As a result farm gate raw milk prices have increased by 27 percent since this time last year, squeezing processor margins.

At the same time there has been a new entrant into the milk-processing sector: a customer has become a competitor. Walmart, previously one of Dean’s major clients, opened its own milk processing plant in Indiana in 2018. Some in the business have accused Walmart of using liquid milk as a ‘loss leader’ to attract customers into their stores.

Companies in the sector are doing what every sector under pressure does: cutting costs by reducing capacity through consolidation while diversifying into other products where demand is growing, whether they be plant-based milk substitutes or value-added dairy products such as cheese and yoghurt.

And while demand for ordinary milk is falling, demand for lactose-free or lactose-reduced milk is increasing, as is demand for specialty dairy products. US sales of flavored whole milk jumped 8.9% in the first ten months of last year while sales of lactose-reduced or lactose-free milk grew 11% between November 2018 and November 2019. Grass-fed milk sales grew about 51% in that period.

Some companies have even taken the dramatic step of exiting the shrinking dairy market to concentrate solely on the expanding plant-based substitute market. Elmhurst 1925, which operated dairy facilities in the New York City region, closed in 2016 and emerged a year later as a plant-based beverage producer without any cow products.

Unfortunately neither Borden nor Dean Foods were nimble or flexible enough to avoid bankruptcy. Borden’s CEO told Bloomberg, “Borden has a 163-year history that has stood for the goodness of dairy for all that time. We’re going to stay squarely focused on that.”

Finally, I was shocked to find out this week that Charles Darwin never said, “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” It’s a shame because it is a great quote, one that obviously applies in this case.

© Commodity Conversations ®

Over the holiday period I enjoyed reading Wilding – The Return of Nature to a British Farm by Isabella Tree. It is the (true) story of how the author and her husband Charlie Burrell stopped traditional farming on  Keppe Castle Estate, 3,500 acres of heavy weald clay in West Sussex, and let it return to nature, with only the occasional nudge from themselves.

Before the Second World War Britain imported about three quarters of the country’s food by ship each year. During the war enemy submarines and warships prevented much of this food from getting in. Fearing food shortages, the British government launched ‘The Dig for Victory’ campaign. People were urged to use every spare piece of land to grow vegetables. More importantly, marginal farmland was switched to intensive crop production and grazing. When the war finished, the country did not return that marginal land to nature but instead farmed it more intensively.

It was this typical marginal British farm that the author’s husband, who had studied agricultural at college, inherited in 1987 at the age of 23. His family had owned the land since it was a medieval deer park. It is situated on the famously heavy clays of the Sussex Weald: poorly draining “marginal” soil that sets like concrete in summer and porridge in winter.

Although intensively farmed since the war it had rarely made a profit. The couple thought that they could turn the business around by investing heavily in better dairy cattle and new technology, but by the end of the century they were deeply in debt and still losing money.

They had little choice but to sell off their farm equipment and dairy herd, letting off two-thirds of their land on contract to a neighbouring arable farmer. The land closest to their home they returned to nature, spraying it first with glyphosate (!) and then replanting it with native grass seeds. Three years later the neighbouring farmer let his contract drop, also unable to make a profit from the marginal soil, and the couple let that land return to nature as well. Slowly they introduced free-roaming grazing animals – cattle, ponies, pigs and deer – to act as proxies for herbivores that would have grazed the land thousands of years previously.

The couple now has 350 head of English longhorn cattle (100 cows and their youngsters), Tamworth pigs, red and fallow deer and Exmoor ponies. Rather than set targets to protect specific rare species, their principle is to allow “natural processes” to unfold. There is no predator control.

As an intensive farm, Knepp lost money in all but two years as a result of both high running costs, particularly labour, but most importantly because of capital investments in new machinery, such as dairy technology or new slurry lagoons or sewage systems to adhere to new legislation.

The ‘wilded’ farm has much fewer capital demands and only one employee. Annual farm income (not profit) is now made up of £120,000 from selling high-grade organic meat, £500,000 from renting former farm buildings to local businesses (attracting 200 full-time jobs to the local economy), £118,000 from renting seven former workers’ cottages and £230,000 from a ‘glamping’ site. The couple has recently started running ‘safaris’ to allow visitors the wildlife and explain what they are doing.

As far as subsidies are concerned, the farm currently receives £220,000 for having its land in the highest level of environmental stewardship scheme and £195,000 in “basic payments” which every British farmer receives via EU funds. What happens to these EU payments after Brexit remains an open question.

The couple admits that not every farmer is as lucky as they are. First, they got their timing right. They sold off all their farm equipment and livestock before the market tanked; as a result they were able to pay off their hefty mortgage, leaving them with no debts. This was partly because the farm has been in the family for generations: Charlie and Isabella had got the land for free, something that many farmers could only wish for. In addition, the EU was at that time just beginning to switch subsidies away from production and more towards ‘setting land aside’, leaving it idle.

Second, the couple was lucky in terms of geography: their farm is conveniently located close to London in the populated (and wealthy) South-East of England. This has obviously helped them with tourist income, as well as enabling them to rent their old farm buildings.

In a way their situation is similar to my own family smallholding outside Canterbury in Kent. As I described in my recent book, our land was worth more to the sports club next door than it was worth as a pig farm.

Wilding is beautifully written and I would recommend it highly to any nature lover. It describes in detail how wildlife has returned to the farm with astonishing results in terms of biodiversity with purple emperor butterflies, turtledoves and nightingales, to name just a few.

I would also recommend the book to any farmer struggling to stay afloat – and I know that many of you are. The author clearly explains how and why their farm failed—it was marginal land that shouldn’t have been farmed in the first place—as well as the difficult steps that the couple took in getting financial support to ‘rewild’ it. The author also clearly demonstrates how they are now beginning to take advantage of the recent trend for pasture-fed meat.*

The book is also important because the author emphasizes the point that grazing animals are—and always have been—an essential part of nature’s heritage. Indeed her most important—and most positive message—is that farming can benefit nature; it isn’t necessarily detrimental to the environment.

The author doesn’t pretend to have all the answers, but at least she poses the right questions.

* If I have understood correctly, grass-fed livestock must be fed on grass for 51 percent of their lives while pasture-fed livestock must be fed on grass for 100 percent of their lives.

© Commodity Conversations® 2020