Category: Blog

Good morning, Dave. Could you tell me a little about yourself and your background in commodity trading?

In 2004, I joined Cargill’s pension fund management team at their headquarters in Minneapolis, Minnesota. In 2010, I moved to Cargill’s grain trading group in Geneva to help build what they called their Non-Fundamental Analysis (NFA) group.

I founded Peak Trading & Research in 2018 as a quantitative agricultural research and trading company, where I’m currently the Head of Research.

How do non-fundamentals affect the markets?

The contract price will always converge with the cash (physical commodity) price when a futures contract expires. However, as a percentage of market participation, the number of players who use futures to source or deliver cash is decreasing. At the same time, the total number of players trading non-fundamental inputs has increased.

Until they expire, futures contracts will often make significant moves based on non-fundamental factors such as macroeconomic data and momentum trader flows.

You may be bearish based on your S&D balance sheet. Still, the macro-economic environment may be bullish – it’s challenging to stay short if crude oil is going up, the dollar is down, and inflation expectations are rising. You also need to take seasonal factors into account. Is it a time of year when prices typically move higher? You must also look at momentum; is it pointing upwards?

What does every fundamental trader need on their non-fundamental dashboard?

We refer to the non-fundamental price drivers in agriculture markets are the “Four Ms”: Monthly seasonality, Macro, Momentum, and Market Structure.

Agricultural markets have strong seasonal price patterns. Every commodity is different, but we see predictable and consistent seasonal patterns across most grains, oilseeds, meats, and softs.

Macro-flows are critical for agricultural markets: macroeconomic data, central bank policies, currencies, and energy, particularly crude oil.

Momentum is our third M. Many hedge funds focus on momentum as a reason to get into or out of markets. They try to catch the big moves, especially at the front edge of the futures curve. Momentum traders try to stick to the most liquid part of the curve.

Market structure is our fourth M. Fundamental traders must be aware of the Commitment of Traders (COT) reports showing how market players like hedge and index funds are positioned. Are they over-extended, either long or short? How vulnerable are those positions, given what prices are currently doing? Will we see a long liquidation, or, if they are short, will we see a short squeeze?

Can a fundamental trader be successful now just trading fundamentals?

It isn’t easy. Markets see cash convergence at expiry, but in the meantime, futures are increasingly following non-fundamental inputs. Traders who trade non-fundamentals continue to attract capital and are having more impact on our markets.

There’s a lot of focus on inflation right now – how is that affecting the markets?

The easy money is probably behind us. The Fed has announced that it will start tapering, winding down its Quantitative Easing (QE) purchases. We could have hikes in interest rates in the middle of 2022. Central banks are now actively working against inflation. It doesn’t mean that inflation can’t continue. One year ago, central banks were trying to manufacture inflation. They are now slowly shifting to capping inflation. Over time it will take some wind out of the sails of this supercycle story.

What would you put on a macroeconomic dashboard for agriculture traders?

Every trader should watch the US dollar and Crude Oil.

For the US dollar, we often say, ‘US dollar up = Ags down.’ Most of our markets are dollar-denominated, and changes in the dollar can impact the competitiveness of US products. A strong dollar encourages origin selling and acreage expansion while making US products less competitive.

Crude oil also matters for the ag markets. Strong energy markets ripple through the ags in many ways: higher fertiliser prices, production costs, transportation costs, etc. Then there are the secondary impacts like hedge funds buying futures because crude oil is going up. Energy market strength lifts ag futures prices in many different ways.

Beyond crude oil and the dollar, it’s essential to watch US and Chinese stock markets, commodity currencies like the Canadian and Australian dollar and the Russian rouble, bond and inflation markets.

What you have on your dashboard depends on the market you trade. Every commodity has its unique set of macro indicators.

And these macro indicators change over time. You must look at correlations and see which macro indicators move which market. Soybean traders currently watch fertiliser prices, propane, and natural gas. Five years ago, they watched Chinese rebar prices as a good proxy for Chinese growth expectations and soybean import demand.

Do physical traders still have an advantage?

Physical traders have a massive advantage if they work in trading houses where they can trade the various arbitrages available to them. They are beginning to understand how these new market participants operate and are learning to complement their views with non-fundamental inputs. It is absolutely a move in the right direction.

If they haven’t done so, every trader should build out a dashboard of non-fundamental trading inputs that matter for their market. Every market is different. Sugar has strong seasonality. Lean hogs are an excellent breakout market. Cocoa is mean-reverting. Bean oil trades all these macro flows. Work out which non-fundamental factors are essential in your commodity, and then follow them like a hawk!

Thank you, Dave, for your time and comments.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

 

by Wouter Jacobs – Erasmus University

In their book, The World for Sale, published in 2021, Bloomberg reporters Jack Farchy and Javier Blas documented in rich detail the evolution of global commodity markets during the late twentieth century. They made explicit the modern-day commodity trading firm and the practices of their top-dog traders and executives. The crux of their analysis is that traders “go where no one else would go”. It is a trait that resonates with the characteristics of the merchant trader from an earlier era. Still, it remains a critical human-based skill in our current period dominated by Big Tech, Big Data, and Artificial Intelligence (AI)-based machine learning.

However, the ongoing financialisation of commodity markets, digitalisation, the quest for sustainability and inclusion, the emergence of decentralised and alternative forms of finance, the decommodification of supply chains and when or how to navigate the geopolitical and macro-economic restructuring of the world economy are all changes that require commodity trading firms (CTFs) to integrate new skills and mindsets.

CTFs need more analytics and more analysts to synthesise the increased amount of data points to inform decision making and trading strategies.

CTFs need to install compliance, due diligence, and Know Your Client (KYC) protocols to meet the demands of regulators, financiers, and the public. These protocols can be expensive, and they can constrain the intrinsic capability of a company’s traders to go where no one else would go.

CTFs need to take the time, effort, and leadership to incorporate sustainability into their company’s DNA. It requires specific skillsets to monitor and report on Sustainable Development Goals (SDGs) with nitty-gritty detail, such as the amount of water used per plantation or the carbon exposures of a particular trade. It may require a public relations office protocol and narrative to deal with any criticisms. It may require strategies to maintain a local license to operate and a moral compass.

Finally, CTFs need to digitalise their operations to synthesise complex information. Adopting information technology has been critical for commodity trading, but CTFs are not leaders in the space. Some struggle to define and optimise their digitisation needs to adapt to the rapid emergence of decentralised platforms for exchange, finance, and post-trade execution.  

Given all these changes and the specific demands for skillsets, CTFs need to develop what Berkeley university professor and business guru David Teece has referred to as dynamic capabilities. Dynamic capabilities refer to the ability to sense, seize, and transform.

Sensing refers to scanning the business environment and identifying new opportunities that emerge from new technology. CTFs must seize any opportunities and translate them into their business model and adapt it accordingly. CTFs can encourage sensing through scenario planning and actively scouting for opportunities.

Seizing is more complicated. It requires clever re-combinations of existing competencies, such as rapidly prototyping new technologies into the workflows. An example of this was when some CTFs first ran in-house pilot projects on blockchain before joining a platform. Another (digital) seizing strategy is to consider lean start-up methodologies.  An example is Farmer Connect, founded by Sucafina’s head of trading, David Behrends.

Transforming is the most complex. It sometimes requires a wholescale redesign of its business model, asset portfolio, routines and competencies while insourcing entirely new or related skillsets. Internal shaping might involve – as Olam has recently done – an organisational separation of business lines. External shaping might include investing in universities’ education and training programmes or B2B platforms and digital ecosystems.

The Covantis platform, in which the ABCDs, Viterra and Cofco took the lead, is an example of the latter. Its scale and incumbent support can capture ‘network effects’ and dominate the market quickly, similar to other platforms (e.g., Netflix, Uber, Airbnb) in different markets and industries. While Covantis is now about trade execution, it may evolve into something more commercial. Be that as it may, it is not unthinkable that new platforms might even displace many of the intermediacy benefits of individual CTFs.

Finally, dynamic capabilities require managers to overcome company-internal barriers to novelty while designing governance structures and a business culture that enables adaption or business transformation. Often periods of crisis, low profitability or the risk of a hostile takeover can act as wake-up calls and remove internal barriers to change.

The archetypical successful trader goes where no one else would go. This risk appetite, combined with an intermediate position that captures value from information asymmetry within global supply chains, still defines a CTF’s business model.

But the amount of information upon which to act has increased exponentially. CTFs have increased their analytics teams accordingly. The larger companies have invested in technical analysis and quant-based trading modelling and strategies, predictive analytics, etc., while internally optimising their data systems. They have added new skill sets to the company, which do not involve ‘going where no one else would go’ in the traditional sense.

However, ‘going where no one else would go’ still matters in a world defined by digital apps and algorithmic machine learning.  It may matter even more in the future, although with a smaller physical presence than in the past. Understanding and appreciating local circumstances, cultural conventions, and languages is necessary for building trust and relationships.

‘Going where no one else would go can give you an informational edge that no algo (still) could grasp’.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

Good morning, Michiel. Could you please tell me how you got involved in the cocoa business?

After leaving Cranfield, I worked for a Dutch company exporting agricultural products, mainly frozen vegetables, to Spain and Portugal. I stayed in food marketing and distribution, working in the UK, Spain, and France before accepting a position with ADM, marketing their cocoa products into Southern Europe. I already knew all the buyers and understood food systems, so it was a great fit. Technically speaking, cocoa powder, cocoa butter and liquor are all food ingredients with specific attributes.

In 2007, I migrated from sales to trading and became director of trading and manager West Africa.  Trading cocoa was increasingly about what we now call sustainability, and I worked closely with the Sustainability Director until he left in 2011. I took over his role, shedding my previous trading responsibilities, but remained in contact with clients on sustainability issues. I represented ADM Cocoa in many initiatives, steering committees and working groups.

Why did you found FarmStrong?

ADM decided to get out of cocoa; it didn’t fit well with their other commodity trading businesses at that time. It took time to find buyers. Cargill eventually bought the chocolate assets, while Olam bought the cocoa processing, grinding, and pressing.

In 2015, I left ADM and started FarmStrong to have the independence to advise trading companies looking to make their supply chains more sustainable. The French commodity trading company Sucden was an early customer and supporter.

What does FarmStrong do?

We design sustainability programmes for most of the significant international chocolate manufacturers and some smaller family businesses. We also currently run two programmes partly financed by the Swiss government. We do some work with UN agencies, developing and scaling up their environmental interventions. We also receive UN support to scale our programmes. We are a non-for-profit recognised by the Swiss federal government for its work in the public interest.

Our programmes include training in good agricultural practices, but agriculture is not necessarily the most significant problem farmers face. The cocoa tree is not the problem. The most important issues that farmers, families, communities face are health, nutrition, education, security, and poor infrastructure.

Why have the chocolate companies failed to eradicate child labour from their supply chains?

The NGOs put pressure on the chocolate companies to eradicate child labour, but independent research has shown that it hasn’t worked even in their narrow supply chains. Chocolate companies can do more, but they can’t solve the problem on their own.

The fact that child labour exists in West Africa has nothing to do with cocoa. Child labour is still widespread regardless of the crop that the farmers are growing. It is a correlation, not causation.

One of the biggest problems is that many children in the Ivory Coast do not officially exist. They don’t have birth certificates or registration documents. Their (grand) parents immigrated and never went through any registration process. A child cannot go to school in Ivory Coast without a birth certificate, and they can’t get a birth certificate if their parents don’t have an ID. It is difficult to get an ID if you don’t have a birth certificate or are not registered.

Sometimes local schools allow unregistered children to attend classes, but as soon as they are twelve years old, they must take an exam to move on to secondary school. They can’t take the exam unless they show they have a birth certificate or are officially registered. So, their schooling ends at 12 years old, and they work on their parents’ farms. Sitting at home is not an option.

The sector is facing enormous challenges. What is to be done?

Chocolate companies, trade houses, governments and the public are putting massive amounts of money into cocoa, channelling it at a high cost into aid agency programmes. These programmes are well-intentioned but largely ineffective. Independent research shows that they had little impact for the last 20 years.

If you want to improve cocoa farmers’ livelihoods, don’t help them grow more cocoa.  Encourage them instead to grow more food crops that they can either eat or sell locally. And acknowledge their issues around health, nutrition, education, registration of births and land.

Thank you, Michiel, for your time and input. 

© Commodity Conversations ® 2022

This is a short extract from my next book Commodity Crops & The Merchants Who Trade Them – available now on Amazon.

Good morning, Paul. First, tell me how you ended up trading palm oil in Singapore.

I worked for Cargill until 2013, when I joined Golden Agri-Resources (GAR), where I am now head of global vegetable oil and oilseeds.

 Palm oil differs from other commodities because the top traders are producers. Why is that?

Several things differentiate palm from many of the competing food crops. First, you must wait four years before the trees reach an age where they bear fruit. It’s a substantial upfront cash investment with no returns for those early years.

Second, no government subsidies exist, unlike the significant taxpayer-funded contributions paid to European and American farmers.

Third, once the trees mature, harvesting occurs every two to three weeks.

Given the size of the upstream investment and the need to ensure a home for the product year-round, many producers felt the need to control their destiny by vertically integrating into processing, trading, and distribution.

How important are physical assets in trading palm oil?

You don’t need physical assets to trade palm oil. Plenty of liquidity exists in the Dalian futures market in China and the BMD in Malaysia. However, assets are necessary if you want to be involved in the physical movement of palm oil. End users are increasingly demanding. They rightly insist that their suppliers control their supply chain at every step of the process. It is not just about sustainability but also about food quality.

 People talk about palm oil plantations, but what percentage of world supply is produced by smallholders versus large companies?

At least three million smallholders worldwide make a living (or part of a living) from oil palm; they produce more than 41 per cent of the world’s palm oil. Even though smallholders are a vital part of the palm supply chain, they are frequently ignored in the palm story. The focus is inevitably on the more prominent actors like us. Our business relies on smallholders producing more and better-quality palm oil in line with sustainability requirements. It’s in our interests to help them get there.

The average income for palm oil farmers in Indonesia is $2,500 per hectare per year, compared to only $250 per hectare for rice. Palm oil contributes up to 60 per cent of income in rural areas in Indonesia. The palm oil sector has lifted millions of Indonesians out of poverty and has had a substantial impact on the welfare of rural communities by providing schools and clinics. Palm oil companies also provide and maintain critical infrastructure like roads, increasing connectivity and ease of access to previously remote rural areas

How do you react when people blame palm oil for deforestation?

Given the persistent negative stories and images linked to palm oil production, it’s easy to get defensive. Many of those images are highly emotive – orangutans fighting bulldozers come to mind. In most cases, these are images from the past. They do not reflect the amount of work the sector has done and continues to do to address deforestation.

Facts are on our side, but truth generally loses in a battle of reality versus emotive imagery.

But I’ll give you the facts. The most important one is that cattle farming causes the most deforestation worldwide. The World Resources Institute (WRI) has analysed satellite data and found that, from 2000 to 2015, cattle farming resulted in 45.1 million hectares of deforestation. During the same period, palm oil was far behind, responsible for 10.5 million hectares of deforestation.

For comparison, soy cultivation led to 8.5 million hectares of deforestation over that period. When you consider that virtually all soy goes to animal feed, meat production is responsible for 53.6 million hectares of deforestation during the period—more than five times more than palm production.

Compared to the meat industry, the palm oil sector has taken significant steps to combat deforestation. A combination of corporate and government policies has led to decreased deforestation in the palm oil supply chain, especially in the last five years.

What challenges does palm oil face in the future?

I would say there are three main challenges:

First, trade barriers effectively ban palm oil in specific markets – in Europe, the US, and elsewhere, where sustainability is used as a barrier to market access rather than an incentive for change. The palm sector faces regulatory barriers and shifting rules of engagement even though it has demonstrably done more than any other deforestation-linked commodity to address the issue. The EU’s REDII rules that take palm oil out of biofuels and ongoing due diligence regulation developments in critical markets could have a chilling effect on the progress made. It’s the opposite of what the industry needs.

The second challenge is a lack of manpower. Recruiting palm oil workers will get more complicated as younger people do not want to work on the land. Palm oil remains an incredibly labour-intensive industry. The manual nature of harvesting is hard work and less attractive to young people.

Third, climate change and extreme weather will increasingly impact palm oil production. Any agribusiness needs to factor in reducing its carbon emissions and developing carbon adaptation strategies.

Thank you, Paul, for your time and comments

© Commodity Conversations ® 2022

This is a brief excerpt from my new book, Commodity Crops & The Merchants Who Trade Them available now on Amazon

 

Good morning, Colin.  You are responsible for both cotton and sugar at Viterra. Are the two commodities similar?

Commodity traders tend to focus on the differences between their different commodities, but, ultimately, once you block out the technical language and focus on the concepts, they’re all the same.

Cotton and sugar are similar in how the trade houses get involved in the futures expiry process.  As a percentage of open interest, I suspect that the positions taken into the expiry – or in the case of cotton, into the notice period – are larger in sugar and cotton than in other agricultural commodities.

Sugar and cotton trading distils down to ‘What is your view on the spreads?’ Your view on the spreads will impact your opinion on the physical premiums. The two are interrelated.

What is the secret to making money in cotton trading?

If there is a secret, it is assessing value.

You can assess value in various ways. In terms of time spreads, the value of cotton may be too low relative to the future, and you can arbitrage that difference.  In terms of geographies, you can find dislocations in value across different regions. Essentially all we do is look at the value of something relative to everything else.  We try to pick out the outliers that are either over or undervalued and make it work. Trading is about assessing value. You must reduce every discussion down to what value am I measuring this against?

Do you trade spreads and differentials more than the flat price?

I like to trade the time spreads in cotton because time is our only consistent value benchmark.

I don’t like trading cotton flat price. When you trade sugar flat price, you get price points where things happen and the balance sheet changes. The best example is the optionality that the Brazilian mills have in whether to produce ethanol or sugar. You can look at the price of sugar compared to ethanol and make a robust case for the flat price to move higher or lower. You have a value anchor where a move in price changes the balance sheet.

We don’t have that in cotton.  Fundamentally, it doesn’t matter if cotton moves from 65 to 90 cents a pound. It doesn’t bring significantly more cotton into production. Nor does it change demand from the spinning mills in Vietnam or the price of jeans on a shelf in Walmart in Texas. Consequently, trading flat price in cotton is often an exercise in second-guessing sentiment.

What advice would you give to a young person beginning in the cotton trade?

Get involved in the physical commodity and understand the full implications of any trade. Once you make a sale, someone must create a shipping order, book containers, send people into the cotton fields to draw samples and test them. Someone must go to the bank to open a letter of credit. You must understand how all those things interact.

You don’t have to be an expert in everything, but you must talk knowledgeably about every aspect of trading. You must understand the implications of tweaking one part of a trade; what does it mean further down the chain?

You must also be comfortable with large amounts of data. The future of trading is in understanding and analysing data.  On the production side, it may be in interpreting satellite crop data. On the demand side, it may involve getting live feeds on point-of-sale volumes in retail outlets.  Data mining and analysis are becoming a crucial part of our market analysis. It is a huge opportunity.

Thank you, Colin, for your time and input!

© Commodity Conversations ® 2022

This is a short extract from my book Commodity Crops & The Merchants Who Trade Them available now on Amazon

Good morning, Todd. What’s your current position within Cargill?

I have a dual role. I have led Cargill’s global corn and ethanol trading activity for the last seven years, managing the worldwide teams. About one year ago, I also became managing director of our global grain business. That role goes beyond trading into the more commercial side of the company.

What is it that you like about the commodity trading business?

People usually explain commodity trading as a primary business that moves goods from surplus to deficit areas across time (carry) and place (dislocation) and form (processing). It may not sound like the most exciting thing, but it’s fascinating once you get into it.

There are many different aspects to trading and ways to approach it. I particularly enjoy the interaction with people, both customers and suppliers, that you get when you handle physical products, moving them along the supply chain. This personal interaction is an essential part of the business for me.

I also enjoy being involved in the shipping side, as well as leading teams, getting the best out of everyone, and mentoring teammates in their careers.

What gives you an edge both personally and as a company?

Collection, interpretation, and analysis of data are essential, but so too is teamwork.

What gives a team an edge?  Being competitive and hungry to win. What does that mean? It means that you’re gritty and creative, and you are constantly challenging and evaluating the situation around you, looking for opportunities.

Look at the analogy of a sports team, say a football team. A team plays together, works together, constantly looks for opportunities to score. At Cargill, teamwork is a vital part of our culture.

As a trader, you work in your own space, trying to leverage everything you can within that space, but your role is to contribute to the team’s success.  Teamwork is as essential in trading as it is in sports.

Whenever I talk to recruits, I emphasise the overlap between sports and trading.

What advice would you give to a young trader?

Don’t limit yourself to one product or one commodity. I would advise young traders to get to know and understand as many products and aspects of the business as they can. Gain experience across the space, across geographies and across products. Go as deep and as wide as you can and learn about as many commodities as you can.

During my career, I have traded both barge and ocean freight. This experience has been invaluable to me on the bean, corn, and veg-oil desks. You can’t trade commodities without understanding freight and logistics.

Likewise, my time on the vegoil desk has been invaluable when talking about or trading biofuels.

The approach to trading and the skill sets you need are similar across different products. There’s always a technical learning curve specific to each commodity, but your cross-commodity exposure will give you an edge as a trader.

Our ability to give traders experience over a range of commodities is one of Cargill’s strengths as a company.

What would be a likely career path for a young person joining Cargill today?

If you were to join Cargill, we would start with the business basics to understand what everyone else on the desk is discussing! We would also teach you the concepts and mechanics of supply and demand, logistics, freight, and risk management.

Most people will have some experience at a domestic regional location – in EMEA or the Americas – where you can learn and understand the basics of origination, where the supply chain starts.

That won’t be the path for everyone, but that’s how I started. Honestly, I think that if you want to learn something, you must go to the core, and origination is one of Cargill’s core businesses.

From then, your career will follow a natural pathway of growth and evolution of responsibility. You will go from talking local to regional markets, then on to a specific export market, entire geography and then global. It is not Cargill-specific; it is the general path a recruit would experience in big ag companies.

During your career, you will build your risk management skills and develop your risk tolerance and style. People sometimes believe they know their tolerance and style, but you only understand that through experience.

 What qualities are you looking for in a candidate?

I look first for a competitive team player.  You need to have a strong drive for results and equally want your teammates to win.  I’m also looking for someone with a creative side. I’m less interested in the specifics of past experience and more interested in their approach to things.  Do you seek challenges and like to find a solution for a puzzle?  I’m generally looking for that competitive edge combined with a creative side.

I am also looking for balance. Someone with an appetite and understanding for risk, balanced with the ability to manage that risk. I’m always looking for someone cool under pressure. The moment when everybody else is panicking is usually when an opportunity presents itself. That’s a complex characteristic to identify when you’re interviewing somebody, but it is something that I’m always looking for.

And the last thing is leadership. I believe that no matter what your role is, leadership is a high-value characteristic. How you manage yourself, how you interact with people, how you handle adversity. These are all relevant attributes for somebody running a commercial business, such as a trading desk.

Is there anything you would like to add?

Only to say that this business is awesome.

There are so many moving parts. What’s the future of EVs, the energy transition and renewable fuels, of China? I don’t know, but it excites the crap out of me that I don’t know. It’s my nature. It’s the nature of people we’re looking for, people who want the challenge to go figure it out.

Our industry is ever-changing, fast, and fascinating. Go for it!

Thank you, Todd, for your time and input!

© Commodity Conversations ® 2021

This is an extract from Commodity Crops & The Merchants Who Trade Them – available now on Amazon.

Good morning, Dave. Could you please tell me your current role?

I am the global head of trading and a partner at Sucafina.

What is the key to success in coffee trading?

To get to the top in physical trading, you must first master the fundamentals. Successful coffee traders have experience in operations and finance and understand research, balance sheets, costing structures – all the minutiae that make up our business.

Once you have that base, coffee is still a people business, so you need a certain charisma and an ability to work with people. You need to understand the complexities of what the more prominent brands want – what do you need to do on the sourcing side to meet your clients’ expectations today and tomorrow. Traders need foresight and vision. The business is evolving so rapidly that you will fall behind if you do not think about those things.

Today’s successful traders have more quantitative backgrounds than in the past; they understand and process data in a meaningful way more than trusting their gut instinct. They also need to be digital natives and have sustainability embedded into their DNA.

How important is coffee in terms of development?

Can coffee save the world? No, but we can improve farmer incomes for the 12.5 million coffee farms worldwide and remove some of the volatility inherent in the business. We can work towards better social and environmental practices. If we do that, we give our customers an additional reason to enjoy coffee, which drives more consumption and has an increased impact on the whole supply chain.

To what extent does traceability affect your ability to be a trader?

Traceability is fundamental to our business. If you go to a supermarket and pick up a product that doesn’t list the ingredients and nutritional information, you will probably put it back on the shelf. That is the way traceability is going. In the future, if you don’t know where a product comes from and its route to get to you, you won’t buy it. Not only that, but you also want to see the product’s environmental and social impact – you want to feel good purchasing it.

In a way, it de-commoditises the coffee supply chain. Different clients have different needs, and various producers harvest different coffees. As merchants, we are the bridge between the two.

We are also increasingly involved in prefinancing farmers, improving quality while reducing inputs within the supply chain. Increasing the visibility within the supply chain gives our clients greater confidence in buying from us. It moves us towards building long-lasting partnerships with producers and customers.

You were the founder and the driving force behind Farmer Connect. How is that going?

Farmer Connect is an end-to-end platform that allows participants to share traceability, price transparency and ESG data in a standardised way across the supply chain.

I am pleased with the progress so far. I never set out to be the founder of a tech start-up company. I was just a trader that believed in traceability – and I thought that traceability depended on data. There was no mechanism to get data from the farm to the consumer, and I felt we needed one.  However, when I spoke to brands and retailers, they constantly told me how hard it was to go into every supplier’s website and see the data presented in different formats.   Their big ask was that the industry rally around a standard solution.

Although I did help get Farmer Connect started, I am not involved in the day-to-day operations. I don’t want any conflicts of interest, and I genuinely hope that it can be a tool that benefits the entire industry, including competitors of Sucafina.  Farmer Connect has expanded now into cocoa and has quite a few conversations with other agriculture verticals, so I am pleased to see it become more than just a coffee traceability platform.

Additionally, brands using Farmer Connect have been pleased with their sales and consumer engagement.   For me, that further validates the voracious appetite consumers have to embrace new technologies and learn more about the products they love the most.

Thank you, Dave, for your time and input. 

© Commodity Conversations ® 2021

This is a short extract from my book Commodity Crops & The Merchants Who Trade Them – available soon.

 

Good morning, Soren. Could you please tell us what you have been doing since you left Bunge?

I left Bunge in June 2019 after six years as CEO and after 36 years in traditional agricultural trading and processing with Continental, Cargill, and Bunge. I am now trying to use my experience to help emerging companies across the full spectrum of the agricultural value chain.

What areas have attracted your attention?

I have focused on optimizing existing agriculture using modern technology: indoor agriculture, digital data around agriculture and food, natural rubber, micro-biological products that improve yields, carbon capture, and remote sensor equipment to monitor grain quality.

Aquaculture is perhaps also a piece that deserves special mention. Next to cultured meat grown in fermentation tanks, aquaculture is probably the most efficient way to transform feed into protein. It can make a very positive environmental impact as feed, sensor and data technology evolves further.

So too will indoor controlled agriculture, starting with leafy greens and quickly evolving into vegetables, fruits and berries. It is a sector undergoing a massive technological revolution, and it brings production closer to the consumer.

Over the past 75 years, the focus has been on increasing agricultural yields while at the same time reducing costs. It has been about growing enough calories. We still want to produce enough calories, but we now want to develop the right kind of calories in a way that doesn’t harm the environment, repairs the soil, and produces nutrient-dense food.

It is a new revolution: using technology to improve existing production techniques and regenerate soils. The goal is to harness the power of ‘Production Ag’ without all the adverse side effects.

The world is working to decarbonize the economy. Is that driving this new agricultural revolution?

Decarbonization is part of this new agricultural revolution, but there are other forces at work, all pointing in the same direction. For example, the demand for alternative proteins is driven by consumer preference for healthier food and concerns over animal welfare; it’s not just about carbon.

But it’s all moving in the same direction. Alternative protein was not created only because of a quest for decarbonization, but it’s part of the equation. You see this with new initiatives from the USDA and the new Green Deal in Europe. Both support the transition to the next stage of precision farming, where agriculture contributes to carbon capture or reduces farming’s negative impact on the environment. At the same time, it allows farmers ways to differentiate between the crops and products they produce.

I put indoor farming, genetics, data management, artificial intelligence, and robotics in the technology bucket. Am I missing something? 

I would certainly include soil health; it is almost a bucket on its own. Soil health is the key to unlocking many carbon initiatives and finding better ways to deploy and create plant nutrients.  The USDA and many companies are trying to figure out ways to monetize carbon captured under different farming practices and protocols. We must develop carbon capture standards. The USDA is best placed to do that, especially if it means financial incentives to allow farmers to change practices.

Carbon farming comes under the bullet of soil health. It is already happening but not yet at scale.  The scale will come with standards.

It seems that regenerative agriculture has a significant role to play.

There are – at least – two schools of thought on regenerative agriculture.

The first is where you let nature do its work, and you learn from the best practices that have been proven over the centuries. You don’t till. You plant cover crops.  You have farm animals that fertilize the ground, and you thoughtfully rotate them. It’s an integrated system where, over time, you create a healthy soil microbiome. Using modern equipment and data results in similar yields and possibly better profitability than you would get using traditional technology, chemicals, and fertilizers.

There’s another school of thought where regenerative agriculture means using all the tools in the toolbox. One tool might be CRISPR technology for seeds. Another might be advanced micro-ingredients for nutrient build-up in soil that can substitute for chemical fertilizers and eliminate some pesticides. It is about using technology to its fullest extent to improve soil health and capture carbon in a turbocharged way.

I think the result might be the same, but how you get there is vastly different. Big Ag is going for the second option, using every tool in the toolbox.

Big Ag faces a problem with consumers’ apprehension over and understanding of technology.  Consumer attitudes in the western world could ultimately prevent farmers from efficiently producing enough food to feed everybody and do it in a sustainable, healthy way. We need to find a way for the consumer, the farmer, and the technology providers to communicate and establish trust.

Thank you, Soren, for your time and input.

© Commodity Conversations ® 2021

This is a short extract from my upcoming book Commodity Crops & The Merchants Who Trade Them.

 

Raul Padilla is President, Global Operations, Bunge. He was previously CEO of Bunge South America, having served as Managing Director, Bunge Global Agribusiness and CEO, Bunge Product Lines since 2010. Bunge is the largest oilseed crusher in the world, with about 10 per cent of global capacity.

Good morning, Raul. Could you tell me how you got into commodities?

First of all, I have to tell you that this is a particular time for me. After 44 years in the business, I am taking my retirement at the end of this year.

I started my career in 1977 when I joined a trainee program with an André company in Argentina.  After an initial training period, I began as an assistant oilseed trader, working on trade execution, finance and shipping. I then became a soymeal trader on the domestic market. Later, I was in charge of the soybean oil exports to Latin America, after which I spent two years at André’s head office in Lausanne, Switzerland.

Did you stay with André?

I left André within a couple of years of returning to Argentina and moved to a locally owned oilseed crusher, Guipeba, as commercial director. In 1995 Ceval, a large Brazilian company bought Guipeba and, in 1997, Bunge bought Ceval.  It was almost a reverse-takeover. I became CEO of Bunge’s Argentine operations in 1998.

When did you join Bunge’s executive committee?

In 2001, when we did the IPO. At that time, we were a confederation of companies and countries that lacked structure. It made it difficult for everyone to work together. It became evident that we needed a marketing arm to bring together all our physical origination/production and destination operations.

We looked at various options, including merging with one of our competitors. We talked at length with Dreyfus, but we eventually decided that we would be better on our own. I helped A. Gwathmey, Bunge’s Ag. Product Line CEO at that time, put together a consolidated and central marketing arm. We opened trading offices in Geneva and elsewhere.

In 2010, I moved to White Plains to become responsible for Bunge’s agri-business segment, where I integrated the different divisions and companies within the company. I did that for four years, but I grew weary of the corporate side of the business. I like to run an operation and be part of the day-to-day action. So, in 2014, when the CEO of Bunge’s Brazilian operations (Pedro Parente) decided to leave the company, I asked to replace him.

Brazil is – and always has been – an essential piece of Bunge. It has been almost half of the company. In 2014 we had three divisions in Brazil: sugar, agribusiness, and food and ingredients.

Tell me a little about Bunge’s decision to go into sugarcane.

I was not in favour of Bunge going into sugar. I didn’t like it, not because I knew the sugar business, but because it made us farmers – and farming was not our business. Sugar is eighty per cent agriculture. Bunge is not an agricultural producer; it is a merchant and processor.

Anyway, that’s history, but I ended up being responsible for Bunge’s sugar and bioenergy operations until we merged it with BP in 2019. I continue to sit on the board.  We have a great partner in BP, and the team is doing an excellent job with the combined business.

Were the other businesses working well?

Our results were not what they should have been, and we decided we needed to make another adjustment. In 2017, we split operations into three regions: South America, North America, and Europe and Asia. I took the responsibility to integrate the South American functions. However, we were still not performing as well as the shareholders and we wanted.

So, at the end of 2018, we shook the tree again. Greg Heckman took over as CEO, and the company made changes in the board. Everyone knew that we had to do things differently. We had to change the way we were operating throughout the whole company. I like to describe it as ‘pushing the reset button’.

Does that mean you are now doing less trading and more merchandising?

We manage the mismatch between farmers selling and consumers buying. Addressing that mismatch forces us to have a market view. Sometimes the supply chain will give us a structural margin that we can lock in without thinking about it, but it doesn’t happen every day. There is risk in each of our supply chains. As part of our company reset, we have changed the way we managed risk.

Are physical assets important to trading?

They are essential. You need physical assets to receive, store and process agricultural commodities. You can’t be in the business without physical assets. Processing is critical in soybeans as you can either sell beans or process them into oil and meal. And as you move down the supply chain, you can market the oil in retail bottles or, for example, for biodiesel. We have 35 per cent of the packaged oil market in Brazil – a vast number of bottles!

If you are a grain exporter, you can buy and sell corn, but most importantly, you have the option to do nothing – to neither buy nor sell. You don’t have that luxury in an oilseed supply chain. Capacity utilisation is essential to efficiency. We at Bunge process 45 million tonnes of oilseeds each year. You cannot say, ‘OK, I do not see things clearly; I will step out of the market for a while.’ That doesn’t happen when you manage a crush operation.

People sometimes accuse trading companies of controlling markets.

The only thing that trading companies can control is their cost structure and risk appetite; that’s all.

Moving on to biofuels, is renewable diesel an opportunity – the next big thing?

It is at the centre of the strategic discussions in the industry.

Biofuels fell out of popularity when food prices rose in the 2000s, and there is a danger that history will repeat itself. I fear that food inflation and the food versus fuel debate is going to resurface. We won’t be able to avoid it, although the focus on climate change and sustainability will change the dialogue from last time.

In addition to the food versus fuel debate, the amount of CAPEX required to make a significant bet in the renewable diesel sector is substantial. It’s a big cheque, and you have to be pretty sure of what you are doing and the projected returns.

So yes, renewable diesel is a big thing – a significant factor that we have to consider. We will not rush in; we don’t have all the answers, but we are doing the work as things develop.

Are you worried about peak meat?

We are following this constantly, and the company has invested in alternative meat companies. We did so partly to help us better understand the changes in consumer demand and as an investment in an expanding sector. We debate meat demand constantly – at every commercial discussion.

How has trading changed since you have been in the business?

Today, everyone has access to the same information, real-time on their phone. It is how you interpret the data that is important now, rather than the data itself. We used to have better information, but now we all have to analyse the same information faster and better.

Now everything is immediate; we have instant communication with customers and suppliers. We also have quick access to our colleagues. Over the past year, due to the pandemic, we have all been working from home, connected by technology. We have run a global processing and trading business from home. It is an extraordinary achievement that demonstrates how the world has changed. It is incredible how things have changed so fast.

Would you advise a young person to join the industry?

Absolutely.  Our business is never dull. It changes from hour to hour and even from minute to minute. You can have one scenario in the morning and a completely different one in the afternoon. You have to rethink everything.

You will never be bored, but you will have to be on your toes 24/7.

Thank you, Raul, for your time and input!

© Commodity Conversations ® 2021

This is a short extract from an interview that I will include in my upcoming book ‘Commodity Crops – And The Merchants Who Trade Them.’

 

Fausto Filice was head of wheat trading for Cargill before moving to Bunge in 2013. He retired from the corporate world in 2019 and now lives in Verbier, Switzerland. I asked him how the wheat market has changed over the years.

Wheat was the main focus of the trading floor when, in 1987, I joined Cargill Geneva after two years in their Milan office. The top managers in Geneva were all former wheat traders, and wheat was the commodity with the most opportunities. It generated the bulk of the profits.

At that time, trading meant making deals; wheat was the commodity with the most opportunities to make deals. The Soviets and Chinese were the big players. Striking supply deals with them gave you a significant advantage in market knowledge. Other governments were also willing to make deals secretly.  Some of the more notable deals were even kept secret from young traders on the trading floor for several days!

There were also government entities on the supply side: the Australian Wheat Board and the Canadian Wheat Board made secret deals with big buying entities; monopoly players dealing with other monopoly players.

Wheat feeds people directly and is the commodity that is most susceptible to government involvement.

It was also the period of big export subsidy wars; the US and EU were trying to gain market share and reduce their costly intervention stocks. The business was about having large trades in the books and then ‘bidding’ Washington and Brussels for the highest subsidies. It was when prominent global players like Cargill, Continental, and LDC had a significant competitive advantage.

All of this has changed over time as the wheat market has progressively liberalised and privatised.

How would you describe the wheat market today?

The wheat market evolved in the 2000s as the Black Sea became an increasingly prominent player. At the same time, we had the liberalisation of Canada and Australia, so those markets also opened to traders.

There are no dominant players in today’s global wheat market – and no more large secret deals.  Instead, many small companies are originating, marketing and shipping wheat from one or two origins, often serving specific customers with specific quality requirements.  Large multinationals like Cargill, Bunge and LDC try to compete with these smaller companies in the various wheat export geographies, but they are often the 4^th, 5^th or 6^th player in these areas.

The large trading companies retain a competitive advantage: although they may not be the biggest in any of the significant exporting corridors, they participate in all of them.  Cargill is a big player in soft red winter wheat in the US, but they are not the largest. Likewise, they are big players in spring wheat from the PNW (Pacific North West), but they are not the biggest.  The same reasoning is valid for Bunge, LDC, ADM or Viterra. The result is that even though these companies don’t dominate trade flows, they have the best global overview of flows and, consequently, the global supply and demand.

Today the global wheat market is highly fragmented, with dozens of smaller niche players, strong in their origins but without a global overview. Only a percentage of what goes on in the wheat market is visible; many private deals are going on in the background.  It makes things interesting.

Over your career, you have traded corn, wheat and soy. Which do you prefer?

I prefer wheat. It is more complicated than the other grains. Yes, there’s a global wheat market, but, as I said, it’s a compilation of smaller niche markets that intersect within themselves, but only partially.

What advice would you give to a young trader in the wheat market today?

If you’re a young wheat trader, you’re most likely working for a company that is a niche player. It could be a Russian, Ukrainian or Romanian company working exclusively out of the Black Sea area. Or it could be a French or German cooperative. You will be a specialist in your region but ignorant of other parts of the globe. I would encourage you to learn as much as possible about the different areas and how they work.

For various reasons, different countries – and the buyers in those countries – buy specific qualities. The spreads between these qualities can be technical.

Wheat is not wheat. There are perhaps as many as 20-25 different types of wheat traded, and I would advise you to learn as much as you can about the relationships between them.

You can trade these differentials while learning to understand the nuances between the different origins and qualities and how and when they intersect. This knowledge will allow you to have an opinion on the overall direction of the market.

Agricultural commodities are weather-based, but you have to consider all the political drivers, whether a change in Chinese policy, Russian or Argentinian export taxes or Brazilian strikes. These factors are constantly changing. You have to be able to weigh those variables the right way. It’s like a never-ending game of chess.

Would you recommend a young person to join the sector?

Absolutely!  I find commodity trading more interesting than, say, looking at corporate balance sheets or bond yields. Commodities are much broader; they encompass more facets of the global economy.

Commodity trading is the pulse of the world economy.

Thank you, Fausto, for your time and input!

© Commodity Conversations ® 2021

This is an extract from my upcoming book, Commodity Crops – And The Merchants Who Trade Them.