Category: Blog

A conversation with Khoon Hong Kuok

Wilmar International Limited was founded in 1991 as Wilmar Trading Pte Ltd in Singapore with an initial capital of $100,000. It is now Asia’s leading agribusiness group with a market capitalisation of US$16 billion and a turnover in 2018 of nearly $45 billion. That’s not bad for a relative newcomer in what is traditionally considered to be a slow growth industry.

I caught up with Khoon Hong Kuok, the co-founder and CEO of Wilmar, in Beijing, where he told me that this was the first interview he had ever given. I asked him the secret of Wilmar’s success.

“Right time, right place and plenty of luck,” he replied. “In 1991 when I started Wilmar, Malaysia and Indonesia produced 9.0 million tonnes of palm oil compared to 62.5 million tonnes in 2018. In 1991, China imported 136,000 tonnes of soybeans compared to 84 million tonnes in 2018. These developments enabled us to become a major palm oil trader and a major agriculture commodity processor.”

“NGO’s have criticised Wilmar over sustainability and the environment. How would you respond?” I asked.

“In the old days palm oil plantations were burning forests to clear land and some even discharged effluents in the rivers. Today most major plantation group adopt sustainable practices. The NGOs have been a force for good in this.

“We are the biggest player in palm oil. So even though we stopped planting oil palm in new areas many years ago—and we were among the earliest to adopt sustainable practices—the NGOs still criticised us for buying palm oil from other producers who were burning to develop new areas. The NGOs attack the big names like us, not the smaller producers who sell to us.

“Having seen the deterioration in the environment due to burning and other irresponsible practices of some plantations, we decided to take a lead even if we had to sacrifice some business. The accusation that palm oil is not environmentally friendly is no longer fair.”

“What about labour issues?” I asked.

“Palm plantations bring good jobs deep into inland areas far from the towns. You need engineers, agronomists, and accountants—a lot of people. We need about 0.2 people for every hectare of palm. So if you have 10,000 hectares you need about 2,000 and if you include their families, it supports a lot of people. To attract and retain staff, you have to build good housing for your employees, as well as schools and clinics. In those rural areas the government does not usually provide good facilities.”

“I have been told that you could increase palm oil production without increasing the area…that with better trees you could double production. Is that true?” I asked.

“With better seedlings, technology and management, the yield of new palm plantations today are much higher than the past. This is especially so in Africa where production can be increased significantly by re-planting the old plantations thus minimizing deforestation.”

“You have concentrated your energies in Asia and Africa. Why don’t you invest in the West?”

“We have a strong position in Asian and African countries with over 4.5 billion people. The population and economic growth of these countries are among the highest in the world, and per capita consumption of agri-commodities is increasing. The population of North, Central, South America and Western Europe combined is less than 1.5 billion and per capital consumption is not increasing much.

“We do not have the financial resources, brands and distribution network of the food giants in the West. We don’t want to go to markets where we have no comparative advantage.”

“How do you see the Chinese market developing?” I asked.

“The Chinese are the fussiest people in the world when it comes to food. China will soon become not only the biggest but also the most sophisticated food market in the world.

“To succeed in a very competitive country like China you have to produce, market and distribute the best quality product at the lowest cost. Our integrated plants mean that our production costs are lower than our competitors, and our bigger volumes and multiple locations give us lower marketing and distribution costs.”

“You are known for working 16 hours a day. How do you manage to grow into such a big business but still maintain control over it?”

“I work 16 hours on some days but not every day. If I were to drop dead tomorrow our existing business would continue successfully. People think I spend a lot of time running our existing businesses. I don’t. The time I do spend is to ensure we have sound risk management, to ensure we have good people managing it and to make sure our operations work closely with each other to bring out the full synergies of our group.”

“Have you tried to persuade your children to come into the business?”

“I believe that you must let your children pursue their interests. Our job is pretty tough; you have to have a passion for it. The decision in my case is simpler because I don’t have a controlling interest in Wilmar. My children do not have the birthright to take over from me. They can only do so if they are good enough.”

“Thank you Khoon Hong for your time and insights!”

© Commodity Conversations ®

This is an extract of a conversation that is published in my new book Out of the Shadows – The New Merchants of Grain available soon on Amazon

Most people believe that early agriculture enabled humans to build settlements, and that subsequent agricultural improvements have made humankind better off.

In his thought provoking book, Against the Grain – How agriculture has hijacked civilisation, Richard Manning disagrees on both issues. In particular, he questions the traditional view that the shift from hunting and gathering to agriculture led to “the surplus of food that allowed the leisure and specialisation that made civilisation.”

He also argues that it was only when hunter-gatherers, particularly fisher folk, started to live in settlements that agriculture could take form. He writes, “the archaeological evidence suggests that…sedentism—the radical human experiment with staying put, made agriculture possible, and not vice versa. Agriculture did not arise from need as it did from relative abundance. People stayed put, (and) had the leisure to experiment with plants.”

He is also an early exponent of the argument that agriculture has turned mankind into slaves. He writes, “We tamed the plants and animals so they could serve us, a sort of biological slavery, but if coevolution is true, the converse is also true. In biological terms, wheat is successful; its success is built on the fact that it tamed humans. Wheat altered us, altered our genome, to use us…. To a hog in a pen it must appear that he has enslaved the farmer. Why else would the guy show up twice a day with a buck full of feed? The hog believes this until the day he dies.”

Finally, he argues that somewhere along the line we have stopped eating food and begun eating commodities.

“Consider the range of plants humans consume, the hundreds of species. That’s food. Consider that two thirds of our calories come from wheat, rice and maize. Add sugar and you have a nearly complete picture of commodities. It is an oversimplification, but a useful one, to assert that these commodities have a fundamental and key distinction from the rest of food; they are storable and interchangeable and close to currency in their liquidity; in fact they are traded in markets just as currency is. They form the basis of wealth, and have done so for ten thousand years.”

Rice, he argues, is different, because “well over half of rice consumed is eaten by the same people who grew it.” He continues, “True, rice is storable, tradable, a dense package of carbohydrates that meets the definition of a commodity, but because it is the most important foodstuff of the world’s poorest people, it has many of the hallmarks of food.”

Yuval Noah Harari took up many of the same themes in Sapiens – A Brief History of Humankind. He writes,

“We did not domesticate wheat. It domesticated us. The word domesticate comes from the Latin ‘domus’, which means ‘house.’ Who’s the one living in a house? Not the wheat. It’s the sapiens….What then did wheat offer agriculturists..? It offered nothing for people as individuals. Yet it did bestow something on Homo Sapiens as a species. Cultivating wheat provided much more food per unit of territory, and therefore enabled Homo Sapiens to multiply exponentially….This is the essence of the Agricultural Revolution: the ability to keep more people alive under worse conditions.”

But is that really true? It would be true if we all lived in farming villages, wracked by disease and the occasional famine. But we don’t. Most of us live in comfortable cities. In the U.S. only one percent of the population is still engaged in farming. In Europe the figure is 4 percent; the global average is 28 percent.

Agriculture has enabled 99 percent of the U.S. population—and 72 percent of the world population—to escape the drudgery and hard labour of farming. Meanwhile, technology has lightened, at least a little, the workload on the farm. Agriculture has enabled all of us to live better lives.

At the same time agriculture has, along with improvements in health care, been one of the main enablers of our growing population. This is now putting a strain on the earth’s ecosystem. Agriculture has also contributed to environmental degradation through deforestation, reduced biodiversity, and climate change (through GHG emissions). To some extent, therefore, agriculture has become a victim of its own success.

The solution, however, is not to go back to some mythical golden era. The solution is in developing new technologies to improve the way in which our hard working farmers grow food, in order to reduce agriculture’s negative impacts on the environment.

This is already work in progress, and unlike Richard Manning, I am sure that it will succeed.

© Commodity Conversations ®

A conversation with Brian Zachman, President of Global Risk Management Bunge Limited (NYSE: BG)

The views and opinions expressed in this interview are those of Brian Zachman and do not necessarily reflect the official policy or position of Bunge Ltd.

Good morning Brian. My first question is, how did you start in the business?

I am from St. Michael, a small town in Minnesota, just northwest of the Twin Cities. My family was in the dairy farming business, but it was never really my hope to have a career in the family business. My choice of university, Minnesota-Duluth, even came with an added bonus: it was too far from the farm for my dad to call at 3pm and ask for a hand milking the cows at 5 pm!

I was interested in markets and studied Economics and Math in college before applying to Cargill, but for a position in their financial markets department. Cargill likely saw the farming background and instead offered me a merchant trainee job in West Fargo, North Dakota.

What happened to the family farm? Is it still going?

My parents sold the milking cows and the young stock in the early 1990s, when Mom and Dad reached retirement age and when no obvious succession plan emerged for the farm—all of my five siblings also chose professions other than farming. Dad still lives on the farm, although suburban development and the resulting increase in land values means less and less of the land is directed to agricultural uses. It’s a tale as old as time, a pattern likely to continue throughout rural America.

Before joining Bunge you worked briefly for a hedge fund. What was it like?

I really enjoyed the experience. The ‘reason for being’ is very clear in a fund: it’s about delivering results, and that clarity has a way of creating the right kind of focus. Also, maybe contrary to popular perceptions, my experience is that hedge funds are very disciplined organizations. There’s a real recognition that outcomes are uncertain and that one doesn’t know anything with certainty, so a big part of the business revolves around managing risk.

My primary frustration in the managed money space was being limited to the Exchange-traded instruments and not being able to take positions in the underlying physical commodities (the basis) or in any other part of the value chain. The analytical process is the same in both settings—oftentimes at the fund we had very solid opinions about value migration in parts of the chain but with no way to express our opinion in those markets.

Are you optimistic or pessimistic about the future?

I am optimistic. Bunge is a global player with a global asset base. We physically originate 70 million tonnes of grains and oilseeds each year and have an end-to-end presence in the supply chain; that’s an inherently strong structural position, which is not easy to replicate.

From the standpoint of price 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.

What advice would you give to a young person starting a career in commodities trading?

My first piece of advice would be to remain intellectually curious. It seems to me that some of the most successful people in the business always ask the next question, not in the interest of information overload, but in the interest of drawing connections between cause and effect in the markets: What’s driving this? Why is this happening? Does it have any knock-on effects? What does it mean?

Second, be humble. If you don’t already possess humility, the market will eventually provide it to you—but it’s almost always more expensive that way!

Accept that you give something of yourself when you put on a position; it exposes your vulnerability to failure. In reality, markets can reward you even when your underlying logic was flawed, and a bet can go badly even when your underlying logic was sound.

Some of the best advice I received went something like “be less concerned about defending your logic and ‘being right,’ because you don’t have all the facts; be more concerned about the outcome and managing your capital.” When it’s framed that way you realize a bad bet isn’t an indictment on your intelligence.

Third, “never say never.” You can say that there’s a low probability of something happening, but you shouldn’t say it will “never” happen. We’ve all seen too many things happen that we thought would never happen. The options markets have this pretty well figured out.

Fourth, find what works for you and develop your own style. At the same time, though, seek the counsel of people that you trust, who can ground you in moments of emotion and the extremes, and who can help you put things in perspective.

Finally, appreciate the place that commodities have in the world…we are in a relevant business with great purpose!

Thank you Brian for your time!

© Commodity Conversations ®

This is a brief extract of a conversation from my upcoming book to be published in November.

A conversation with Ivo Sarjanovic

Could you please tell me a little about career?

I joined Cargill in July 1989, and after working in Buenos Aires and Sao Paulo, I was transferred to Geneva in 1993 as a wheat trader. In late 1994 Cargill asked me to join the soybean desk. I started as a junior trader and worked my way up to become head of the desk, a position I kept from 2001 to 2011.

I was in charge of Cargill’s worldwide activities in soybeans, including the coordination of crushing activities. It was a role that combined international trading with the strategic side of the business, so it was super interesting. I loved it!

So you were head of the bean desk through the whole of the super cycle?

I first visited China in 1997 at a time when they were buying almost no beans at all. Twenty years later they are importing 85 to 90 million tonnes each year, which is roughly 60 percent of the world total.

This created tremendous opportunities for the desk. I was lucky to be there at that time—and to have had the right experience and the right team to be able to enjoy it. For me it was like playing football for Barcelona in La Liga.

What was Cargill’s share of the world soybean trade at that time?

We had maybe 15 percent. The business was extremely competitive, but not only among the big trading houses. Chinese companies soon started to buy soybeans directly from the origins and trade them to destination.

In 2011 you moved within Cargill from beans to sugar. What prompted that move?

I had been in soybeans for almost 20 years, and I wanted a change. I also wanted to have a position that was more managerial, more asset-based and less trading-orientated. Becoming head of Cargill’s Sugar Division was a perfect opportunity for me. I jumped at the chance.

What are the main differences between the sugar and the soybean markets?

The biggest difference is the delivery mechanism. Sugar trading revolves around the delivery process against the futures market, especially the optionality that you have between the different origins.

What was a surprise was that physical margins were even worse in sugar than they were in beans. Traders are even more willing to discount physical prices to put on a short sales book to end destination.

After a few years of running Cargill’s Sugar Division you merged it into Alvean, a joint venture with Copersucar.

Alvean was probably the best idea I have ever had professionally, combining what at that time were the two biggest traders in a market that was desperate for consolidation. Cargill had the global trading expertise while Copersucar had the origination infrastructure in Brazil. The combination was very strong.

Moving on to your current position, you now act as an advisor to trading companies on risk management.

Risk management is a journey. We can only try for continual incremental improvements. Also, I don’t think there is a definitive way to manage risk; different companies have different methods.

Thirty years ago we managed risk in terms of the size of the position measured in tonnes. We then moved on to looking at the risk in monetary terms, the value. We then began to incorporate tools that were developed by the financial industry such as ‘Daily Value at Risk or DVAR”, “Drawdowns” and ‘Stress’. We combine all these tools into what we call a ‘Dashboard’ and then we try to find a balance, a way to combine each of the various legs such as flat price, spreads, premiums and freight positions within limits.

It was challenging at the beginning, but most people now realise that you can’t trade if you don’t use those tools. Without them you may overtrade relative to your equity and run the risk of ‘blowing up’.

In addition to my advisory work I give courses on agricultural commodities at the Masters level at the University of Geneva, as well as at the Universities of Buenos Aires and Rosario in Argentina. I love teaching young people about our business, and sharing my enthusiasm for the business with them.

Thank you Ivo for your time and input!

© Commodity Conversations ®

This is a short extract of a conversation that will be published in full in my new book due out in November.

A conversation with Riccardo and Emanuele Ravano, respectively President and CEO of IFCHOR

IFCHOR is an international shipbroking company based in Lausanne, Switzerland with a network of 12 offices in Asia-Pacific, Europe, Middle East and the USA. I asked Riccardo, the founder of the company, how it had all begun.

I come from a ship owning family. I started in the shipping business in 1964 at the age of 20, in Genoa, Italy. In the 1970s, politics in Italy began to get really bad, even dangerous. Many of my clients began to move abroad, and in 1976 I decided to follow them. I looked originally at Monaco and then at Geneva. I had a friend who told me that there was a one-room office for rent in his building in Lausanne. I took it.

I started on my own at first with a secretary—who by the way is still with the company 42 years later! Over the years we expanded from one room to two floors…but we remained in the same building!

And Manu, when did you join?

Ours is a family business, so I joined when I was born! I officially started working in 2002, just before the freight super-cycle, which lasted about five years between 2003 and 2008.

How big is the company today?

Today we are about 180 people around the world. I would say we do between 3,000 and 4,000 transactions a year throughout our various offices and segments. We have never calculated the amount of tonnes that equates to, but perhaps we should. It could be good marketing!

Do the big trade houses each have a shipping department?

All of them do. Over the years they have developed bigger and bigger departments. Forty years ago they might have had one guy chartering vessels on a voyage basis, but now they all have separate departments with P&Ls that can reach tens of millions of dollars.

Manu, that’s one big change in the past 40 years. Are there others?

The most important change in the past 40 years has been the development of the market in Forward Freight Agreements, FFAs. These now trade every day in thousands of lots, allowing operators to hedge their freight needs. The FFA market has traditionally been an OTC (Over The Counter) market, where counterparties enter into direct agreements with each other. It is still an OTC market, but since the crash of 2008 all FFAs are cleared either in London or Singapore.

FFAs are closely linked to the physical shipping business. It is the physical shipping market that determines the FFA prices, not the other way around.

Any other changes?

Shipping transports 90 percent of the goods in the world. At the same time, the sector burns only 7 percent of global oil consumption. Shipping globally contributes only 3 percent of the GHG emissions in the world.

Recently, the IMO took a major step to implement—as of January 2020—new regulations to ensure a targeted 20 to 30 percent reduction in GHG emissions, to be achieved principally through the use of low sulphur fuel.

Could LNG be used as an alternative low emission fuel?

There is a currently lot of discussion around LNG fuelled ships, but for the moment the technology is pricey and it is difficult to justify economically. Some charterers may be willing to pay more to charter LNG fuelled ships for environmental reasons, but trading margins are currently so thin that it is unlikely that trading companies could do so and remain competitive. There is also a question of LNG supply at the ports. It is not easy to organize globally. There is a risk of having LNG fuelled ships being stranded.

So how could the industry reduce emissions further?

I think it will be a contribution of many things. There might be some sails that work. There might be some solar power as well. There might be some electric contribution to the engine. It will be an evolution that will take another 10 to15 years before we reach a point of having the right mixture of technology.

What’s the average lifespan of a ship?

That is another thing that has changed significantly over the past 40 years. When my father started in the business, the average lifespan of a cargo vessel was 25-30 years. Today, it is more like 15 years, especially when you look at all the new regulations coming.

Remember though, that some ships are well maintained and safe for carrying grain, even at 25 years old. Others are less well maintained and are a problem at 12 years old. We know which ships are well maintained, and which ones aren’t.

Where is innovation likely to come from in the future in the industry?

Shipping is facing the same challenges as those faced by commodities. Technology has made communication fast and seamless in both chartering and trading. This has led to thinner margins. As a result, traders are seeking economies of scale and shipping is evolving with bigger and bigger ships. Port infrastructure is also adapting to accommodate these bigger ships.

I wouldn’t say it’s a challenge. It’s a reality. We have to adapt to a world that is faster and bigger.

Thank you Riccardo and Emanuele for your time and input.

© Commodity Conversations ®

This is a short extract of the conversation that will be published this autumn in my new book on the grain business.

A conversation with Karel W. Valken, Global Head Trade & Commodity Finance (“TCF”) Agri for Rabobank

Good morning Karel, could you tell me a little bit about Rabobank and it’s involvement in agriculture?

Rabobank is cooperative bank that emerged from small agricultural cooperative banks founded by Dutch farmers. We have Members but no shareholders.

Agriculture is our backbone. We understand the seasonality and the complexity of farming. As a cooperative it can be a challenge to raise enough capital, and for that reason we tend to be conservative. But the advantage of not being listed is that we can take a longer-term view of the business; we can be more patient. We are perhaps more focused than other banks on contributing to the wellbeing of society.

I saw from your website that your mission statement is “Growing a better world together.”

I recently did a presentation to the bank’s executive board where I looked at the mission statements of the ABCD+ group. They all had similar statements. We are aligned.

“Growing” stands for sustainable, healthy growth, development and progress. “A Better World” goes beyond our clients, employees, and members and includes our communities and our associations. “Together” is important because, as a cooperative bank, we believe in the power of coalitions. Our strength lies in connecting people and knowledge. It is much more than an empty slogan!

This mission is part of our Banking for Food (“B4F”) strategy. It entails the meaningful role we want to play in food transition, and how we can help feed the 9 billion people that will be on this planet in 2050, while respecting planetary boundaries.

In terms of sustainable financing, which commodity presents the greatest challenges?

If you look at my area of responsibility, most challenges are in cocoa and coffee, simply because of their level of complexity and the need to improve the livelihood for smallholders. We spend a lot of time on those two commodities, even though they are much smaller in terms of volume than grains and oilseeds.

Our challenge is to stop deforestation and prevent climate change, while at the same time feed the world: how can those two objectives coexist? We have to embed sustainability in the business and our daily thinking. Our “sustainable toolkit” includes services & financing from Rabo Foundation/Rural Fund but also the Fund we established with United Nations called “Agri3” to combat deforestation and enhance livelihood of smallholder farmers.

Do you think a time will come when Rabobank will only finance commodities that are certified as sustainable?

This year we were the sustainability coordinator of a $2.5 billion Revolving Credit Facility with green features. Customers are getting discounts on the interest rates they pay as long as they meet certain sustainability criteria. I would not be surprised going forward if companies that are not green, or less green, they will still get financing, but they will have to pay a premium.

It is different for palm oil. The consumer pressure is different. We do not finance companies that are not RSPO members. We may sometimes make an exception if a company is not RSPO certified as long as it is committed to become RSPO certified, and has put the correct milestones in place. We can help them on that journey.

Could you describe a typical TCF finance?

TCF has traditionally meant, “transactional financing,” where we would finance, say, a Ukrainian wheat exporter to purchase wheat from farmers and to export it. We can finance the wheat from the moment it is in an upcountry silo though until the importer’s Letter of Credit is opened and cashed.

We make an important distinction for the ABCD+ group—the seven companies covered by your book. The ABCD+s each have individual credit ratings within the bank, which allows for unsecured financing. We provide them with anything up to $1.5 billion in working capital that they can use throughout the globe for different purposes. We do not finance them on a transactional basis. That is why the distinction between ABCD+ companies and non-ABCD+ companies is so important.

How do you see your business evolving in the future?

There are two strategic drivers for our agri-clients: sustainability and innovation.

We divide innovation into two categories: food and feed innovation and digital innovation. The first is to meet changing consumer demands. For example, Dreyfus recently invested in a company producing fake blood from beet for vegetarian burgers. We help our clients with this type of innovation through our franchise. We have a platform called FoodBytes, headquartered in California, which looks at the innovation needed to meet changing consumer demands. We help our clients with start-ups and their incubation to take them to the next step.

On the technical/digital innovation side, we have embedded in our teams a number of people who are looking at, say, Blockchain or robotics. If you look at Dreyfus again, they recently signed a joint partnership with a big e-commerce platform in China, which they will use to sell their brand of soybean oil.

Traditional TCF is changing. The amount of due diligence that we now have to do is such that smaller merchants will have increasing difficulty in obtaining financing. We do not have the mandate to do business with companies with a capital below $25 million, simply because the income we can create from this kind of client is too small—and the risk is too big.

The world’s population is growing and international trade will have to play an increasing role in keeping people fed. International traders will continue to have a role despite disintermediation and the democratisation of information. Their role will be in logistics and risk management, and having a large global footprint will allow them to maintain optionality in the chain.

Thank you Karel for taking the time to share your experience with us!

© Commodity Conversations ®

This is a short extract of an interview to be published in my upcoming book.

A conversation with Greg Morris

Good morning Greg. Could you please tell me about your current role within ADM?

Good morning Jonathan. Earlier this year, I was asked to bring together our Origination and Oilseeds business units into what we call today, Ag Services and Oilseeds, which I now lead. This new combined business unit constitutes a significant portion of the employees, the revenues and the profitability of the corporation. Fortunately, it is also made up of some of the best talent in the company and the industry, so I am fortunate to work with a great team every day.

What tonnage of commodities does ADM trade each year?

 We process about 60 million tons of ag commodities each year. We don’t disclose the tonnage that we trade, but it would certainly be bigger than that.

Some people would say that ADM is an industrial rather than a trading company. Would you agree?

Many companies that operate in this space feel that their job is to trade. Our philosophy at ADM is different. We trade with a purpose. We don’t trade just to trade; I think that is yesterday’s model.

We trade to support higher utilization rates in our assets. We trade to help provide products for our customers. So no, I wouldn’t say that ADM is necessarily a trading company. We trade as a critical function of managing our portion of the supply chain to serve our global customer base.

 Are you affected by the current overcapacity in agricultural production and logistics?

 We’ve certainly had some challenges with oversupply of some of raw materials, such as grains and oilseeds, and this has led to margin compression. However, it goes back to having the right philosophy.

Recent trade policies and decisions have resulted in regional dislocations, as has the terrible weather in some of the growing areas in the U.S. Some parts of the U.S. have been badly hit by flooding; others have been relatively okay. Our global footprint has allowed us to keep supplying our customers – when we can’t get something out of the U.S., we can often get it out of Europe or South America, and vice versa. That’s really the critical role for our industry – companies with global reach like ADM are the ones that can move agricultural and food products from areas of supply to areas of demand. So it’s been a dynamic situation, but overall, I think we have fared pretty well in a challenging environment.

 Are there any ways that the sector could better meet the challenges it faces?

Looking forward, I believe that partnerships will become more interesting for the industry as a whole.

At ADM we’ve done some partnerships, as have others in the industry, in order to reduce the risk of an investment, or to participate in a new region of the world. For example, we’ve recently entered into two separate joint ventures with Cargill: one, called SoyVen, which owns and operates a soy crush facility in Egypt, and another, called GrainBridge, that is developing a single digital platform for farmers to consolidate information on production economics and grain marketing activities. We’re also a founding member of an industry initiative to standardize and digitize global agricultural shipping transactions.

 What advice would you give to a young person starting a career in commodities?

 In a trading role, and in the current environment, the best advice I could give would be to keep your head on a swivel. You have to pay constant attention, whether to global economics, geopolitics, the weather, currencies, or the latest consumer trend. As a commodity trader, you can’t read a newspaper or watch the news without naturally connecting it back to your business, because it all matters.

From a career growth perspective it’s important to think beyond whatever your current role is. I would advise any young person in this business to stretch themselves and find other ways to contribute to the corporation and develop good business management and leadership skills. Trading can be a great foundation, but don’t limit your professional options.

 Is there anything that you’d like to add?

I think for me it’s important to recognize that ADM has undertaken a lot of change in the recent past but there is one thing has remained constant: we are proud of the role that we play in the world.

Our purpose statement says “We unlock the power of nature to enrich the quality of life.” We believe that is a noble cause. But at the same time we are evolving. We are transforming our portfolio of businesses, our capabilities and the way we interact with our customers across all of our businesses. We are more process focused and disciplined and our growth strategy includes a very robust agenda.

ADM is a much different company than the company I joined 24 years ago. We’re a stronger company and I’m proud to have been part of the evolution.

© Commodity Conversations ®

This is an excerpt of a full-length interview with Greg that I will publish in my book later this year.

Jason Clay, the head of agriculture at WWF US in Washington, once famously calculated that the world’s farmers will need to produce as much food in the next forty years as they produced in the past 8,000 years. Can they do it?

The UN’s FAO believes that they can. At a world summit back in 2009 the Organisation predicted that in order to feed the world in 2050 global agricultural production would have to be 60 percent higher than it was in 2005. Although that sounds a lot, it would be a smaller increase than the agriculture sector achieved over the previous past half century.

Where will that 60% extra production come from?

The FAO expected that, in aggregate, more than 85 percent of the increase in production would come from improved yields. They projected global cereals yields would increase from 3.3 tonnes/ha in 2005 to 4.30 tonnes/ha in 2050. World average yields for other major crops were expected to follow similar patterns.

The rest would have to come from bringing more land under agricultural production. The FAO estimated that the world has a total of around 7.2 billion ha of land suitable for rain fed food production. After discounting for areas already in production, under forest cover or put to other uses – as well as land that is only marginally suitable – the world has some 1.4 billion ha of prime land that could be brought into cultivation.

Much of this, however, would have to come at the expense of pastures, and would require considerable investment. In addition, some of that spare land is not readily accessible due to lack of infrastructure and its distance from markets, making production uneconomical.

The FAO estimated that land under crops would increase by some 70 million ha by 2050. However it warned that much of the spare land is concentrated in a small number of countries, for example in Brazil. Some countries may find it difficult to increase the amount of land under food crops.

All this means that, at the global level, the FAO was optimistic that agricultural production could be increased enough to satisfy the 60 percent increase in demand projected to 2050 for both food and non-food uses.

Where are we ten years later? the World Resources Institute, a non-profit organization, still believes the challenge can be met, but only if certain  “gaps” can be overcome. In a recent report entitled “Creating a Sustainable Food Future” the WRI identified three gaps. The first is the food gap, the difference between the amount of food produced in 2010 and the amount necessary to meet likely demand in 2050. They estimated this gap to be 7,400 trillion calories, or 56 percent more crop calories than were produced in 2010. (Their numbers are pretty much aligned with those of the FAO.)

The second, the land gap, is the difference between global agricultural land area in 2010 and the area required in 2050 even if crop and pasture yields continue to grow at past rates. They estimated this gap to be 593 million hectares, an area nearly twice the size of India. The third, the Green House Gas (GHG) mitigation gap, is the difference between the annual GHG emissions likely from agriculture and land-use change in 2050 compared to emissions that have been targeted under the Paris Agreement to limit global warming to below an increase of 1.5°C.

The foundation argued that closing these three gaps would be harder than often recognized. The report’s lead author said, “If we tried to produce all the food needed in 2050 with today’s production systems, the world would have to convert most of its remaining forests, and agricultural alone would produce almost twice the emissions in 2050 allowable from all humans sources.”

The Intergovernmental Panel on Climate Change (IPCC)—a global group of scientists convened by the United Nations to study climate change—is also worried about agriculture’s GHG emissions. In a report published last month, the panel warned that cutting emissions from major polluters like factories and power plants won’t be enough to keep global warming below the two degrees Celsius agreed under the Paris Climate Agreement. They concluded that land use and food systems have to change, too.

The report found that food production (including post-harvest activities like transportation) accounts for between 21 and 37 percent of greenhouse gas emissions caused by humans. The scientists emphasized the need to manage land better and recommended diversifying cropland, reducing food waste and transitioning to vegetarian or vegan diets. The report found that methane emissions are rising again after a no-growth period between 1999 and 2006. Methane is a particularly potent greenhouse gas, and cows and global rice production are largely to blame.

They also warned that climate change will exacerbate food insecurity even in the best-case scenario. In fact, they say that climate change is already affecting agricultural production.

Many of the solutions outlined in the IPCC report—farming techniques that prioritize soil health, reforestation—take time. It can take years to rebuild soil that’s healthy enough to withstand a flash flood or a dust storm; a tree can’t start capturing carbon until it’s several years old. The IPCC warn that the time to act is now.

A failure to do so would lead to increased degradation of land because of intensive farming, while a rise in deforestation would accelerate climate change that would in turn make land less fertile and productive, the IPCC added.

We all agree that the way forward for agriculture, and for a sustainable food future, is through producing more food per hectare, per kilogram of fertilizer, pesticides, and herbicides, and per litre of water.

Are our farmers up to the challenge? You bet!

© Commodity Conversations ®

Good morning J-F. Could you briefly describe who you are and what you do?

I am a former banker with a banker’s DNA. I spent most of my career in international banking and trade finance, with stints in Greece and Asia. I was originally with Crédit Commercial de France -CCF, and then with HSBC, when they took over CCF. I moved to London where I built the structured trade finance activities, and then the global commodity finance activities for the group.

I’m now a consultant on trade and commodity finance and strategy for banks, companies and funds. I also teach commodity market dynamics at Sciences Po in Paris, and regularly lecture at the London Business School.

How are the different trade houses adapting to the changes in their business environment?

Although everybody is investing in logistics, Glencore is differentiating itself through a strategy of size. They believe that through size they can reduce costs, and perhaps even become a price-setter rather than a price-taker.

When you talk to ADM or Cargill, they tell you that they don’t trade commodities, but that they are an integrated supply chain from farm to fork. Their profits are not coming from trading; their profits are coming from sophisticated supply chain management. They also endeavor to generate commercial margins by producing and selling adding-value products downstream.

Cargill has been doing this for many years now, shifting focus to animal and fish proteins. This certainly makes sense when population is increasing and the middle-class is growing. The world needs more protein, and Cargill’s investment into the verticality of the protein supply chain is paying off handsomely.

ADM is a different animal. Let’s not forget that the original “A” amongst the ABCDs was André, not Archer Daniels Midland. ADM is by and large an agri-industrial company, not a trading house. It has developed into trading, but the bulk of their money is spent and earned on the industrial part of the business.

Dreyfus will also tell you that they are no longer a trading house, and that they are now supply chain managers. However, Dreyfus is probably one of the last true large trading houses left in the market. That is quite a challenge in a market where the odds of making money through trading get slimmer.

Bunge is somewhere in between Cargill and Dreyfus. There is more trading at Bunge than there is at Cargill, but Bunge is keen to complement their upstream capabilities with downstream access, in search for commercial margins. Their aim is to lower their reliance on trading and become more of an agri-industrial company.

What about COFCO, or rather their trading company COFCO International Ltd? You once said that their role was to feed the dragon.

COFCO International is a game changer in the world of agricultural commodity trading.

I believe their true mission is to optimize sourcing at origin and ensure a smooth and efficient supply for the Chinese market. Their grip on China as a destination is already strong and will only get stronger. This is a major issue for the ABCDs, as price discovery in China will get more difficult to read.

I believe the rivalry between the U.S and China is a new normal. If that view is correct, COFCO International’s role becomes even more important. It has to restructure the sourcing and origination of China’s food imports in order to lower the country’s dependency on the U.S. To fulfill it efficiently, I would expect further acquisitions/alliances down the road.

Do you believe that traceability is an integral part of a trade house model?

Traceability is not a luxury, it is “a must have.” Part of the process of industrialization is to efficiently support that traceability requirement. For now, consumers in developed countries are the most demanding, but with emerging urban middle classes around the world, requirements for traceability will only rise and spread.

There seems to be a growing trend for banks to link finance to sustainability and human rights objectives.

I see a future—not too far away—where at least the large banks will eventually only finance sustainable production. This is the trend. If you look at the coal business, not a single international bank will finance a new project in coal fired power generation. I think that banks will have to exit non-sustainable agribusinesses. Not doing it would merely be unacceptable to the society at large, and the reputational risk incurred would be too high.

 Will any of the big trading companies exit their bulk commodity trading operations to concentrate on higher value parts of the supply chain?

Trading companies will not “quit” trading. It is their core expertise and their culture. However, trading as a stand-alone is no longer generating profits in line with the risks undertaken. All large trading companies therefore are endeavoring to complement – or rather, enhance – their trading capabilities by capturing what they have identified as the higher value parts of the supply chains. This is easier said than done.

First, you need to identify the right supply chain and the right portion of it: upstream or downstream. Second, investing in supply chains is costly and companies need the financial strength to do so.

Not every player can afford the risks and costs involved. This leaves them with two alleys: partnerships and mergers amongst equals.

Do you think that trade houses should be publicly quoted?

A listed company has to have a growth story to tell, year after year to investors. This does not fit well with the cyclical nature of the commodity business. But I will go one step further. As I already said, commodity traders are currently struggling to make money, and I think that they will continue to struggle in the years to come. So I doubt we will see any commodity traders listing in the next 10 or 15 years.

Would you recommend a young person now to join one of the big grain trading companies?

There is no better school for someone to learn about markets and discover how the world works. Commodities are about history, demography, geography, economy, finance and geopolitics! It is a fantastic training for young people, even if they intend to move on to other activities.

Thank you J-F for your time.

© Commodity Conversations ®

This is a brief extract of a conversation that will be included in my upcoming book on the grain trade, to be published before the end of 2019.

What are the biggest challenges currently facing the grain merchandising industry?”

In the 2000 to 2010 boom the industry built up too much capacity, too many silos. Farmers around the world have also built storage capacity. Their need for merchants of grain to store commodities, and to take them off their hands at harvest time has become less. That is a significant change that challenges intermediaries such as ourselves. We need to add value to the farmers in a different way than we have done in the past.

Another challenge that we face is government intervention; the current trade conflict is an example. Tariffs and import and export bans make it harder and more costly to move food around the world. They lead to inefficiencies and extra costs.

Ian McIntosh, the CEO of Dreyfus, recently said, “One tweet and everything changes.” Traders need volatility, but they like volatility that is at least partially predictable.

If you trade you need price volatility. If the price doesn’t move, you can’t make money. You might not lose either, but not losing isn’t enough to stay in business. By definition traders require volatility.

However, unpredictable political volatility increases risks and costs. It becomes a casino, and then it becomes gambling rather than trading. There have been a lot of market impacting tweets. That has made trading difficult in the past year.

But one thing I would say is that our global scale has helped us to find solutions. Recently, trade tariffs have made it more expensive to supply US beans to our buyers in China, but because of our global scale we have been able to supply Brazilian beans instead. We couldn’t do that without global scale. If you were a small regional player in the US you would have been caught in that.

Can grain merchants still add value, or can the market now do without intermediaries?”

There are a lot of myths around the grain trade, that traders just make money hand over fist, that they are making huge amounts of money on the backs of farmers and consumers. It is not true. In reality, margins are very thin in the agriculture sector.

On the plus side, pressure on margins means that we are constantly looking to make the systems more efficient, to cut back costs, and to make sure that our agricultural products are moved in the most cost effective and efficient way.

So yes, there is a need for intermediaries as long as they can continually reinvent themselves to add value. We have to differentiate ourselves from our competitors and to add value on both ends of the spectrum, at origin and at destination. If you cannot add value, then there is no reason for you to be in business.

Is traceability compatible with tradability?

I don’t think traceability necessarily kills tradability, but it clearly restricts it. You end up with an IP (Identity Preserved) product. It is a value added product that is not really exchangeable. A commodity is a commodity because it is exchangeable. An IP product requires segregation; it is not a standard product.

Our objective within Cargill is for all products to become sustainable. Once that happens the distinction between traceability and tradability no longer exists.

How has Cargill changed since you joined?

At its core, the company has not changed. We are still a values-driven company where ethics and compliance is at the top of who we are. That has not changed over 150 years and I don’t think it will ever change. It is a family requisite. The Cargill family cares about the company, about passing on to the next generation, and that will only happen if we take care of the company in an appropriate manner.

Cargill has however changed from a portfolio perspective. When I joined in 1987 we were still predominately a trading company. The trading part of Cargill is still a critical part of the company. We still have an active trading business. We trade actively around our assets. We are a major supply chain manager. But we have also diversified our portfolio into the value-added products. We have invested heavily into animal feed, into the meat businesses, into starches and sweeteners, fermentation. That has diversified the revenue streams, but it has also allowed us to capture margins in the downstream supply chain just as the margins in trading were under pressure.

Chris Mahoney, the CEO of Glencore Agriculture, told me that something like 15 percent of his company’s revenue comes from trading and merchandising.

It is difficult to put an exact number on it, and trading is an art not a science; it varies from year to year. We still have a huge amount invested in people and talent to trade and position in the market place, and I would guess that it is larger than our competitors today. Nevertheless, the trading side of Cargill relative to the rest of Cargill is now less than it used to be. That is simply because our portfolio on the value-added side has grown significantly.

What makes Cargill different from other merchandising companies – what is your USP?

I am not going to talk about our competitors, so I will answer that question in terms of what I think we are good at.

Number one is our exceptional talent—our people. Number two is that we are truly global as a company; we have good assets in all the key geographies, whether at origin or destination. Number three is the way that the different businesses within Cargill work together. Number four I believe we can differentiate ourselves by the importance we place on our relationships with customers and suppliers. We work with our end users and our suppliers to adapt to their changing needs.

Would you recommend young people to become traders, to join Cargill?

You are asking someone with a fascination for markets and trading, so yes I would recommend anyone to become a trader. Trading will never disappear. We manage risks, and those risks will never disappear. There is risk all along the agriculture supply chain and that risk has to be managed. To manage risk you have to understand the marketplace.

To take that one step further, you go beyond simply risk management into trading opportunities, where you see something that the market is mispricing, and you seek to profit from that. That is how markets work. It is a fascinating business. You have global forces at play.

There is now greater need to understand mathematics and mathematical models than in the past. Data science is becoming increasingly more important. I joined Cargill before the Internet existed. And I studied law, not mathematics. But I guess I must have some ability at maths, otherwise I wouldn’t be where I am today.

So you need to be strong in mathematics now to be a good trader, and that is not for everyone.

You also need to be able to manage stress. Your job should not be at the cost of your health. It is a tough environment. A lot of people come and go. It is performance driven culture, if you don’t perform consistently you will be replaced. You are always at the cutting edge. Performance is quick to come and go.

Cargill is often viewed as a training programme for the industry. How do you feel about that—and how do you manage it?

 I have mixed feelings about that. In one sense it bothers me. Through our training we are obviously feeding our competitors with talent. But at the same time I am proud that we recruit and train people so well. That tells you a lot about this company and the way we invest in our people. I think that is a good thing.

But frankly there is no choice at the end of the day. We are a pyramidal structure. People are promoted on merit, and there will be people that fall out of that system. Our objective is to maintain our strongest talent. We don’t always succeed. But not everyone can make it to the top, so there will always be people that seek other opportunities. I think that is ok. It is the way the system works; it is inevitable.

What would like to read about in a book about the grain trade?

The grain trade plays a vital role in the agriculture sector and I think that story needs to be told. The industry has a stigma that is hard to lose but the key is transparency. We have to show we are doing good, but we also have to admit to our challenges and vulnerabilities. I am proud of the way that Cargill has evolved. We tell our story in good faith. We have very strong values, and we are in the business for the long run.

To feed a growing population we have to make sure that our farmers receive a fair payment for their crops and that they thrive. But at the same time we need to care for the planet. We don’t want any further deforestation. There are paradoxes that we need to manage. We are in the middle of this and want to play a role. There are a lot of conflicting issues to be managed. We cannot ignore one away in favour of another. They need to be handled and met at the same time.

Thank you GJ for your time!

The full interview will be published in my upcoming book, “Out of the Shadows: The New Merchants of Grain.”

 © Commodity Conversations ®