Category: Blog

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Fake news in the wheat market

Wheat prices spiked last week, reaching a three-year high, and then fell back down after Ukraine issued confusing statements on possible export limits. The trouble started when Ukraine said on Facebook that it planned to limit shipments of milling wheat. The ministry later tried to clarify things by saying that it was not discussing “strict limits” and would instead discuss projected shipment volumes with traders. The wheat price fell back pretty much to where it came from. The move can be seen on the following graph from Bloomberg.

The episode set off a social media storm. Some traders complained that journalists had acted irresponsibly by reporting on the original Facebook post without first checking on its accuracy. Others argued that the Facebook post was in itself a market-relevant event (even ignoring what it contained) and that needed to be circulated as quickly as possible. 

In an (excellent) article published after the event, Agricensus explained that,

The big two providers that control 56% of the market – Bloomberg and Reuters – have spent vast sums of money on improving latency by milliseconds – hoping that it gives their clients an edge in trading.

That puts pressure to print stories and market moving headlines, leaving reporters with little time to corroborate, double-check or even question the most ambiguous statements made by ministers and even world leaders.

Some commentators on social media complained that the episode was just another example of fake news. Others argued that you shouldn’t be trading on Facebook posts in the first place—and that if you want good information you should pay for it. However this ignores the fact that the original post was picked up by the big newswire services. And as Agricensus points out,

Global spending on financial market data analysis and news exceeded $28 billion in 2017, according to consultants Burton Taylor International – up 3.6% on the previous year and the highest growth rate since after the financial crisis.

 People are already paying huge sums for “real” news.

However, the idea that if you want real rather than fake news then you have to pay for it is one of the themes of Yuval Harari’s new book 21 Lessons for the 21st Century. The book will be released at the end of August, but in a prepublication interview Mr Harari tells The Guardian,

The idea of free information is extremely dangerous when it comes to the news industry. If there’s so much free information out there, how do you get people’s attention? This becomes the real commodity. At present there is an incentive in order to get your attention – and then sell it to advertisers and politicians and so forth – to create more and more sensational stories, irrespective of truth or relevance. Some of the fake news comes from manipulation by Russian hackers but much of it is simply because of the wrong incentive structure. There is no penalty for creating a sensational story that is not true. We’re willing to pay for high quality food and clothes and cars, so why not high quality information?

The Guardian has also published an extract from the book in which Mr Harari writes, 

In fact, humans have always lived in the age of post-truth. Homo sapiens is a post-truth species, whose power depends on creating and believing fictions. Ever since the stone age, self-reinforcing myths have served to unite human collectives. Indeed, Homo sapiens conquered this planet thanks above all to the unique human ability to create and spread fictions. We are the only mammals that can cooperate with numerous strangers because only we can invent fictional stories, spread them around, and convince millions of others to believe in them. As long as everybody believes in the same fictions, we all obey the same laws, and can thereby cooperate effectively.

He continues,

Joseph Goebbels, the Nazi propaganda maestro and perhaps the most accomplished media-wizard of the modern age, allegedly explained his method succinctly by stating that “A lie told once remains a lie, but a lie told a thousand times becomes the truth”. In Mein Kampf, Hitler wrote that “The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over.” Can any present-day fake-news peddler improve on that?

Returning to the wheat market I understand that Ukraine always tracks and informally manages their wheat exports. Professional wheat traders were therefore surprised by the way that the market reacted to the Facebook post rather than by the Facebook post itself.

The post stampeded the herd—a herd that was already extremely nervous because of the extreme hot weather in many of the world’s wheat growing regions. Something else could have stampeded the herd: a rumour, say, or a big order hitting the screens—or even nothing at all. The herd was ready to stampede; it didn’t necessarily need an outside stimulus.

This type of situation is common in markets. Indeed, there was a lesser example just the week before when two famous wheat traders, Donald Trump and Jean-Claude Juncker announced that the EU would increase their purchases of US soybeans. The US soybean price rallied on the news and then fell again when the market realised that Trump and Juncker were not soybean traders after all.

There is an old commodity market saying that price will often go back to check out the extreme highs or lows made in a panic move, like the one in wheat last week. (This is not a prediction that the wheat price will return to last week’s highs, but I will be interested to see if it does.)

Finally, I had lunch with an old trader friend last week who reminded me that although traders love volatility, they don’t like political volatility; weather they can deal with, politics they can’t. Traders may or may not think that wheat prices will rise further on supply factors, but they have no way to foresee what the politicians will do in response.

As Bunge found out to their cost recently, it is dangerous to predict what politicians will do next, especially our present crop of politicians. As a result, traders normally increase the size of their bets in a fundamental market and reduce them in a political one.

Wheat has always been a “political” commodity; the current drought makes it even more so.

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The Writing Was On The Wall

In his book Merchants of Grain (published in 1979), Dan Morgan describes the history of the grain trade and takes a look at what the future might hold for the five private companies—Cargill, Continental, Louis Dreyfus, Bunge and André—that at that time dominated the business.

The early 1970s had been exceptionally profitable for those five companies, and the seven families that controlled them. The Soviet Union was redirecting resources away from industrial production and towards consumers. Increasing meat supply was an integral part of that plan, but to do that the USSR had to import large amounts of protein and animal feed.

This coincided, in 1972, with the failure of the anchovy season off the west coast of South America (anchovies/fish meal was a significant source of animal feed at that time), as well as poor weather in the Black Earth region of the USSR.

The first wave of Soviet buying in 1972 came to be known as the “Great Grain Robbery”, and resulted in rising food prices and domestic inflation in the USA. It also began to focus political attention onto the grain trade, something that intensified when the Soviets came in for a second round of buying in 1975.

But that buying was a double-edged sword. As Dan Morgan writes, “Opportunities for big profits, which the companies had looked forward to in the doldrums of the 1950s and 1960s, certainly were present. But the enormous volumes and the volatility also created unprecedented risks.”

Continental Grain learnt this the hard way when they underestimated the depth of the second round of Soviet buying; the grain giant sold physical corn short, expecting to cover their sales when prices fell later in the year. But corn prices didn’t fall; they continued to climb and the company covered their shorts at the top of the market.

For Michel Fribourg, the owner of Continental Grain, this was a traumatic event, and he declined to offer any further tonnage when the Soviets came back for more in October 1975. A few months later he reorganized the company, firing traders and employing risk and business managers instead. As Dan Morgan writes, the risk in these big sales was just too big: “The glory days of the grand slams in the Russian trade were over.”

He continues,

“Continental was not the only company to experience trading troubles. Most of the companies now insisted that the Soviet Union share more of the risks. Louis Dreyfus, for its part, set up a system of compensating balance sheets with the Russians. In effect it worked for the Russians on a fixed commission; losses in any given transaction would have to be recovered in profits on subsequent transactions…”

At that time most commodity imports were handled by central government agencies within the importing country. Governments were generally assumed to be more reliable counter-parties than the private sector, but this belief was shaken when in early 1975 wheat prices fell and “Turkey’s wheat-importing agency cancelled the wheat import contracts it had concluded at higher prices with Continental, Bunge, and Cargill.”

At the same time, the state buying agencies in importing countries had begun to attract the US government’s attention in terms of the inducements and bribes that the grain companies paid to civil servants and politicians to get the business done. A new light was being shone on these practices. A new morality began to take hold within the US, leading to the Foreign Corrupt Practices Act that was passed in 1977.

A new light was also being shone on the shipping and transportation of the physical grain, leading to an FBI investigation in short-loading and falsified shipping documents at the Mississippi grain loading terminals. In 1975 a grand jury in New Orleans “issued a total of thirty-one indictments, covering 265 federal criminal violations against forty-eight individuals…All kinds of activities came to light that showed how company employees schemed to misgrade or diminish the quantities of grain destined for foreign countries.”

Meanwhile, anti-competitive practices were also being brought under the spotlight. “In December 1976, the Interstate Commerce Commission held hearings in Chicago to determine why some small grain elevators inland had been unable to obtain covered hopper cars and grain boxes to move their commodities…The hearings showed what a close relationship existed between certain railroad companies and the grain firms.”

Physical trading margins within the agricultural supply chain were almost as thin in the 1970s as they are now, and the big trading companies largely made their profits by speculating massively on the futures markets that they themselves dominated. But there again a new morality was beginning to take hold with the formation in April 1975 of the Commodities Futures Trading Commission, a new independent government agency to police the exchanges. It was formed “with fewer “policemen” than the Rockville, Maryland Police Department” and appeared to get off to a slow start, but it was a sign of things to come.

Perhaps more importantly, the big trading companies were already—in the 1970s—beginning to lose their domination of the agricultural futures markets.  Large well-financed speculators were moving in. The most famous were the Hunt brothers who had made a fortune early in the decade by squeezing the silver market. The brothers entered the soybean market in 1976, accumulating “approximately a third of the total beans that forecasters thought would be left over when the new soybeans from the 1977 crop became available. This was not a corner, but it was getting near to one”.

Their buying pushed prices higher and helped speed the demise of the publicly quoted Cook Industries, a former cotton trader that by the mid 1970s had begun to rival the traditional grain companies. “Within a year the company that Ned Cook had built into one of the highest-flying grain companies in the world had all but disappeared”. Cook was forced to sell its US grain elevators, allowing the Japanese trade houses Mitsui and Marubeni their long-awaited opportunity to get a foothold into the US grain business.

Taking all this together it is perhaps possible to pinpoint the start of the decline of the traditional grain business as a reaction to the massive price volatility and subsequent general inflation that followed the Russian purchases of US grain in the 1970s.

The grain companies had been hoping for such an event all through the doldrums of the 1950s and 1960s, but the consequences were greater government intervention and increased transparency, as well as the entry of well-financed speculators into markets that had previously been quietly local.

Bring those elements into a sector that was already struggling to cope with higher volumes and greater counter-party risks and you can begin to see that the writing was already on the wall. The era of seat-of-the pants buccaneering trading was on the way out; professional risk management, cost control and a new morality were on the way in.

Photos from Pixabay under Creative Commons

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Bad journalism and poor science

The Guardian recently published two articles concerning the cancer risks of mobile phone use. The first was entitled, The inconvenient truth about cancer and mobile phones. The second, published one-week later, was headed, Mobile phones and cancer – the full picture.

In the first article the two journalists highlighted a recent study that found that mobile phones caused cancer in rats. They wrote,

The study concluded that there is “clear evidence” that radiation from mobile phones causes cancer, specifically, a heart tissue cancer in rats that is too rare to be explained as random occurrence.  

The journalists continued,

Not one major news organisation in the US or Europe reported this scientific news. But then, news coverage of mobile phone safety has long reflected the outlook of the wireless industry. For a quarter of a century now, the industry has been orchestrating a global PR campaign aimed at misleading not only journalists, but also consumers and policymakers about the actual science concerning mobile phone radiation. Indeed, big wireless has borrowed the very same strategy and tactics big tobacco and big oil pioneered to deceive the public about the risks of smoking and climate change, respectively. And like their tobacco and oil counterparts, wireless industry CEOs lied to the public even after their own scientists privately warned that their products could be dangerous, especially to children.

The story was picked up by other media, both in the UK and in the US, and spread rapidly across social media.

The second article in The Guardian, written by Dr David Robert Grimes, a physicist, cancer researcher, and science writer based at Queen’s University Belfast and the University of Oxford, completely refuted the first article.

He argues that the study cited in the first article is flawed, and accuses the journalists of cherry-picking and misrepresentation, saying they had ignored data that contradicts their hypothesis and retained only evidence that fitted the desired story. He writes that, this is antithetical to science, where the totality of evidence must be assessed in concert.

He continues,

Since the early 1990s, mobile phone usage worldwide has grown at an exponential rate. If phones are linked to cancer, we’d expect to see a marked uptick in cancer with uptake. Yet we do not. American mobile phone penetration increased from almost nothing in 1992 to practically 100% by 2008 and there is zero indication glioma (cancer) rates have increased, a finding replicated by numerous other studies.

And adds,

The scientific evidence points to a conclusion totally at odds with what the authors postulate. The analogy to industry bamboozling the public to ignore findings doesn’t hold if there is no strong scientific consensus from which to deflect, rendering it cynical or ignorant to equivocate the twain. This is not a case of an industry trying to distract from an inescapable scientific conclusion – the reality is there is nothing of substance from which to deflect.

All this might sound familiar to those of you who are in the business of producing and supplying sugar to an increasingly reticent public. In most people’s minds sugar has now been identified as “the cause” of obesity. This has become an almost irrefutable fact, despite there being little—or no—scientific evidence that a sugar calorie is more fattening than any other calorie. Meanwhile, the sugar industry has been accused of lying to the public and conspiring to conceal the harmful nature of their product.

In his article Dr Grimes argues that the fact that cancer rates have not increased in line with mobile phone use suggests that there is no link between the two. There is no correlation. As far as sugar is concerned, per capita sugar consumption has been falling while obesity has been increasing. This is an inverse correlation.

I will leave the final words to Dr Grimes whose strong criticism of the first article may strike a cord to those of you in the sugar industry.

As enthralling as (the) narrative might be, it is strewn with rudimentary errors and dubious inferences. As a physicist working in cancer research, I found the authors’ penchant for amplifying claims far beyond that which the evidence allows troubling. And as a scientist deeply invested in public understanding of science, I’ve seen first-hand the damage that scaremongering can do to societal health. While it is tempting to rage into the void, perhaps this episode can serve as a case study in how public understanding of science can be mangled, and what warning signs we might look out for.

Photos under creative commons from Pixabay

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Food connects us to nature

In his 2006 book The Omnivore’s Dilemma, Michael Pollan asked the question, “Where does your food come from?” He wrote,

“Imagine if we had a food system that actually produced wholesome food. Imagine if it produced that food in a way that restored the land. Imagine if we could eat every meal knowing these few simple things: What it is we’re eating. Where it came from. How it found its way to our table. And what it really cost. If that was the reality, then every meal would have the potential to be a perfect meal.”

In 2016, when Penguin published a tenth anniversary edition of his book, New Food Economy interviewed the celebrated author, asking him whether he thought his book had had an effect on the way food is produced and marketed, and how much had changed in the previous decade. His answer to both questions was “not much”. He did however concede that the market (in the US at least) for organic and local product has been growing strongly, and that the alternative food economy (as he called it) is gradually being co-opted by the main food economy. He told New Food Economy,

“One of the good things about having a handful of large companies dominate the food landscape is that monopolies can sometimes move quickly to change the system. When you persuade McDonald’s or Walmart or KFC to change what they do, you can rapidly drive a lot of change throughout the food system. Ultimately, I think many of the values that seem alternative now—cage-free eggs, for example—will be mainstream very soon. I think you’ll have major fast food chains switching to organic at some point as a marketing matter—and it’ll work, and others will follow suit.”

He added, 

“This is how change comes to America, right? We tend to make progress by co-opting challenges, rather than by revolution and replacement. There is no question that you’ll see this alternative food economy gradually co-opted.”

This is certainly something that we have seen over the past few years: sustainability has gone mainstream in terms of both the environment and human and animal rights. However the biggest challenge is still to come: to get (wealthy) consumers to pay for it. As Michael Pollan told New Food Economy in 2016,

“Still, the alternatives we’re talking about will probably never be as cheap as conventional food, partly because those low prices didn’t reflect the true cost of product. We pay for conventional food in other ways: in public health, in damage to the environment, in taxpayer subsidies. As we reform the system, I think we’re going to see that the low cost was illusory. You can’t really produce food that cheaply, without charging the real cost to the environment or the public health.

That, I think, is the big challenge of the food movement: to democratize sustainably and ethically produced food.” 

Describing his relationship with nature, there is one thing that Michael Pollan wrote in The Omnivore’s Dilemma that I particularly liked,

“The single greatest lesson (my) garden teaches is that our relationship to the planet need not be zero-sum, and that as long as the sun still shines and people still can plan and plant, think and do, we can, if we bother to try, find ways to provide for ourselves without diminishing the world. ”

I was thinking of this when I picked up a copy of Mr Pollan’s recently published How to Change Your Mind: The New Science of Psychedelics. This surprising new book describes the history of psychedelic drugs, such as LSD and psilocybin (from magic mushrooms), and looks at the new research being done around the effects of these drugs. Mr Pollan uses himself as a guinea pig, starting with some dried up magic mushrooms. Under their influence he rediscovers a connectivity with nature that he lost as a child. He writes,

“I stepped outside, feeling unsteady on my feet, legs a little rubbery. The garden was thumming with activity, dragonflies tracing complicated patterns in the air, the seed heads of plume poppies rattling like snakes as I brushed by, the phlox perfuming the air with its sweet, heavy scent, and the air so palpably dense it had to be forded. The word and sense of “poignance” flooded over me during the walk through the garden.” 

For many city dwellers (and I count myself in that category), our main—and sometimes only—connection to nature is through the food that we eat. It is no surprise that we need to maintain that connection. But to do that we have to know where our food comes from, and that its production doesn’t inflict damage on the environment, or cruelty to animals or our fellow human beings. Food is not only our connection to our agricultural past, but also to our environmental future.

My favourite quote from How to Change Your Mind is from Huston Smith.  Michael Pollan writes,

“Huston Smith, the scholar of religion, once described a spiritually “realized being” as simply a person with “an acute sense of the astonishing mystery of everything.” 

The author argues that when we treat nature and the environment as an object to be studied—and mastered—we are losing sight of the fact that we are in, and connected to, nature. We have no choice in the matter: everything we do that alters nature alters us in turn.

In his book Michael Pollard interviews Paul Stamets, a world expert on mushrooms and advocate of medicinal fungi.

“Mushrooms have taught me the interconnectedness of all life-forms and the molecular matrix that we share…. I no longer feel that I am in this envelope of a human life called Paul Stamets. I am part of the stream of molecules that are flowing through nature. I am given a voice, given consciousness for a time, but I feel that I am part of this continuum of stardust into which I am born and to which I will return at the end of this life.”

 Whether or not you need psychedelic drugs to feel this connectivity is another matter—and perhaps the subject of another blog.

All images from Pixabay under creative commons

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The last straw

Earlier today, when I went for my morning swim in the lake, I suddenly found myself caught up in a large semi-submerged plastic bag. My guess is that it  had once packaged a large-screen TV, possibly recently purchased for the World Cup. As to what it was doing in the lake, someone may have brought it down to one of the lakeside beaches to sit on during an evening barbecue. They had  inadvertently, probably after a few too many beers, left it there to wash out into the waves..

One moment I was swimming peacefully in crystal clear water; the next I was confused and panicked as I struggled to free myself from the plastic. At one stage my hands and arms were inside it and I had trouble staying afloat. My panic only lasted a few seconds, but as I brought the plastic bag back to the shore to dispose of in one of the rubbish bins on the beach, I thought of all the turtles and other marine life that get caught and perish in the plastic debris floating in our oceans. They too must suffer the same sense of panic and confusion that I had felt earlier today. One moment they are free; the next they are trapped in a thing of which they have no comprehension.

I had already been thinking about plastic last Saturday evening when my wife and I went out to dinner and we were served our cocktails with unnecessarily large—and unnecessarily plastic—straws. I thought about complaining to the waiter about them, but my habitual British fear of embarrassment stopped me. I didn’t want to spoil what was a lovely evening.

Starbucks announced this week that they would be completely eliminating plastic straws from their 28,000 stores around the world by 2020. And that is no small thing: the company currently uses more than one billion plastic straws per year.

McDonald’s also recently announced it will ban plastic straws at its U.K. and Ireland restaurants; other food outlets and airlines are following the trend. Cities are also joining in, with Seattle becoming the latest city in the US to do so. The UK environment minister has gone on record as saying he would like to ban plastic straws completely in the UK, while the EU has also proposed a ban on plastic straws and single use cutlery.

This week National Geographic published an excellent article on the history of plastic straws and how they took over the world. They write that in just the U.S. alone, one estimate suggests 500 million straws are used every single day. One study published earlier this year estimated as many as 8.3 billion plastic straws pollute the world’s beaches.

However, eight million tons of plastic flow into the ocean every year, and straws comprise just 0.025 percent of that.

Bloomberg argues that giving up plastic straws may make you feel better about yourself, but will have little effect on ocean plastic. The news agency cites a recent survey  that found that at least 46 percent of the plastic in the oceans by weight comes from a single product: fishing nets. Other fishing gear makes up a good chunk of the rest. (Bloomberg suggests that all fishing gear should be marked with the name of the ship that uses it: a complicated and difficult solution that will take time to implement.)

Banning plastic straws, like taxing calorific soft drinks, is a simple response to a complex problem. Doing so enables politicians to say that they are doing something to solve a problem, whether it is plastic waste or obesity, but in reality they must know that their actions will have little impact.

So what is the solution to plastic waste—and what can the food and agriculture industry do to help? The answer is, as usual, complicated.

The BBC published this week an excellent analysis of the issues involved with plastic packaging in the food industry. They argue that although plastic is viewed as bad, “the shrink wrap used on cucumbers for instance, can more than double the length of time the vegetable can last, allowing it to be kept for up to 15 days in the fridge and cutting food waste in half.

The BBC adds,

“Much of the food we now buy in supermarkets comes tightly wrapped in sealed plastic films and protective trays. This keeps fresh meat in an oxygen-free atmosphere, helping to prevent it from spoiling. Delicate fruit and vegetables are also kept safe from bumps that can degrade them, meaning they’re more likely to be sold. Putting grapes in their own individual plastic boxes has been found to cut food waste by 75%.”

The BBC also looks at the environmental cost of replacing plastic drink bottles with glass ones. They write that “it is generally not that much more expensive to produce a glass bottle versus one made from PET – about $0.01 more, according to some analysis. 

“However, when manufacturers start transporting produce in glass bottles, costs start to rise. A 330ml plastic soft drink bottle contains around 18 grams of material while a glass bottle can weigh between 190g and 250g. Transporting drinks in the heavier containers requires 40% more energy, producing more polluting carbon dioxide as they do and increasing transport costs by up to five times per bottle.

As a result, some, including those the packaging industry, argue that in many cases plastics are actually better for the environment than the alternatives.

But what about plastic made from renewable sources? There again the answer is not a simple one.

Coca-Cola became a leader in bioplastics when two years ago they launched the PlantBottle,  partially made with Brazilian sugarcane. However just because they are made from renewable green sugarcane doesn’t mean the bottles are biodegradable or compostable. They have to be recycled, but they also have to be separated from PET in the recycling process, driving up the costs.

France is a leader in the use of biodegradable and home-compostable plastic bags in supermarkets, and in 2017 took partial steps to ban single-use plastic bags. France’s Environment Ministry estimates that before the ban 17 billion plastic bags were used in France each year. Of those, some five billion were handed out at check-outs and 12 billion were for fruit and veg. An average plastic bag takes one second to make, is used for roughly 20 minutes and takes up to 400 years to degrade naturally.

The example of France shows that real progress can be made if the political will is there, even if only by one small step at a time. Further comfort can be taken from the fact that with petrol prices rising, recycled plastic is actually cheaper than fresh, virgin plastic made from oil. A tonne of virgin PET costs around £1,000 while clear recycled PET costs just £158 per tonne.

We can all be part of the solution by drinking from a reusable bottle whenever we can, and by conscientiously recycling the PET bottles whenever we can’t. As for plastic straws, they have become a totem for the anti-plastic movement; they help to focus our attention on the issue. So don’t wimp out like I did last Saturday evening: refuse a plastic straw whenever it is offered to you.

And one last thing: please don’t take any plastic with you when you go to the beach this summer. I had enough of a panic attack already!

All images from pixabay under Creative Commons

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Palm oil – a complex problem

A report published last week by the International Union for the Conservation of Nature (IUCN) highlighted the way that the palm oil industry is encroaching on rainforest and endangering biodiversity.

However the IUCN also highlighted the little-reported point that alternative oil crops, such as soy, corn and rapeseed, require up to nine times as much land as palm. Palm oil provides a third of the world’s vegetable oil, from 10% of the land used for all oil crops. Switching to alternative crops could result in the destruction of wild habitat in other parts of the world, such as Brazil and Argentina.

The director general of the IUCN told The Guardian, “When you consider the disastrous impacts of palm oil on biodiversity from a global perspective, there are no simple solutions. If we ban or boycott it, other, more land-hungry oils will likely take its place.”

The IUCN report’s lead author added, “Palm oil is decimating south-east Asia’s rich diversity of species as it eats into swaths of tropical forest.” But, quoting US writer HL Mencken, he said, “For every complex problem there is an answer that is clear, simple, and wrong.”

The answer is to not to ban palm oil, but to make its production more sustainable. That is easy to say and difficult to do. Indeed, the IUCN report criticised current sustainability efforts, arguing that certified palm oil is little better than non-certified palm oil.

A spokeswoman for the Roundtable on Sustainable Palm Oil (RSPO), which certifies almost 20% of all palm oil, disagreed. She told The Guardian that, “While we acknowledge that the certification system is not perfect, it has made a real contribution against deforestation.” She added that the RSPO is currently strengthening its standards.

So here we have two of the ten factors that Hans Gosling highlighted in his recent book Factfulness: Ten reasons we’re wrong about the world—and why things are better than you think. First, things are more complicated than they seem. Second, they are not perfect, but they are getting better.

An example of that second point can be found in the slowdown of soybean expansion in the Amazon basin following a moratorium by trading and food companies  on purchases of soybeans from newly deforested land. The annual rate of deforestation for soybeans in monitored municipalities has fallen 85 percent since 2008 and has accounted for only 1.2 percent of total cutting in the Amazon region in the period.

According to Greenpeace, the moratorium shows that zero deforestation is a possible pledge, and that similar protection should be expanded to other areas facing destruction.

The problem, of course, is that we still have to feed the world’s growing population. Agricultural expansion is the single largest driver of biodiversity loss, and it makes sense on a global scale to increase yields from existing areas rather than expand into new areas. This can be done by improving seeds, breeds and processes, or by planting more efficient crops.

As the IUCN study admits, a hectare of palm oil trees produces roughly 4,000 kg of oil per year, while a hectare of soybeans produces only 475 kg. (Cynics might argue that it is this difference in yields, and hence costs, that is driving the western world’s anti-palm oil lobby, not concern over biodiversity loss.)

Looking at different crops in terms of calories, palm is one of the most efficient at 3,520 calories per square metre, just behind sugar beet at 3,652 calories per square metres, but ahead of sugarcane at 2,781 calories. So if you really needed to feed the world, you would cover the planet with those three crops.

Of course nothing is that simple. First, calories alone are not enough: the body also needs proteins, vitamins, fibre and micronutrients. (Although my kids might disagree, you cannot live on Nutella alone.) Second, those three crops aren’t suitable for all climates; they don’t grow everywhere. Third, as the Irish potato famine showed us, monoculture can be extremely risky.

However there is a fourth issue here: fairness. The IUCN estimates the total area of industrial scale palm oil plantations at 18.7m hectares, with smallholder plantations taking the total to 25m hectares. This means that smallholder farmers grow about one quarter of all palm oil. Those smallholder farmers are no different from any of us; they are simply looking to provide for their families and ensure a better future for their children. It is difficult to tell them that they can’t do that.

In his book, Hans Gosling warns against another human instinct: to always blame someone when something goes wrong. Just as polar bears have become the totem of global warming, orang utans have become the totem of all that is wrong with palm oil. But unlike polar bears, whose numbers are increasing, Borneo’s orang utan population has fallen by an estimated 150,000 in the past 16 years.

The IUCN estimates that most of that decline has been caused by hunting, rather than through habitat loss as a result of agricultural encroachment. (There is an argument that agricultural expansion is bringing humans into closer contact with wildlife, and and that it is this that has lead to an increase in hunting.)

All in all, if you were to ask your friends and neighbours why orang utans are dying out, they will blame palm oil. If the palm oil industry wants to win back the hearts and minds of the world’s consumers, they will need to work with the local population to reverse that decline in the orang utan population.

As one of the coauthors of the IUCN report said, “We need to work with people to help them understand that orang utans are not dangerous and that it’s illegal to kill them. We know this decline has been largely due to hunting, and if we can turn that around, these orang utans could, over a long period, bounce back. When you lost the habitat, it’s gone forever, but the forests are still there. If we can stop the hunting and killing, we can reverse the trend.”

The conclusion has to be that boycotting palm oil is not a solution to the problem of biodiversity loss; it may in fact displace and aggravate it. The only (horribly complex) solution is to work with bodies such as the RSPO to improve sustainability, to help smallholder families lead better lives without cutting down virgin forest, and to educate the local population not to kill protected wildlife. The solutions are as difficult as the problems are complex, but they are nonetheless urgent.

Images from Pixabay under creative commons

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Are commodities a zero sum game?

A close friend (and ex-trader) recently contacted me to argue that unlike services or many manufacturing industries the supply chain for commodities is a zero-sum game. The market fixes the price of the end product, so if one participant in a supply chain makes more money, someone else in the supply chain has to make less. The same applies to market share. As demand is static, or at best growing very slowly, if one producer sells more, another must sell less.

It is an interesting point. Everyone in a commodity supply chain is a price taker—they have to take whatever margin the market allows them. They only way they can make a bigger margin would be to use their market power to squeeze other supply chain participants in order that they make less. And, argues my friend, widespread communication, instant information, and all the other things that I have written about in the past, have reduced the market power of the agricultural trade houses. As a result, they now capture a smaller share of the margins in the chain.

This would probably change if the supply chain was disrupted for external reasons, such as crop failure, natural disaster, or war (whether armed or trade), but as the CEO of Cargill said a couple of weeks back, it is no longer enough to “rely on the occasional crop failure, export ban, or supply shortage to save the day.”

If we accept that a commodity supply chain is a zero sum game, there is a way of increasing your margins without taking money from your suppliers and clients: you can do it by cutting your costs. This can be done in a number of ways.

Cutting labour costs is often (usually) a company’s first response to margin pressure. Reducing headcount can do this, making the remaining employees work harder or more efficiently. Reducing salaries or, in the case of traders, bonuses is another option.

Companies can reduce costs by outsourcing specific tasks in the hope that other companies will be able to perform a function more cheaply that they can. (We saw this recently with Bunge closing their sugar trading department and letting other trade houses merchandise their production.)

Innovation, either in processes or technology, can help companies reduce labour costs and gain efficiency. Obvious examples include better communication between offices, data handling in offices, and mechanization (including robots) in manufacturing and handling. There is no reason to think that innovation will suddenly end. Indeed there is reason to think that the trend will accelerate, (for example blockchain and AI), enabling further cost reduction along the supply chain.

Farming is the one part of the agricultural supply chain that has probably benefited the most from innovation and technology. Hybrid seeds, more efficient farm machinery, improved pesticides and insecticides, as well as drone and GPS technology have all helped to reduce costs.

Economies of scale are a common source of cost reduction; building a one million tonne commodity processing plant or port loading facility will not cost twice as much as building a 500,000 tonne one. However the best way to reduce unit costs is to increase throughput; make sure that the capacity you have built is being used to its maximum.

Lastly, and this in the interest of everyone, companies can cut cost by reducing waste. The UN estimates that food waste and crop losses amount to close to one trillion dollars each year. That is a huge cost not just to the environment but also to the agricultural supply chain. Even making small inroads into that waste could significantly benefit the profitability of supply chain actors.

In a zero sum supply chain, the only way to increase your profits without picking others’ pockets is by reducing your costs. Unfortunately, what may work for an individual company (or farmer) may not work collectively.

One farmer can take advantage of innovation and technology to grow the same size crop from a smaller area, but his instinct will be to plant all his available land and produce more. To capture economies of scale a processor will build a mega-plant, and to reduce his unit costs he will look to maximize throughput. And, obviously, any success in reducing wastage will also increase available food supply.

There is therefore a tendency for cost cutting in a commodity supply chain to lead to increased supply. And increased supply usually results in lower prices. Acting alone, an individual player in the supply chain may be able to increase his margins by cutting costs. However, if everyone does it, the resulting extra production could result in a fall in price that negates the costs saved.

Looking at this in another way, economic theory tells us that the price of any particular commodity is, in the long term, determined by the marginal cost of production of that commodity’s most efficient producer. The more efficient the producer, the lower the cost.

Or looking at it from yet another angle, you have to ask, “Who has the market power?” If you are talking about Apple, it is the producer. If you talk about apples, it is the consumer. Where there is no product differentiation—and there is none in commodities—the market power lies with the consumer and not the producer.

Transforming commodities into ingredients can shift market power from consumers to producers. Some commodities, such as coffee and cocoa, are already losing their commodity status and are differentiated by origin. End-consumers are already willing to pay more for gluten-free, or lactose-free, or organic, or non-genetically modified, or locally produced food. And the big brands are willing to pay more (hopefully) for specific food varieties that fit their particular recipes.

That takes us back nicely to the beginning of this blog. Cost cutting can help restore margins for individual participants in the food supply industry, but it is not a solution for the supply-chain as a whole. The only way for the food supply chain to restore margins is by recapturing the market power that they have lost over recent decades. Crop failures or other disruptions would do that in the short term, but product differentiation is the only solution in the long term.

Image courtesy of Pixabay under creative commons

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Factfullness: Sugar and Obesity

“We find simple ideas very attractive. We enjoy the moment of insight, we enjoy feeling we really understand or know something. And it is easy to take off down the slippery slope, from one attention grabbing simple idea to a feeling that this idea beautifully explains, or is the beautiful solution for, lots of other things. The world becomes simple. All problems have a simple cause—something we must always be completely against.

Or all problems have a simple solution—something we must always be for. Everything is simple. There’s just one small issue. We completely misunderstand the world. I call this preference for single causes and single solutions the single perspective instinct.”

So wrote Hans Rosling in his brilliant book, Factfulness: Ten Reasons Why We’re Wrong About the World—And Why Things Are Better Than You Think.

Obesity is one area where we are all looking for a simple solution to a serious problem. One food product, sugar, is singled out as the cause of obesity; reducing sugar consumption, or giving it up altogether, is seen as the simple solution.

Most health scientists admit that obesity is more complex than just excessive sugar consumption. Public Health England demonstrates the complexity of the problem of obesity with this “simple” representation of its causes on its website.

Meanwhile, the US Center for Disease Control writes: “There is no single or simple solution to the obesity epidemic. It’s a complex problem and there has to be a multifaceted approach. Policy makers, state and local organizations, business and community leaders, school, childcare and healthcare professionals, and individuals must work together to create an environment that supports a healthy lifestyle.”

The sugar industry argues that sugar is a calorie like all others, and that obesity is caused by excessive calorie consumption compared to physical activity. But what does the data say about calorie consumption?

In the UK, the Department for Environment, Food and Rural Affairs (DEFRA) has carried out annual surveys of the British diet since 1974. Their data shows that there has been a significant decline in UK daily per capita calorie consumption in the last forty years, from 2,534 in 1974 to 1,990 in 2012. This represents a decrease of 21.5 per cent.

What about sugar: has consumption also fallen? The DEFRA survey showed a 16 per cent decline in the consumption of ‘total sugars’ since 1992. Meanwhile, the Institute of Economic Affairs found that in the period 2002 to 2014, sugar consumption fell 7.4 per cent. Meanwhile, research carried out in 2014 by Czarnikow (a consultancy) found that UK sugar consumption peaked at 53 kg/head in 1957, dropped to 48.5 kg by1970 and has since fallen to 35kg/head.

This chart shows the reality of the situation in the US: obesity has risen while per capita calorific sweetener consumption has fallen.

In his book Mr Rosling warns,

“Being always in favour or always against any particular idea makes you blind to information that doesn’t fit your perspective…Constantly test your favourite ideas for weaknesses. Be humble about the extent of your expertise. Be curious about new information that doesn’t fit, and information from other fields.”

In a later chapter Mr Rosling writes about the human need to attribute blame—to always find a (usually evil) culprit. He calls it “The Blame Instinct” and defines it as, “the instinct to find a clear, simple reason for why something bad has happened.” He continues,

“It seems that it comes very naturally for us to decide that when things go wrong, it must be because of some bad individual with bad intentions. We like to believe that things happen because someone wanted them to, that individuals have power and agency; otherwise, the world feels unpredictable, confusing and frightening.

“This instinct to find a guilty party derails our ability to develop a true, fact based understanding of the world; it steals our focus as we obsess about someone to blame, then blocks our learning because once we have decided who to punch in the face we stop looking for explanations elsewhere.  

“This undermines our ability to solve the problem…because we are stuck with over-simplistic finger pointing, which distracts us from the more complex truth, and prevents us from focusing our energy in the right places.

In 2016, the Journal of the American Medical Association published a peer-reviewed article that alleged that the sugar industry had subverted health science during the 1950s and 1960s. The article received wide media attention and reinforced the public’s impression of the sugar industry as “evil”, on par with the tobacco industry.

Ask your friends and neighbours what they think about sugar and they will tell you that the world is getting fatter because sugar consumption is increasing, and that this is all the fault of the evil sugar industry. It is a simple explanation for an exceeding complex issue, with someone (evil) to blame.

I will leave the last word to Hans Gosling,

“If you really want to change the world, you have to understand how it actually works and forget about punching anyone in the face.”

Sugar photos from pixabay under creative commons

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Things are better than you think

In his book “Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think”, Hans Rosling argues that although the world is far from perfect, real progress is being made. Things are bad, but they are getting better.

He writes,

“None of us has enough mental capacity to consume all the information out there. The question is, what part are we processing and how did it get selected? And what part are we ignoring?”

We all know that keeping mankind fed is one of the main causes of environmental degradation, and it is commonly accepted that the situation will only get worse as the world’s population increases.

However, although the first part of that statement is true (things are bad), genuine progress is being made in making it less so (things are getting better). That change is occurring within the supply chain, led by companies that are making a genuine impact in how your food is produced, and how it arrives on your plate.

So in case you screened out some of the good news, here are a couple of positive articles that have been published in the past week.

The first, published by Food Navigator, is entitled, “Why Mars thinks the commodities era is over”. It is an interview with Barry Parkin, the chief procurement and sustainability officer at Mars. The very fact that the head of procurement for Mars is also head of sustainability is good news in itself – and should give a clue as to where our business is heading (but more on that later).

Mars is at the forefront of change in terms of sustainable procurement and has mapped the origin of 23 different raw materials used in their products. The company buys either directly or indirectly from around one million farmers, half of which are smallholders. Parkin tells Food Navigator,

“We are in a transparency race. As a company we had better find out where our materials are coming from, and under what social and environmental conditions they are being produced. We need to get working on fixing it before somebody else tells us what is going on. I want to be on the front foot in this race. I want to win this race.”

Palm oil is one of the hottest issues in food production at the moment with a wide supply base. Mars buys only 0.2% of the world’s palm oil supply but is connected to “half” the palm oil mills in the world, more than 1,500 mills. The company has realized that they cannot “be on top of all the conditions in all those mills, each of which is probably connected to 20 plantations” and realizes that it needs to simplify its supply chain if it wants to really know what is going on.

Wilmar International Limited, the world’s biggest processor and merchandiser of palm oil, cannot simplify its supply chain, but it is in a fairly unique position (because of its market share) to influence the way palm is grown and harvested. The company aims to “to meet demand for certified sustainable palm oil by ensuring all suppliers become sustainable”. To further this goal the company has developed an online reporting tool to assess its suppliers in Malaysia, and plans to extend it to Indonesia and Latin America.

The company’s focus on sustainability is paying off not only in terms of brand protection, it is also lowering their cost of borrowing. Last week Singapore’s OCBC Bank announced that the interest rate on their existing US$200 million (S$267 million) revolving credit facility to Wilmar International will now be pegged to Wilmar’s sustainability performance.

But how will this affect the traditional agricultural trading houses? Better for some people may be worse for others. Barry Parkin warns

“You can no longer buy at arm’s length from unknown suppliers. You can no longer buy on price.”

 He adds,

“This is the end of the commodities era. Commodities were all about buying materials of unknown origin, on short-term contracts, with price being the only differentiator. What we now know is there are big differences in terms of the social and environmental impacts of what you source. It is no longer acceptable not to know where your materials are from. There are going to be very different sourcing models in the future.”

Bloomberg last week published an excellent “long read” on Cargill, and how the company is adapting to both technology and changing consumer demands. According to Bloomberg, Cargill Chief Executive Officer David MacLennan is transforming Cargill into “less of a trading operation and more of an integrated food company betting on growing global demand for proteins.”

Bloomberg continues,

“MacLennan, who became CEO in 2013, says he decided three years ago that the company could no longer rely on the occasional crop failure, export ban, or supply shortage to save the day. “I thought, Boy, if we wait for something to change without disrupting ourselves, we’ll be in trouble,” he says. “What’s that old adage? You put a frog in a pot of water and slowly turn up the heat, and the frog doesn’t notice it’s been boiled. I didn’t want to be the frog in the boiling water.”

No one wants to be the frog in boiling water, but the real question is “How do you get out of the pot once you are in it?” There is no clear answer to that question, but as Mr MacLennan realized, the most important first step is to realize that you are in hot water in the first place.

The second is to do what Wilmar is doing: map your supply chain and work to make sure that all your suppliers are sustainable. If all food were produced in a sustainable way the “tradeability versus traceability” dichotomy would go away.

So we know where we have to go. Let’s get going!

All photos sourced under creative commons from Pixabay

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As old as the hills

A friend recently sent me a link to one of the UK’s earliest-recorded “Commodity Conversations” – a letter sent by a certain Octavius to his brother Candidus in around AD 100. The letter is part of the Vindolanda tablets, a rich source of information about life on the northern frontier of Roman Britain. Written on fragments of thin, postcard sized wooden leaf-tablets with carbon-based ink, the tablets date to the 1st and 2nd centuries AD (roughly contemporary with Hadrian’s Wall – photo above).

The documents record official military matters as well as personal messages to and from members of the garrison of Vindolanda (photo below), their families, and their slaves. Highlights of the tablets include an invitation to a birthday party held in about 100 AD, which is perhaps the oldest surviving document written in Latin by a woman.

In his letter, Octavius uses a variety of financial idioms and a few technical terms. The letter shows entrepreneurial initiative; the sums of money and goods mentioned are significant. The two brothers are involved in the supply of goods, mainly animal hides and grains, to the military. There is no way of knowing whether Octavius is a civilian entrepreneur and merchant, or a military officer responsible for organising supplies for the Vindolanda garrison.

The letter refers to credit arrangements, evidence for the operation of a cash economy. He writes,

“I have several times written to you that I have bought about five thousand modii of ears of grain, on account of which I need cash. Unless you send me some cash, at least five hundred denarii, the result will be that I shall lose what I have laid out as a deposit, about three hundred denarii, and I shall be embarrassed. So, I ask you, send me some cash as soon as possible.”

He instructs his brother to

“See with Tertius about the 8½ denarii which he received from Fatalis. He has not credited them to my account. Know that I have completed the 170 hides and I have 119 modii of threshed bracis. Make sure that you send me cash so that I may have ears of grain on the threshing-floor. Moreover, I have already finished threshing all that I had.

He then writes about what appears to be a customer default,

A messmate of our friend Frontius has been here. He was wanting me to allocate (?) him hides and that being so, was ready to give cash. I told him I would give him the hides by 1 March. He decided that he would come on 13 January. He did not turn up nor did he take any trouble to obtain them since he had hides. If he had given the cash, I would have given him them.

As I wrote in my book, Commodity Conversations, commodity trading is much older than the Roman Empire:

In ancient Mesopotamia, around 1750 BC, the sixth Babylonian king, Hammurabi, created one of the first legal codes: the Code of Hammurabi. The code allowed for goods and assets to be sold for an agreed price for delivery at a future date. The code required contracts to be in writing and witnessed and allowed those contracts to be sold or assigned to others. This is the first recorded incidence of derivatives, in the form of forward and futures contracts, with trading carried out in the temples.

A few years back, Greg Page, at that time the executive chairman of Cargill, spoke at the FT Commodity Conference in Lausanne. He quoted Libanius, a Greek teacher of rhetoric, from his Orations III, written in the fourth century,

God did not bestow all products on all parts of the earth, but distributed his gifts over the different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so he called commerce in to being, that all men might be able to have common enjoyment of the fruits of earth, no matter where produced.

Greg continued with his own view of the commodity business,

“Trading, or exchanging goods, has long underpinned human progress, and the interdependence that comes from trading creates the real capacity to raise living standards. Trading across national boundaries is a necessity, not a luxury, if the world wants to better serve the needs of its citizens. And as we face a global population reaching nine billion by midcentury, an even greater proportion of the world’s food will need to move across oceans to feed the people. National self-sufficiency in food will not suffice. Trading has always been important and will always continue to be so.”

There is not much I can add to that!