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This week, I asked Google Notebook LM to create a podcast on wheat. I sent them some of the stuff I had written over the years, and this is the result.

The power of AI continues to astound me. However, it made one mistake in the podcast: the New York warehouse that blew up contained ammunition, not wheat. However, I will forgive that one misunderstanding.

I hope you enjoy listening to the podcast as much as I enjoyed putting it together.

I wish you all a healthy and happy holiday with your loved ones. I will be back in January.

First, congratulations on your book. It’s short, to the point and thought-provoking. You mentioned reading over 3,000 newspaper articles to research the book. Where did you source them?

There is an online newspaper database in Australia called TROVE. I searched for two keywords, war and wheat, from the beginning of World War One to the end of World War Two. By the end of it, I had to start wearing glasses.

How long did it take to write the book, and how did you do it with a full-time job?

It’s hard to say when I started writing the book. I didn’t start with the intention of writing a book. I started with the intention of understanding the real drivers of markets. I began looking at the most significant price drivers over history and noticed that the hefty price moves happened when governments got involved, especially when there was a military conflict. That’s how I got to look at the two world wars.

I did a little bit every day, in the early mornings and sometimes late evenings. There were times when I stopped for a month or so and lost track of where I was heading.

Are you Ukrainian by origin?

When the Soviet Union collapsed in the early 1990s, my folks moved from Russia to Australia, where I was born. One granddad was born in Ukraine, and the other in Russia. Their situation was part of my interest, whether at the front or the back of my mind.

Did you enjoy writing the book – and what was the part you enjoyed the least?

What I loved most was going through the old newspaper articles and discovering things we weren’t taught in school and university.

For example, before joining World War One, the Americans supplied the British and the French with weapons and food. There was a large warehouse in New York harbour full of weapons that the US planned to ship to the Allies. The Germans sent their secret service to blow it up, and the explosion was so large it partially blackened the Statue of Liberty.

I also enjoyed learning about the shifting relationships and alliances between countries during the wars.

At the same time, there were a lot of dreary articles. Ironically, reading the articles was the most enjoyable and, at times, least enjoyable part of writing the book.

What’s your target audience for the book?

My target audience starts with farmers; they need to know what happened during past conflicts and how a future one could impact their businesses. The same goes for flour millers, grain traders, and the government.

My book has a clear message: Australia produces massive grain surpluses, but it may be unable to export them during a conflict.

Are you planning a follow-up book?

I’ll take a breather and assess the world. I will think about it later.

As I mentioned, I found your book thought-provoking. I have three historical questions. The first is, did Churchill launch the Dardanelles campaign in WWI to reopen the route to Russian grain exports? Did 8,700 Australians lose their lives at Gallipoli for wheat?

In 1914, Russia accounted for around 20-30 per cent of global wheat exports, about the same percentage as now. While access to Russian wheat was a significant factor, it does not appear to have been Churchill’s primary motivation. Churchill’s main reason for authorising the Dardanelles campaign seems to have been primarily strategic and military, but food played a role.

UK food prices were running rampant in the months prior. At the time, Argentina was a significant source of wheat for the British. However, their stocks started running low due to strong exports and poor production. Meanwhile, Australia’s last crop was drought-stricken.

There is a debate among historians as to why Nazi Germany invaded Russia. Goebbels, Hitler’s Minister of Propaganda, wrote that the Nazis opened the Russian front for ‘grain and bread’ to capture ‘the vast fields of the east (which) sway with golden wheat, enough to nourish our people and all of Europe’.

The invasion had catastrophic consequences for both sides. Over 2 million German soldiers and 24 million Soviet soldiers and civilians died. Soviet agriculture was severely disrupted, with grain production falling from 95 million tons in 1940 to 29 million in 1942.

If the Nazis had never made that dash for Russian wheat—if they had never invaded the Soviet Union—they may have won the Second World War. Is it possible that we all owe our freedom to wheat?

While there were ideological reasons for the Nazi invasion of Russia, there were also significant logistical reasons. Before Germany invaded, Russia supplied Germany with substantial volumes of commodities, including food. Before and in the early stages of the war, Germany paid Russia for its resources with hard currency. Eventually, when Germany’s financial resources started to wear thin, Germany could only offer German Marks in exchange for commodities. At this point, the trade in commodities between Germany and Russia began to dry up. Before Germany’s invasion, journalists were writing that Germany was stationing troops on Russia’s border to bend it into sending it more resources.

Ukraine, known as the “breadbasket of Europe,” was a primary target.

Germany didn’t have many options. Where else were they going to get food? When they invaded France and Poland, they confiscated their grain reserves. Farmers had no incentive to plant a new crop as they knew the Nazis would confiscate their harvests.

I read with interest how the Australian government had to nationalise the grains industry in the second year of World War One. They had a considerable surplus of grain that they couldn’t ship. Do you think that the Australian government intervention was successful during the wars?

Their first goal was to ensure that the agricultural industry survived. Prices would have collapsed if the government had allowed the free market to function. Following the harvest, grain would have made its way to the port, piled up, and started to rot. Shipping availability had fallen substantially. Farmers would not have been able to repay their bank loans, and many would have gone bankrupt. The country had substantially more grain in both world wars than it could consume.

The Australian farming sector had a critical role to play. Australia supported and maintained its farming sector to support the Allies when shipping became available and to feed the millions of starving Europeans when the war ended.

If you let an industry like farming fall apart, it takes a long time to rebuild.

The world of wheat has had two major crises in the last five years: COVID-19 and the Ukraine war. Which caused the most disruption in supply chains?

The global grains industry handled COVID-19 well compared to other industries. Grain continued to flow. Governments considered agriculture a critical sector, and farmers kept farming. Apart from a few minor hiccups, exports continued.

Some countries implemented export bans to ensure sufficient food for their populations, but in most cases, these were quite limited and didn’t last long.

The war in Ukraine was more disruptive. Russia’s invasion caught a complacent world off guard regarding how significantly supply chains rely on everything working perfectly.

The conventional wisdom is that the supply chains worked well during COVID-19 and the Ukraine invasion. The markets solved the problem, while government interventions such as export bans were harmful. Do you agree with that conventional wisdom?

Export bans were not a positive, but the number one priority of any government is to feed its population. Countries may cooperate during peacetime but compete for scarce resources during famine or plague. We saw how countries outbid each other for masks and vaccines during COVID-19.

Large importing countries will pay any price during a crisis to keep their populations fed.

We’ve discussed the market impact of wars and government intervention, but what about the weather? Isn’t the weather more important than anything else?

Unless there is a hurricane or flood, weather impacts prices, at least initially, quite gradually. Prices gradually increase as market participants learn about an adverse weather event and understand its impact. Government intervention is often abrupt and can catch the market off guard. So, it probably depends on the timeframe. During a crisis, government intervention can impact markets much more than weather.

Let’s move to the current situation. Russia appears to be reestablishing government control over wheat exports. How is that affecting world markets?

People are questioning to what extent governments can influence prices. Before and during WWII, the International Wheat Agreement attempted to balance supply and demand through export quotas and planted areas. It appears the BRICS may now be trying to do something similar. They’re trying to influence the market by changing the supply of grain. People are concerned.

However, it hasn’t worked in the past except for short periods. In the medium term, other exporters will increase production if prices rise. So, prices may initially rise if Russia and Brazil get together to reduce planted areas. However, everyone else will grow more the following year, and Russia and Brazil will lose market share.

But, yes, it impacts when negotiating with one government seller rather than multiple private sellers. Buyers will have less bargaining power if the Russian government monopolises exports.

There was talk in the past of having an OPEC for wheat.

Even OPEC is struggling as there are more oil-producing countries, including the US, than in the past. Many countries grow wheat, and its production is less concentrated than oil. If Russia and a handful of other countries try to reduce area, other countries will increase production.

Oil production depends less on the weather than wheat does. You may reduce the area to support prices, but your production may collapse if there is a drought. The primary beneficiaries of an OPEC for wheat would be the countries that stayed out of it.

Trying to manipulate price by manipulating supply rarely goes well.

We saw Russia donating cargoes of wheat to some developing countries, effectively using food for political ends. Wheat is weather-sensitive, particularly as you head into harvest. Would you say wheat is the most politically sensitive and weather-sensitive of all commodities?

Politically sensitive, yes. Weather sensitive, probably not. Wheat is produced over a wider geographical area than some other commodities. I think that commodities like coffee and cocoa may be more weather-sensitive. A frost in Brazil can skyrocket prices. Disease in West Africa will send cocoa prices soaring.

But yes, wheat is politically sensitive. It is what goes into many people’s daily bread. Didn’t the Romans coin the phrase “bread and circuses”?

You state in the book that the objective of a domestic wheat industry isn’t simply to make money. It also exists for the national survival during times of crisis. Isn’t there a contradiction, as farmers’ interests may not always align with the national interest?

Following WWI—and even now—many countries produce agricultural goods with government support, without which they would be unviable. Governments were so scarred by the food shortages during both world wars that they realised it’s not simply a question of agricultural economics and making money; it’s about food security.

For example, economically, it doesn’t make sense for some European countries to produce as much food as they do, but from a food security point of view, it does.

What are the things you learned that surprised you when researching this book?

My biggest takeaway is how little the Australian sector has changed since the two world wars. We’re just as dependent on ocean freight as we were back then. If there were to be another crisis, the government wouldn’t have any other option but to do what it did in the two world wars. Yes, we have better farming practices and faster ships, but the fundamental structure of our industry hasn’t changed much. That was an eye-opener for me. Fundamentally, the international market still relies on the Black Sea, and Australia relies on ocean freight.

My second takeaway is that the biggest winners in a conflict – if there are any winners – are those who own the freight.

The biggest challenge for Australia in both world wars was that we didn’t have the shipping capacity to move our grains and oilseeds out of the country. Without government intervention, grain prices would have collapsed. It doesn’t matter how much you produce. Prices will decline if you can’t get your harvest out of the country.

A good example is 2021. Australia finally started to have good crop years after a three-year drought. I saw that we would produce a record crop, but our logistics system couldn’t handle it; we couldn’t export all the grain. When Russia invaded Ukraine a year later, global grain prices skyrocketed, but ours didn’t keep up. We fell to a substantial discount to international levels. Now imagine the extreme scenario where there is barely any freight available.

So, what is the solution?

A domestic biofuel industry would allow us to utilise some of the crops we produce and make us more fuel-secure. Over 95 per cent of our fuel comes from overseas. If we can’t get enough fuel, our whole economy grinds to a halt. A biofuels sector could help achieve our climate goals by reducing fossil fuel emissions while providing at least an element of energy security during a crisis.

Biofuels can act as a new source of demand for farmers to ensure that they keep producing. They can also act as a buffer, a reserve in times of crisis. You can switch the biofuels industry off, at least temporarily.

Building a biofuel industry during peacetime is easier and cheaper than during a war. The materials or workforce may not be available during a broader crisis or conflict.

If you look at the biofuel industries in North America and Europe, they wouldn’t have existed without government support, whether through subsidies, mandates, or both. I don’t think it will be any different in Australia. The government will support one if it decides it’s a national security issue.

There are other ways to increase domestic demand, too. If the Australian agricultural sector used more grain to produce meat, the country would need fewer ships for their exports during a broader conflict. It takes 12 kilos of grain to create one kilo of beef. Exporting 12 times less quantity is a lot easier. Admittedly, they would need refrigerated ships.

Is the Australian government ready to do that?

I ended my book with a quote in the Sydney Morning Herald from 1938:

“The curse of Australia is procrastination. We debate things in Parliament eternally, but we hardly ever do anything. I am afraid the awakening will be a rude one.”

© Commodity Conversations® 2024

Good morning, Martijn, and welcome to Commodity Conversations. You have had a 27-year career with Cargill. From 1997 to 2006, you traded grains and oilseeds and then moved to the cocoa desk, where you became head trader. In 2022, you moved internally to spend one year as Cargill’s Trading Technology Adoption Head before leaving the company in 2023. After such a successful trading career, why did you leave active trading?

I had been wondering what I wanted to do over the next five or ten years. People asked me how I could still sit at a trading desk after so many years, but trading was my life. The years flew by quickly because I genuinely enjoyed them.

Covid changed everything. Working from home was a reset for me. I have a daughter of 14 and a son of 12. My relationship with my son wasn’t that great. It was okay, but not as good as my relationship with my daughter. I thought it was him, but during Covid, I realised it was me. I had spent too little time with him.

I had always prioritised trading and Cargill. I was never there for him for the school events. During Covid, I saw who he was and met his friends. I thought, ‘Okay, am I going to spend another 5 or 10 years on that trading desk doing the same thing?’

The whole Covid situation was a blessing in disguise for me.

Don’t get me wrong. I was passionate about trading. I was used to the lifestyle and loved what I was doing. But I realised that I loved my family more.

Was it a difficult decision to make?

Yes. I always saw myself as Mr. Cargill, but suddenly, I realised I needed to think about myself and my family.

But trading was all I knew. After 25 years of trading, I thought, ‘What the hell am I going to do to make the change I want?’

I talked with people in the company who were higher up, and they offered me a position in technology. I had been involved in a technology project for my team and had enjoyed it. I leapt at the chance of doing similar projects across the company.

The one year I spent in technology was a soft landing, allowing me to prepare to leave Cargill without endangering my 25-year career. I had a superb manager, and it was a fantastic period for me. I liked being still in Cargill, but outside of the trading side. It gave me a year to think about what I wanted to do.

What did you want to do?

I wanted to move away from the trading desk. I wanted to move away from a corporate environment. I wanted to stay involved in the commodities industry.

I have always enjoyed interacting with youngsters, and I realised that one of the things that I liked more than the market itself was developing people.

Then I thought, ‘Okay, recruiting, that is what I like.’ But it took me about a year to figure it out. I also came up with the idea of the podcast.

So, I thought, you know what, there is a space for me in the industry as a recruiter. I have a wide network. I know what I’m talking about. I’ve been a trader for 25 years. I speak the language of the client and the candidate. I have a genuine passion for people.

Do you enjoy what you are doing now?

Yes. I enjoy assessing someone’s profile, conducting interviews, and advising clients on who to hire and who not to hire. I’ve been doing this for over a year.

I enjoy making my own decisions and running my own agenda. I can choose who I work with. I especially like talking to young people; they keep me updated with the latest technology and what is important to them.

After leaving the corporate environment, I realised that independence and entrepreneurship give you freedom. It doesn’t mean that things are easy. You must do everything on your own, and it can be lonely. Even so, I wouldn’t want to trade that anymore for the certainty of a fixed salary and being in a big organisation.

Do you also give risk management advice?

Yes, I also advise on risk management. These past two years, the coffee and cocoa markets have gone up in flames, and people have become more aware of their risk exposure.

Many companies now realise that they lack a proper, formal risk policy and have limited knowledge of derivatives and risk management practices. These companies call me and ask me for advice. I like this part of my business because I can share my experiences from working at one of the best companies in the world. I explain how I have survived and thrived through market cycles.

It is the beautiful thing about Cargill. It opens doors. It gives you a stamp of approval for two reasons. The first is integrity. Everyone knows you have integrity if you’ve been successful in Cargill for a long time. And secondly, yeah, you’ve learned from the best.

Did you get withdrawal symptoms from the market when you stopped trading? Was it a drug for you?

I enjoyed it for an extended period but was also consumed by it. Now, I look at the market but don’t need to trade it. I can just analyse it. I no longer feel the pressure of having a position or not having a position.

Do you still follow the cocoa markets?

I find the cocoa market intellectually interesting. It is niche – small compared to grains and energy. Everyone knows chocolate, but few people understand what’s behind it.

Over the years, I’ve learned how the market works, but I’m still passionate about it. I write about it regularly on LinkedIn, and every two weeks, I write a cocoa market report on Vesper, the commodity insights platform.

I once started to write a book about cocoa to complement the ones I had written on coffee and sugar. But I abandoned the project. I found it too depressing. Cocoa has everything wrong with it: deforestation, child labour, land rights, producer poverty and corruption. Is it a supply chain without hope?

There is incompetence, corruption, and mismanagement in origin countries, often at the expense of millions of farmers and their families.

One of the most tragic things about this industry is that it has changed very little. It’s why you see the frustration during all these events discussing sustainability. Corruption is the elephant in the room, but no one dares to mention it.

Where does all the money go? It’s not spent on cocoa infrastructure, and farmers are not benefiting from recent high prices.

What happened last year has been years in the making: years of corruption and underinvestment. The Ghana government should conduct mass spraying programmes to tackle pests and diseases, but it hasn’t done that for years.

During my travels, I always wondered why nothing was changing. The problem is that in societies where corruption is a business model, people have no incentive to change.

How did you cope with that as a trader?

I had a pragmatic approach. The world is a complex place. You have challenging geographies where morals, rules, and life views differ dramatically from those in the West. The media condemn traders who operate in these areas, but they have no idea that much of what we consume in the West originates from these places.

If the consumer demands these commodities, someone must move them from where they are grown or mined to where they are consumed. Traders make that possible by applying enormous capital and taking risks. In doing so, we provide employment in origin countries and processing factories.

Commodity trading is one of the most critical pillars of the global economy. Without commodity traders, there would be no energy, food, or metals. Energy, metals, and agriculture build, move, and feed the world. I have always felt proud of the job I did and the company I worked for. We operated with integrity in challenging circumstances. Journalists don’t realise that trading companies are full of good, ordinary people who do their work with honesty and integrity.

Commodity trading companies must make money to survive. None of them are too big to fail. No one will save us like they did with the banks in 2008.

We have nothing to hide. We should be more open and show our customers, the media, and potential and actual employees what a great business ours is. The problem is that the media looks for the nasty sides, constantly condemning and always sitting on their moral high horse.

ADM left the cocoa sector for reputational reasons, but Cargill stayed. Cargill is an ethical company, and it’s always surprised me that Cargill continues to take the reputational risk of remaining in the cocoa market. How do you account for that?

I do not believe ADM left cocoa for reputational reasons.

Cocoa is a tricky business; trading and processing cocoa and manufacturing chocolate is complex. Cargill likes complex businesses. We always said that complexity gives opportunity. I greatly respect ADM, but they are less sophisticated than Cargill. They prefer the grain and oilseed business; it is more straightforward.

In my years, it was rare to make much money on processing. We usually made the money by merchandising, trading around assets and taking positions. I believe ADM struggled with that. They are more processing-based and do less trading. You can’t run a cocoa and chocolate business just processing. The margins are too thin.

Another point is that cocoa is capital-intensive.

Is cocoa an ingredient or a commodity?

Cocoa is a commodity, but it’s also sometimes called the anti-commodity, meaning it lives its own life. It’s not correlated to anything. To some extent, it’s an attraction. Hedge funds sometimes put cocoa in their portfolio to reduce correlation and risk.

Cocoa is not a standard product like soybeans. It has many different origins and grades. There is not one type of cocoa.

You discover that when you want to make a cash conversion and deliver physical cocoa to the futures market. It makes a difference whether you deliver beans from Ivory Coast or Cameroon. Still, it also makes a lot of difference when you use them in your factory, whether for cocoa processing or semi-finished products, for powder, liquor or chocolate.

Does having so many different grades make it easier to manipulate the market – if there’s a lack of deliverability, for example?

Yes, it has been an issue for many years. I moved from trading soybean oil on the CBOT, a well-regulated market, to trading cocoa on LIFFE. Everything I learned in Cargill about being a good actor and compliant did not exist then in the cocoa market. The business model of several players was to squeeze or corner the market at the expense of bona fide hedgers.

If a futures market loses its role as a risk mitigation tool, you cannot contract forward business. You kill the market.

Is that the main difference between grain and oilseed trading and cocoa trading – that it can be squeezed?

There are many differences, and I think any market can be squeezed.

When I started in cocoa, there were no delivery limits. It was a problem. Now, there are delivery limits. Traders can’t take delivery of a large amount simply to squeeze the market.

What are the other differences?

One critical difference is that cocoa is a tree crop; you can’t quickly grow more after a price hike.

What also makes it different? There’s no alternative. There’s no substitute. When I was trading vegetable oil, and I sold to Unilever for their margarine business, I knew that at specific price points, they would switch from soy to rape or vice versa. In cocoa, there’s no substitute.

Cocoa is not a staple food like wheat, corn, and soy, yet demand is price inelastic. People like to have this small, affordable luxury treat. It helps that it’s still cheap. You can still buy a € 1 chocolate bar. It is rare for chocolate demand to decline.

Cocoa shares some similarities with coffee, with 60 to 70 percent of the global supply coming from two countries—Brazil and Vietnam for coffee and Ivory Coast and Ghana for cocoa. However, this makes it more risky.

What is also interesting is that you have two futures markets. If you look at coffee, you have robusta and arabica. In soybeans, you have beans, meal, and oil futures. In cocoa, you have only beans.

Most commodity traders trade the basis, the price differential between the physical commodity and the corresponding futures month. Cocoa is unique in that you trade a ratio, which is a multiplier versus the futures market, not the difference. It gives an entirely different dynamic with implications regarding hedging and your flat price exposure.

What does it take to be a good trader? What would you look for if hiring a trader for your desk?

The first thing I look for is a natural interest in financial markets. I always ask people what kind of news interests them, what the first website they open in the morning is, and what newspapers they read. I also ask if they have any exposure to the financial markets. Is it an ETF? Is it in individual stocks? Is it crypto? I ask them about current Fed policy and their opinion on it.

Why is this so critical? It goes back to what I said earlier about why I stayed 25 years on a trading desk; it naturally interested me. If you are interested, it doesn’t cost you energy. It gives you energy. If you are not naturally interested, you can manage it for a while, but not for long. Trading is so intense you can only endure it if you’re naturally interested.

You want a debate on a trading desk. The life of a trader, to a large extent, is reading, thinking, debating with other naturally interested people, and then coming to a conclusion and translating that into a risk-bearing position in the market.

You need a risk appetite. I once talked with one of the leads in Cargill, Geneva. He said, “There are people who trade not to lose, but we want people who trade to win.” People may find this strange, but having an appetite for risk does not mean gambling.

The best traders are great risk managers and consistent. It’s not about having the market right for one or two years; it’s about being right for 25 years.

Curiosity is vital. You must have an open mind and be pragmatic, not dogmatic. However, you must be confident to endure the market telling you you’re wrong.

The best traders I know are modest, mundane people with no ego. Not having an ego also means not taking things personally. When you’re wrong, you get out. It’s not a problem. You move on. The market doesn’t care about you or what positions you have.

As a trader, you will never have 100 or even 90 per cent certainty or conviction. But you must be decisive. Otherwise, you’re never going to do anything. So that means that there will be some mistakes, and you get that with experience. You must have the confidence to trust your judgment. It’s not arrogance. It’s not ego. It is simply what you need as a trader.

You also need to enjoy an environment where you are constantly challenged by the market and your peers, by youngsters who are more intelligent than you or have technical skills that you don’t.

I hired intelligent young people who were better in certain areas than me because I wanted them to grow and develop. Hiring smart people creates a team that constantly improves and stays relevant. It’s great when young people come up with an entirely different analysis from yours, and you realise you were wrong. It may be corporate slang, but you want a growth mindset, not a closed one.

Lastly, you need to accept that you must put the hours in.

Is letting ego get in the way the biggest mistake a trader can make?

Too big an ego can mean too big a position. When people are successful, they start to overestimate themselves. They think they are invincible.

Underestimating your competitor is a mistake. There are a lot of smart and intelligent people in this world. You must respect the person on the other side of the trade. I always thought, ‘Okay, if I’m doing this, someone else is doing the opposite. Why are they doing it?’

It is a mistake to surround yourself with yes-men.

Another is underestimating how technology can change a market. On the one hand, you can say that markets never change because they are run by human beings with human emotions, such as greed and fear.

I did a podcast with Tom Kopczynski and discussed why Blenheim closed. One reason was that they didn’t adjust their model. They had a purely fundamental model, and there are times when fundamentals don’t play a role; systematic traders and algorithmic hedge funds dominate the market.

Some of these hedge funds are technology companies. They hire people who can code and capture massive amounts of data.

That brings me to my next question:  to what extent have the futures markets become computers trading with computers? Then, this follow-up question: Will AI take over trading while humans are left to do the physical merchandising?

Most managed money categories moved to algorithmic black-box trading long ago, a trend that has been in place for years.

There is a difference between trading and execution. Algorithms execute 90 per cent of all trades in the futures markets. Still, I think you refer to fully automated algorithms that not only execute the trades but also analyse the market and create the game plan. We looked at this at Cargill and realised that AI made it inevitable. Computers can quickly analyse a vast amount of data and see correlations that a human wouldn’t find.

You must read The Man Who Solved The Market if you haven’t read it. Renaissance Technologies has been doing this for years. They hired the best scientists and mathematicians, but AI may be able to do a similar job in the future.

However, if everyone has access to the same computing power, they will trade their strategies till they’re arbitraged away. It’s the same as in market-making and high-frequency trading. At some stage, margins will decline because people see free money, and free money doesn’t stay long in the market.

Speculators are essential because they provide liquidity, but depending on the market size, they can also eventually obstruct. That is where regulation comes in. We have moved past having free, unregulated markets where the interest of a few can destroy a whole market.

I wanted to return to your comment about respecting the person on the other side of the trade.

It is essential to come out of your bubble regularly, your internal bubble from being in your company with your views and how you do things.

Cargill is one of the best companies in the world. We were everywhere. We had the best information and some of the best people, and I often felt my market view was correct. It was the truth. But then I would spend time in London with the cocoa community, and I thought, ‘Shit, I should be here every day.’

Once you are outside your bubble, you hear many different views. It’s what makes a market. You listen to things about the market and people’s positioning. The funny thing is that you understand that the trade is sometimes not even with a company; it’s with a person.

If you know a person, you know how they might try to influence you. You also know how they react under different market situations. What have they done in the past? You can have an S&D, but someone with a massive position can be more critical than your S&D.

You also learn to see whether someone is in a good or bad position. You see it in the person and hear it in their voice on the telephone.

The problem when trading against machines is that you cannot call them on the phone. Still, it is essential to understand what drives them. That was one reason we started implementing systematic strategies at Cargill. We wanted to know why they were positioned like this. What did they see?

What is one piece of advice you would give to someone wanting to get into the commodity trading business?

Listen to the Strong Source Commodity Podcast. You will hear true stories from people who are not trying to sell you anything but genuinely want to share their knowledge. Listen to the podcasts and be honest with yourself. Yes, it excites me. It interests me. I can’t stop listening.

But if you think, well, actually, I’ve listened to maybe three, and I need to push myself to listen to a fourth, then do some soul searching as to whether commodity trading is for you. Perhaps it is not your cup of coffee.

And what one piece of advice would you give to someone on their first day on a trading desk?

Ask questions and make sure that you understand the things that the others are discussing on the desk.

A trading environment differs from anything you have experienced at university or online. It’s not unusual to be lost and feel you’ll never understand what is going on or being said. Every trader started not understanding things.

Trading is such a different environment. You do not learn to think like this at university, let alone on an online course. There are good courses in Rotterdam and Geneva, but you learn trading by doing.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

I do way more learning than teaching.

You spent 12 years with Louis Dreyfus. Where were you based, and what did you trade?

I did a two-year graduate training programme in London that involved energy, ethanol, sugar, and coffee. I then spent nine months in Paris on ocean freight. At the end of the programme, I had a choice between sugar and freight. I chose freight and moved to Connecticut, taking my girlfriend and young daughter. We were about to get married and had complications with visas and stuff. But we figured it out. I spent ten years with LDC’s Ocean Freight Department, including a stint in Melbourne setting up a new freight desk.

Whilst we were in Australia, my brother committed suicide, and we had to return to the UK. I mention it because it has been a defining factor in my career over the last 15 years. Dreyfus was terrific in helping me out with everything. They could not have treated me better throughout the process, especially my boss at the time, Kevin Grimes.

We spent six months in the UK and were supposed to return to Melbourne, but it was too far from my parents. In hindsight, I probably should have gone back, and we would have figured it out, but everything was so raw at the time.

We went back to what we knew, the safety of the US. We had a home there. Over the next few years, Dreyfus promoted me to run the desk in North America. There was a lot of upheaval and politics in the company at this time, not only on the freight desk but also companywide. I felt that I no longer belonged there anymore.

I left Dreyfus. I had had ten fantastic years with them, but the last two were challenging. I was devastated to leave. I had naively thought I would stay at LDC for my whole career.

Do you think that your brother’s suicide affected you in your decision to leave and the way you looked at life?

My brother’s suicide affected everything and changed everything. Looking back, I wasn’t the same person, nor was the company. It’s still surreal. I get emotional about it fifteen years later, just explaining it to you.

Okay, let’s move on to happier times. You left LDC to become head of sugar trading at BTG Pactual. It seems a random move to go from freight to sugar.

I was never supposed to go to BTG to be the head of sugar. I knew Larry Greenhall, BTG’s head of grains, oilseeds, and sugar, from his time at Dreyfus. I had spent a lot of time in grain and oilseed supply and demand meetings trying to reverse engineer the physical freight business.

We had many arguments at Dreyfus between the trading desks and the freight department. I felt traders showed a lack of trust in the department when they disputed the freight rate without understanding what freight is or the components that go in it. I told them that if we want to get better at doing C&F business together, I’ll learn your business and teach you mine. And that is what I did; I learned their business.

I went to BTG to be in a junior beans position. However, they were looking for someone to head their sugar desk, and all the other candidates were probably more expensive than me. So, they gave me the job. We did some good things, but ultimately, the business plan was not what I had signed up for, and it was a good time to leave.

You then moved to COFCO to be head of the corn desk.

COFCO/ Noble Agri had approached me previously, and we had had a couple of meetings to discuss building a business. A few years earlier, they had once flown me to Hong Kong to discuss me becoming their head of freight, but we couldn’t agree on terms.

I was still talking with them when I realised that my days at BTG were numbered. Corn has a lot of embedded freight involved in the physical business, and spread trading was something I picked up during my time at LDC. I knew freight like the back of my hand, and the company had two fantastic corn traders in Kim Kurstjens and Testuya Watanabe, so the team worked well. It was some of the best trading I’d been involved in.

You then joined Freepoint as managing director and stayed for six years. Is it easier to be a managing director or a trader?

Although I had an MD title at Freepoint, it was more like being a senior trader or a desk manager in a more established trade house. A traditional managing director is more like managing a team of traders—just like a coach in a sports team. We were a new department in Freepoint, purely prop trading for me and managing some junior traders.

Freepoint is probably the most professional company I have ever worked for, with some of the best and most talented people I’ve worked with. We made a few mistakes trying to get the business model right inside an energy company. Still, it is difficult as the margins are few and far between in agricultural businesses without assets. Other energy companies have made similar mistakes. They are different markets. Things can get lost in translation unless you have someone who fully understands what you’re trying to do.

I spent six years with Freepoint. It wasn’t a bad stint, but I wanted to return to Liverpool to be with my family. We had had plenty of upheavals already with family, and I was spending too much time away from the kids.

You then moved from being a managing director and head trader to becoming a consultant and a non-executive. How easy was the move to an advisory role?

It’s not for everyone. You’re still making many independent decisions, but you are making them for yourself and your family. It’s a different kind of pressure. There’s no stability. There’s no salary. You must prove to people that you’re good at what you do, and they need you. It requires a lot of effort and motivation. It’s much harder being a consultant than an MD.

But there’s a lot of freedom. There’s a lot of excitement. And you start to realise that everything you do in life is a trade, whether going long sugar or jumping on a plane to go and speak to someone, hoping to win some business. You’re still making decisions; you’re still planning; you’re taking a bet on yourself, hoping it pays off.

You have set up LMH Academy and become involved with John Moore’s University in Liverpool. Can you explain that to me?

I’ve worked with Danny Donachie, a top performance coach, for the last two years. I brought him in six months before the end of FreePoint. I wasn’t happy with the way I was performing. He was previously with Everton Football Club as a medical physio and now works with many top sportspeople and high-performing businesspeople. He’s been in and around goal-orientated athletes but had no view or clue of trading. During that process, we got into the why? Why am I doing what I am doing? Why am I not at my best? Why am I not happy? What’s missing?

Looking in from the outside, I was successful with a big title at a big company, but it couldn’t have been further from the truth. I realised that I was happiest when I was part of a team, learning from them and teaching them. I was happiest when I was developing, mentoring and coaching people.

The sessions were heavy and dark, as a lot of personal tragedy had to be shared. I probably cried for the first seven sessions. It can make some people in the industry uncomfortable when you talk about these things to people, but it has indeed been life-changing. Danny and I have become very close.

A Welsh friend, Chris Lewis, who is well-connected to the Liverpool community, runs the Big Onion programme. This local business incubator has 15 to 20 businesses inside it, mainly sole traders, but in the past 3 or 4 years, he has helped close to 200 start-ups. We talked about raising aspirations in the local area and bringing commodities back to Liverpool.

We approached John Moores University, where I am an alumnus, but they said they had no budget and couldn’t fund the programme. I told them I would fund it myself if they gave me a room and their name. They agreed.

We presented to 50 accountancy and finance undergraduates and 25 master’s students. Five master’s students and 11 undergraduates signed up, and we started with 16 in the group.

It then started to go crazy. So many of my contacts and friends in the sector wanted to help and contribute their time to the programme. We are now in our second year, with 29 students. Two out of the first group took job offers as brokers; one became a coffee trader; one joined a freight company, and another a Commodity Contract management business. Ultimately, we had nine job offers for the students in the first year.

The programme is not yet well established, and it’s been a bit of a struggle to get noticed by some of the more prominent trading companies, but that will improve. We are already seeing companies getting interested in what we are doing. They are asking if we can develop a programme for their in-house talent. It potentially leads to another career or business opportunity for us.

When you look at your students, can you tell which ones will be successful in the commodity sector – and how do you tell?

I think it’s the curiosity, drive, ambition, and asking ‘why’—always asking the next question. None of us were born the finished article. If you’re a professional, you’re continuously improving. Even you, Jonathan, with all your years of experience, are improving as long as you stay curious and driven.

For me, the definition of success is far more about getting the best out of the individual than just about the company. As a manager, there is a balance between managing individuals and organisations. I care more about the individuals because they are the ones who take care of the business. If people are unhappy in the workplace, they will get in the way no matter how hard you try to improve the business.

How would a young person know whether they would be a good trader?

Having the necessary skill set does not guarantee success, and having specific traits does not necessarily mean you’ll be a successful trader.

There are moments in your career where you can be crushed. Every top trader goes through anxiety, fear, and sleepless nights. You get stopped out of a position. You get fired for losing money. It is when you will find out what you’re made of.

I can get my students to the front door and give them the tools and the education to guide them in their careers. You can practice all you want, but until you are in an actual game situation, you don’t know if you are any good.

You have to say, “I love what I am doing.” I’ve made a mistake, but I’ll figure it out, learn from it, and change. The market will always be there. There is always tomorrow. Maybe you are at a different company, but the market continues, and there is always a new contract month to trade.

It’s highly competitive when you work for a big trading company. You think the P&L is essential, and you know each level is getting more challenging. It’s an ego thing; it’s almost an image thing. You experience shame or guilt if you fail to live up to your or the company’s expectations or if you have the perception of not being successful.

Every young trader falls into the trap. Do you make enough money compared to the profits you make for the company? Is your bonus more than this person’s and that person’s?

You don’t appreciate success properly because you measure success by the biggest number. It couldn’t be further from the truth. The most significant numbers we ever made were when the market gave us the opportunity. I’m sure companies are breaking records this year trading cocoa, but is that because people are trading better or because of market conditions? We are too quick to rate our success on the absolute number as opposed to how well we did in the market conditions.

There are professions within trading organisations other than trading.

Our objective at John Moores is not simply to produce traders; it’s about producing commodity professionals. It’s about working with individuals who come in the door with talent. We say, “Listen, even if you want to be an accountant, you’ll be a better-paid accountant in commodities than in the NHS. And you’ll go around the world and meet amazing people.”

I’m not getting that message across as well as I would like, as some of the most talented people in year one turned down better-paid jobs in commodities and took less-well-paid jobs elsewhere. They were unsure and maybe a little afraid of commodities. They were primarily women, and they didn’t believe they belonged. It was a tragedy because four or five got first-class honours degrees; they would have been phenomenal in the commodity business. They just felt the sector was not for them.

Is trading a young person’s game?

No. Experience counts for a lot. Energy is a prerequisite. If you have the energy to get up and go at 55, you can still compete with the younger traders.

That leads me to my next question. I’m an old guy, and it’s been 12 years since I’ve been out of the markets. How do I stay relevant and up-to-date?

Jonathan, how many people have you met who are very good but didn’t ever want anyone to get past them? They suppressed talent. And how many people loved to see talent surpass them? You must ask yourself the question: Are you elevating or suppressing talent? If you suppress it, then they’re going to go around you. They’re going to go past you. If you elevate talent, they will always come back to you. You’re always stay relevant as long as you’re elevating talent. It is something we are working on closely with Andy Kerr and OCR commodities, who share the vision of growing opportunities for the next generation of talent.

I’ve been covering burnout a bit. Do you have any advice for people who can’t cope with their jobs?

Burnout happens when you push yourself to do things you don’t want to do. I find I have limitless energy when doing something I want to do. You don’t create the boundaries of anxiety and fear that you have when you do things you don’t like. There is no wasted energy when you are doing what you love.

What three pieces of advice would you give to a young person on their first day on a trading desk?

First, be patient. Don’t put too much pressure on yourself as, at some point, you’ll fail, and there’s nothing worse than feeling a failure when you’ve only just started. Don’t be worried about where you are right now. We all have moments where the photograph is not what we thought it would be. There are many ways to get where you want to get to.

Second, use your eyes and your ears far more than your mouth. Be observant and trust your instincts around that observation. If you feel something is not right, then say. Speak last.

Third, be authentic. I know it’s a cliche, but the best things happen when you’re true to yourself. You can’t be something you’re not. You can try hard to change it, but if you don’t honestly believe in it, you won’t have that internal feeling of success.

And what do you tell your students?

I tell my students two things. First, you are never too young to teach and never too old to learn. The second is that you are where you’re supposed to be. By that, I mean you shouldn’t be too quick to make judgments about yourself when you fail – accept that you’re here for a reason, probably to learn something. Likewise, when you have success, bloody celebrate. Don’t move past it too fast, expecting the next celebration to be even bigger. Take stock of where you are; enjoy and appreciate it.

Fernando Alonso, the F1 driver, recently said he is driving better than ever because he’s enjoying it. He said he was never satisfied when winning because he was always trying to get to the successive win. It struck a chord with me.

Anything you want to add?

I’m open to collaborating with people and organisations to help more kids get jobs. It’s not about money. Anyone in this industry for 20-odd years has probably made a decent living; we must help those struggling or having difficulties finding opportunities. We can do better with this, especially with getting more women in the industry. Let’s do it.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

You’ve had an exceptional career as a trader: twenty-one years with Cargill, eleven with Louis Dreyfus, and two with Solaris, all in senior trading or management positions. Do any highlights come to mind out of that wide and long career?

I was the first member of my family who did not join the family agricultural business, which was already a century-old business. Cargill gave me a tremendous foundation in the commodity trading business. Dreyfus allowed me to be more of a manager and a business builder. Solaris allowed me to be entrepreneurial, taking advantage of my previous experiences and trying to visualise the future of the business.

Which did you enjoy the most?

I have lived in five countries and enjoyed every one of them! I have worked for three different companies and enjoyed every one of them!

Cargill was a period of discovery during which I developed the skills I needed for trading and discovered a new world. After Cargill, it was more about developing executive skills and finding a vision. However, the deep learning experience and the people I met in all three companies were unforgettable. Without Cargill, I would not have been able to do the others, but I enjoyed the journey in the following steps as well.

What different commodities have you traded, and which was the most challenging?

I have mainly traded grains and oilseeds, but also fertilisers and molasses. Right. There are all kinds of vegetable oils and seeds in veg oils. Intellectually speaking, oilseeds are the most complex, but complexity is always an opportunity to make things simple. It was the most challenging for me.

Which commodity do you prefer?

My background and fascination with geopolitical issues make me feel attached to wheat. Fragmentation in the world wheat trade has led to two tiers of trading: the global traders and the regional champions. The international trading companies have lost market share in wheat to smaller specialised companies in different origins and destinations.

Russia accounts for almost 30 percent of the total world wheat exports. The country has a tremendous influence in the market, but international players cannot participate in that flow. I expect this situation will endure. This fragmentation is even growing. We’ve had decades of globalisation, and now we’re getting fragmented, if that’s the correct word. It has consequences on trading and shipping, behaviours, and even ethics. It is continuing to have a significant impact.

But it’s not just Russia. China is buying more beans from Brazil and less from the US and is worried about tariffs and export bans. Are politics shaping the global agricultural trade more than in the past?

Yes, the world has split into two blocks. Some talk about the South versus the North, while others talk about the East versus the West. I favour the differentiation between a Western mentality and a BRIC+ mentality. We are in a new world order.

You’ve had a fantastic career. Would you expect a young person joining the business now to have a similar career?

There are tremendous opportunities for the new generation in our sector, but it depends on their attitude. We in the northern hemisphere mostly live within our comfort zone, while those in the southern hemisphere are more ambitious. Attitude is going to make the difference.

You mention attitude. What other factors, characteristics, or character traits make a good trader: ambition, risk appetite, and curiosity?

Common sense is essential, and by that, I mean asking, “Does this make sense?” Don’t take things at face value or fall prey to conventional thinking. Always ask that next question.

Other critical pillars include curiosity, respect for others, and a periscopic holistic view from different angles. Don’t stay deep and comfortable in your submarine. Raise the periscope and look all around.

What about relationship skills? Communication skills have always been essential for merchants and traders, but we’re entering a world of AI and platforms. Are relationship skills still critical?

They are fundamental if you want to understand and communicate with other people. Most successful people are good communicators – and not just in our sector.

How would a young person reading this know if they have what it takes to be a good trader?

I have hired many people in my life with many different characteristics. There is no one model. When I interviewed a candidate, I always tried to decide whether they were the type of person who, when watching a football match, would be interested in the coach’s strategy and tactics, not only how beautiful a goal is. Everyone is born with specific skills, but you must develop those skills. Trading is a science but also an art.

How important is an analytical mind?

Essential! Numerical skills are critical, but I encourage people to be interdisciplinary. The best trader that I have ever seen had a history degree. Your background doesn’t matter if you have analytical skills.

Is trading a young person’s game? Are traders like soldiers? And if they are, is it a function of risk assessment and appetite?

No, there is no age for being a trader. However, vision is not enough; you must implement that vision. You are a dreamer if you don’t execute your vision. Perhaps people are less willing to implement their vision as they age.

Let’s move on to what you do now. How do you spend your days?

First, I advise different companies on logistics, distribution and trading. Second, I do business consultancy on specific sectorial issues. Third, and this is what I enjoy the most: I teach. It pays the least, but it doesn’t matter. Money is not the priority on this one. It’s how I can give back to society what I got from society.

I currently lecture in different business schools and lead the agri commodity programme for managers at the Spanish University of IEB in Madrid. I also give tailor-made programmes for specific big companies. I call this the Trading Academy and adapt the programmes to different companies’ requirements and needs.

What do you specialise in when you’re teaching?

We teach people to think like traders regardless of their businesses. For instance, a procurement team in any sector can benefit from thinking like a trader regarding fundamental supply demand and risk, all within the macro environment. We teach people to structure their thinking to identify the indicators that will change the game. A trader’s way of thinking applies to any business in life.

What’s the toughest part about teaching?

There is no tough part of teaching. The only challenge I often face is when people think in black and white. There is frequently no yes or no answer to a question. The answer is usually, “It depends.” The world is not black or white, but it is not grey either. It is glorious technicolour.

The most challenging part of my work is understanding the programme requirements when I tailor-make a program for a specific company. I can build the course structure only when I fully understand a company’s needs.

Do you work alone?

I work with a close-knit group of colleagues and friends. I have the luxury of having these tremendous professionals who help me structure and deliver a programme. Our objective combines academic passion, intellectual curiosity and profound experience. We want to bring value to the participants of our courses.

One thing that bothers me is that I am an old guy who writes about business for young people. How do you and I stay relevant and up-to-date?

It is essential to keep in contact with people. You must talk with them – network with them. You can’t learn everything from the Internet. I learn enormously from my students. That’s the thing about teaching. I learn as much as I teach.

What about employees? How do they stay relevant during their career? Should they take time out for further education, or should companies offer more in-house training?

Both alternatives are valid. However, our mindset must be to learn constantly, not just when we are on an in-house or external course. Learn from your colleagues. Admit your weaknesses and work to improve them.

But don’t concentrate on your weaknesses. Concentrate on your strengths. Successful people leverage and grow their strengths, which differentiates them from less successful people.

Will AI help?

Traders spend 70 per cent of their time collecting and organising information and data and 30 per cent of their time thinking. AI will allow traders to think 70 per cent of the time and collect and organise data and information 30 per cent of the time.

Pablo González, my co-author of ‘Thinking 2020’, often recalls what his father used to tell me, “Pedro, you work so hard you don’t have time to make money.” AI should allow traders to work less hard and hopefully make more money! It is a common problem.

The other common problem is that you don’t have time to sharpen your sword when you’re working so hard. This leads to burnout. I genuinely hope AI will give us all more time to think.

Which university courses would you recommend a person to study to get into commodity trading?

As I mentioned earlier, it is not a critical issue. As a manager, I hired people with different educational backgrounds on purpose, but they all needed to think critically and analytically.

You must find out if trading is your thing. Take your time to look for an internship. If you know someone in the sector, seek them out as a mentor.

What three pieces of advice would you give to a young person on their first day on a trading desk?

• Behind every problem, there are many opportunities.
• Take the time to specialise in something that differentiates you from others.
• You have two ears and one month. Listen twice as much as you talk.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

 

My book, Commodity Crops and The Merchants Who Trade Them, was recently voted one of the top ten commodity books ever.  To celebrate, I asked Google Notebook LM to produce a podcast on the book.

Google described the book as a compilation of interviews with prominent figures in the agricultural commodities trading sector. The author, Jonathan Kingsman, explores the intricacies of this industry through dialogues with individuals representing major companies such as Cargill, Bunge, Olam, and Wilmar. Each interview, organized by commodity (wheat, corn, rice, soybeans, palm oil, sugar, coffee, cocoa, cotton), delves into the history, production, trading dynamics, and challenges specific to each crop.

The book highlights key themes such as the impact of globalization, technological advancements, sustainability concerns, and the changing role of traders in a rapidly evolving market. It provides a comprehensive overview of the agricultural commodities market, emphasizing the interconnectedness of factors such as supply and demand, geopolitical influences, and the increasingly important role of technology. The book aims to shed light on the complex world of agricultural commodities, offering insights into this essential industry’s strategies, challenges, and prospects.

Commodity Crops – And the Merchants Who Trade Them is available on Amazon

1/ Could you share what you do today and your career journey so far?

My first foray into the sugar market was long ago at Louis Dreyfus when they told me to move from the Grain Department to Sugar. I was initially a grain analyst, covering UK wheat and barley. LDC asked me to sit at the sugar desk and learn about sugar. Somebody threw me the Kingsman report to read. It was my first introduction to the sugar market!

I’ve been in sugar analysis for around 30 years, working for various tradehouses and hedge funds. I am now an independent analyst for DNext, a digital platform based in Switzerland. We aim to simplify data collection and provide more efficient ways of analyzing the market. We cover agricultural commodities such as grains, oilseeds, and sugar.

2/ How have information providers evolved over the years regarding what they offer?

Everybody’s always been looking for the basics of crop analysis and trade flow data,

Data providers have moved downstream and now do more crop survey work. Your data provider now has a better handle on crops than in the past when only tradehouses had the complete overview of crop numbers. People can now access crop information more readily than in the past.

The provision of trade flow data has remained relatively unchanged over the last twenty years. In the future, I see room for a digital platform to consolidate trade flow data and make it more straightforward to assemble a consolidated trade flow.

We’re trying to forecast crops, and I’m unsure how big data helps. You’ve got to get your feet dirty, get out on the ground, and try to understand acreage. That’s where errors can occur. You don’t notice the switches from one crop to another if you’re not on the ground. Fundamental analysts have a critical role and will, hopefully, survive!

3/ Did you ever trade sugar?

It’s a difficult question to answer as it depends on what you mean by ‘trade’. If you work for a hedge fund, which I did, you provide trade ideas to a portfolio manager and then to a team of execution traders. There have been brief periods during my career when I have run a small proprietary book. It can be fun, but you can spend too much time screenwatching. So, I’ve always stepped back, providing trade ideas for the execution traders or the portfolio manager. People not involved in the business struggle with the difference between a trader and an analyst. I think the best traders are also analysts. So it’s a merger of the two.

4/ What’s a common mistake people make when analyzing the sugar market?

They are not spending enough time understanding consumption. It’s easier to follow crop numbers. Consumption involves a detailed analysis of monthly stocks, imports, and exports. It’s hard work. The other problem is that people consume white sugar, not raw sugar; monitoring white sugar trade flows is more complicated than monitoring raw sugar trade flows. The key to success is to get to grips with the white sugar balance sheet, which flows back into a raw sugar balance sheet. It’s been a massive issue for the last seven or eight years, with consumption falling in the developed world.

The challenge with consumption data is that an error can multiply through your balance sheet. A considerable demand shock, like COVID-19, can impact the quality of your consumption analysis. Consumption sets a good analyst apart from a bad analyst. The trade house analysts are often the best as they see the white sugar flows.

5/ What advice would you give someone struggling to stay on top of sugar market analysis?

I would advise them to continually seek new information and to stay on top of production, not just in the key countries but in the top twenty producers.

Get out into the field, meet producers, and build relationships. One thing that has benefited me over the years is that the trade houses I’ve worked for have allowed me to travel. To understand production, you must get out there and meet cane and beet producers. The meeting at the mill is vital to understanding the market.

If you are a trader and expect your analysts to build a decent balance sheet, take them with you when you meet your clients in the supply chain.

My daughter Charlotte conducted this interview as part of the ECRUU series of podcasts.

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

A Conversation with Eddy Fay – OCP’s representative in Argentina

During my recent discussion with Michael Sebag, I was interested to learn that Morocco has 70 per cent of the world’s phosphate reserves and that OCP, a Moroccan state-owned company, is the country’s sole exporter of phosphate-based fertilizers. I wanted to learn more. My friend and mentor, Ivo Sarjonivic, put me in touch with Eddy Fay, OCP’s representative in Argentina. We set up a Zoom call.

Before speaking with Eddy, I asked Chat GPT about Morocco’s fertilizer exports. After the call, Zoom sent me an AI-generated summary of our conversation.

I am unsure that old folks like me fully understand how AI is revolutionizing every aspect of our lives. I have, therefore, taken the unusual step of sharing with you, with only the most minor edits, the Chat GPT answer to my question and the Zoom summary of my conversation with Eddy.

I have added, in Part Three, a brief note on the Haber-Bosch process.

One of the great things about my life now is that I continually learn new stuff. My conversation with Eddy was doubly fascinating. Not only did I learn more about fertilizers, but I also learned more about the power of AI.

Don’t worry; I will revert to my usual (human-generated) format for future conversations.

Part One: Chat GPT answers my question about Morocco’s fertilizer exports.

Morocco is one of the world’s largest exporters of fertilizers, mainly due to its vast reserves of phosphates, which are essential for fertilizer production. The key types of fertilizers that Morocco exports include:

1. Phosphate-based fertilizers:
   • Monoammonium Phosphate (MAP): Commonly used for crops that require high phosphorus levels.
   • Diammonium Phosphate (DAP): One of the most widely used phosphorus fertilizers, containing phosphorus and nitrogen.
   • Triple Superphosphate (TSP): A concentrated form of phosphate fertilizer.
2. Nitrogen-Phosphate-Potassium (NPK) fertilizers: Morocco also exports NPK fertilizers, which are compound fertilizers that combine nitrogen, phosphorus, and potassium to provide balanced nutrition for crops.
3. Phosphoric acid: Although not a direct fertilizer, Morocco exports large quantities of phosphoric acid, which is used as a raw material for producing phosphate fertilizers.

Morocco’s fertilizer industry is dominated by the state-owned company OCP Group (Office Chérifien des Phosphates), which controls most of the country’s phosphate resources and fertilizer production. OCP exports fertilizers to markets worldwide, including Europe, Latin America, and Africa.

Part Two: Zoom’s AI-generated summary of my conversation with Eddy.

Sugar and Grains Industry Experiences

Jonathan first reminisced about his time at Cargill working in sugar, first in London and then Minneapolis for two years before moving back to London. Eddy discussed starting with Cargill in grains in Buenos Aires before training in Geneva, working in molasses in Minneapolis, and then fertilizer in Tampa.

Fertilizer Industry Merger and Mosaic Formation

Jonathan and Eddy discussed the history of the US fertilizer industry, specifically focusing on the merger between IMC and Cargill Fertilizer in 2004 to form Mosaic. Eddy explained that the merger was driven by Cargill’s need to invest a significant amount of resources to grow, and instead, they chose to form a company with IMC’s assets. This decision proved profitable for Cargill, as 65 per cent of Mosaic’s yearly profits was similar to all of Cargill’s earnings.

Jonathan asked Eddy about Mosaic’s dominance in the US fertilizer market and its domestic production. Eddy clarified that while Mosaic is the largest producer, the market can buy domestic production and imports.

Jonathan then shifted the conversation to OCP, a Moroccan company that produces fertilizers. Eddy explained that OCP mainly produces phosphorus-based fertilizers and has a significant presence in India, Brazil, North America, Europe, and Argentina. He also mentioned that OCP exports fertilizers such as MAP, DAP, and TSP, as well as phosphoric acid, rock phosphate and NPS (new products). Eddy estimated that around 15-20 per cent of OCP’s exports are in raw material form as rock, while the rest are processed fertilizers. He also noted that OCP is a market maker and is careful not to compete against itself in specific markets.

Agricultural Product Pricing and Volatility Discussion

They then discussed the pricing and volatility of agricultural products, particularly fertilizers. Eddy explained that while fertilizers have some form of futures markets via future swaps, they lack the liquidity to be a robust reference market. Prices are determined mainly by current economic and fundamental factors. He noted that nitrogen and potash products have recently calibrated to grain market levels. At the same time, phosphorus prices have increased significantly due to reduced exports from China and stock depletion in India.

Jonathan asked about price volatility, to which Eddy responded that it’s driven by events like the Ukrainian war and climate situations. He also confirmed a correlation between grain and fertilizer prices; not all fertilizers follow oil prices.

Strategies for Selling Product and Industry Dynamics

Eddy and Jonathan discussed strategies for selling their product, emphasizing the importance of long-term contracts and price security through formula contracts tied to published prices. They also discussed the changing dynamics of the value chain in the fertilizer and grain industry, noting that companies are now more focused on buying, supplying, and selling back to back, as opposed to taking positions. Eddy highlighted the challenges in setting up a supermarket or grocery store for farmers due to the grain and fertiliser businesses’ different profit and loss objectives. The distribution model hasn’t been mastered by anyone yet.

Fertilizer Industry in Argentina: Production and Politics

Jonathan and Eddy discussed the fertilizer industry in Argentina, which produces single superphosphate (SSP) while the rest of P products are imported, i.e. monoammonium phosphate (MAP). Eddy explained that Argentina mainly imports rock for production and that Bunge handles most SSP production while ACA, a cooperative, manages the rest. They also touched on the political aspects of the industry, with Eddy noting that Argentina has had populist governments in the past that have caused sudden changes in import quotas and exchange rates. However, Eddy expressed hope that the new government would bring stability and predictability to the economy, including the fertilizer industry.

Argentine Fertilizer Challenges and Brazilian Comparison

Eddy discussed the recent challenges faced by Argentine farmers due to economic and political instability, which led to insufficient fertilizer application and reduced soil nutrient levels. He compared this to Brazil, which has tropical soils and requires more fertilizer for production, with relative economic and exchange stability over the last 20 years. Eddy suggested that Argentina needs to import between 50 to 70 per cent more fertilizer to maximize grain production. Jonathan understood this and noted that Argentine farmers have historically not applied enough fertilizer regardless of the farming intensity that good crop yields bring. Eddy also pointed out that Brazil’s fertilizer consumption is significantly higher than Argentina’s and that Argentina should aim to consume around 6 to 7 million tons of fertilizer annually versus today’s almost 5 million tons.

Fertilizer Industry Dynamics and Import Challenges

Eddy and Jonathan discussed the fertilizer industry, focusing on the role of importers and the challenges faced by farmers. Eddy explained that the distribution industry is cyclical, with three bad years followed by two profitable ones, leading farmers to try to avoid market fluctuations by importing directly. He mentioned that significant players like Bunge, Cargill, COFCO (trading companies), and farming cooperatives are involved in importing. Eddy also highlighted the importance of brands in the industry, with companies like COFCO and Nutrien diversifying into specialized products. Jonathan inquired about the logistics of importing, to which Eddy responded that most imports are in bulk, with only 30 per cent being bagged at ports for distribution. They also touched on the safety precautions needed for bulk logistics, which are comparable to international standards.

Fertilizer Supply and Food Security Concerns

Jonathan and Eddy discussed the importance of fertilizer in agriculture and its potential impact on food security. Eddy clarified that while there are concerns about the supply of fertilizers from certain countries like Russia, international safety standards and country controls mitigate these risks. He also mentioned that some countries, like Brazil, have taken steps to secure their fertilizer supply. Jonathan expressed concern about the potential for a few fertilizer exporters to hold countries to ransom due to their dependence on these exporters. Eddy reassured him that while there have been price spikes and minor supply disruptions, these have not led to significant food security issues.

Part Three: The Haber Bosch process

After my previous conversation with Michael Sebag, some people questioned the importance of the Haber Bosch process in enabling and maintaining current population levels.  This article by Hannah Ritchie explains the arguments behind the assertion.

We often talk about the effect of industry on our health, but the Haber Bosch industrial process has produced half the nitrogen in your body.

According to Chat GPT (again), the human body contains about 3 per cent nitrogen by mass. Nitrogen is a key component of many biological molecules, including amino acids (the building blocks of proteins), nucleic acids (DNA and RNA), and other vital compounds. It is essential for cellular function, growth, and repair, forming the backbone of proteins and genetic material.

For an average adult human weighing around 70 kg (154 lbs), about 2.1 kg (4.6 lbs) of their body mass would be nitrogen. It means your body contains at least one kilo of fossil-fuel-based Haber-Bosch nitrogen.

© Commodity Conversations® 2024My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.

 

This week, I talk about fertiliser trading with Michael Sebag, founder and director of Orcom. But first, I wanted to know if fertiliser was a commodity.

“Urea and DAP are commodities,” he told me. “Fertiliser futures trade on the Chicago Mercantile Exchange, with domestic US quotations for various types of fertilisers, including Urea, Diammonium Phosphate (DAP) and Urea Ammonium Nitrate (UAN). But it is not a world market. It is like cotton because you can’t hedge cotton from Burkina Faso on the US futures.”

“What’s the main difference between fertiliser and other commodities?” I asked.

“CME’s fertiliser futures contracts are not traded as actively as other commodities. The trading volume tends to be lower, which can result in less liquidity. Fertiliser is a niche product, with fewer players directly involved compared to more widely traded commodities. Most trading activity comes from industry participants, such as fertiliser producers, distributors, and large agricultural enterprises.

“There have been attempts to launch a world futures market in Chicago. The obstacle is that you cannot get the product delivered. The leading producers sell their production themselves and would not accept to have it delivered against a futures market.

“The lack of a futures quotation makes selling and buying forward or hedge challenging. All the big grain-trading companies traded fertilisers at some stage, but they all gave up partly because of that. Besides, the market is small. The biggest fertiliser trader, Ameropa, possibly trades over 10 million mt annually. Most fertiliser is used where it’s produced and marketed directly by the producers. They don’t need traders.

“Some grain-trading companies still do fertiliser in Latin America for barter trade, giving farmers fertiliser in exchange for crops nine months later. But now the farmers are wealthier and have less need for barter.”

“As there is no hedging mechanism, is the business mainly back-to-back?” I asked.

“I mainly operate back-to-back,” he replied. “I work alone and am not equipped to take too much risk.

“The larger companies take positions, particularly in nitrogen fertiliser. Four or five million tonnes of ammonium sulphate are shipped from China to Brazil annually. Traders go long and pray that the price doesn’t collapse during the 40 days of voyage time. The vessels usually carry 60 – 70,000 mt. If they’re lucky, they sell 20,000 mt in advance and sell the rest on the way.

“Are there payment issues?” I asked

“When I started in the business in 1997, there were 100 importers in Brazil alone. Today, four companies make up 90 per cent of the import market. You have no payment issues.”

“Would a vessel take fertiliser from China to Brazil and then soybeans back?” I asked.

“Yes, they are the same vessels that move soybeans or raw sugar from Brazil. However, a cargo of 70,000 mt is specific to the ammonium sulphate trade in China and Brazil. Most fertiliser is shipped in vessels of between 25 to 50,000 mt. In Europe, 3,000 – 4,000 mt coastal vessels move fertiliser from Russia to North Europe.”

For such a small, niche market, fertilisers are critical in global agriculture. As Michael Pollan explains in his book The Omnivore’s Dilemma – A Natural History of Four Meals, the great turning point in the modern history of agriculture can be dated to 1947 when a vast munitions plant at Muscle Shoals, Alabama, switched from making explosives to making chemical fertiliser. Ammonium nitrate is an excellent source of nitrogen for plants. The chemical fertiliser industry (along with pesticides based on poison gases) was the product of the US government’s effort to convert its war machine to peacetime purposes.

Even though the Earth’s atmosphere is about 80 per cent nitrogen, nitrogen atoms must be split and fixed to hydrogen atoms before making fertiliser or bombs. A German chemist, Fritz Haber, worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on Earth had to be fixed by soil bacteria or electrical lightning, which breaks down nitrogen bonds in the atmosphere.

In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that “there is no way to grow crops and human bodies without nitrogen.”

Without Haber’s invention, life on Earth would have been limited by the small amount of nitrogen that bacteria and lightning alone could release. Mr Smil argues that the Haber-Bosch process for fixing nitrogen (Bosch industrialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 per cent of the population today would not be alive if Haber hadn’t invented it. Without synthetic fertiliser, billions of people would never have been born.

Once humankind had acquired the power to fix nitrogen, the basis of soil fertility shifted from a reliance on the sun’s energy to a new dependency on fossil fuel. More than half of the world’s supply of usable nitrogen is now manufactured—and farmers use more than half of all the synthetic nitrogen to grow corn. *

“We cannot live without fertiliser today,” Michael told me.  “In 2021, the Sri Lankan government banned fertiliser imports to save foreign exchange and demonstrate that the country was green and sustainable. Rice production collapsed by 20-30 per cent, leading to hunger and food riots.

“We do not have an alternative to fertilisers,” he continued. “My friends complain about what I do. They say that fertilisers pollute, and we should be organic. You cannot feed nine billion people with organic. Maybe one day, but not today.”

“But there are some organic fertilisers,” I argued.

“Farmers still use human waste in some parts of the world,” Michael replied. “North Korea is one. In the 19th century, guano, bird excrement, was probably the first fertiliser traded internationally. It is rich in nitrogen, phosphate, and potassium. Farmers still use duck and chicken excrement in the Netherlands and Belgium, but it doesn’t work for all crops.

“Typically, you use NPK triple 15 on coffee, which is 15 per cent nitrogen, 15 per cent phosphate, and 15 per cent potash. The rest is filler. The ratio of duck or chicken waste is not enough. Coffee farmers must use chemical fertilisers.

“Nitrogen, phosphate and potassium are the main fertilisers, but what is DAP?” I asked Michael.

“DAP, diammonium phosphate, is one of the most used phosphate fertilisers. You mine the phosphate and mix it with ammonia to make DAP or MAP, monoammonium phosphate.

“Urea, ammonium nitrate, and ammonium sulphate are nitrogen-based fertilisers. Urea, made from gas, is the main one. You take the gas, process it into liquid ammonia and use that to produce urea. In China, they make it from coal, which is of lower quality. It comes from gas in the Middle East, Egypt, and Russia.

“Potash is a granulated mined product. Among fertilisers, it is the least transformed nutrient.”

“What are the main trade flows in fertiliser?” I asked. “I saw that Trinidad and Tobago is a big exporter of urea. I find that odd.”

“Not really,” Michael replied. “The country is small and has a lot of natural gas, which the industrial sector transforms into ammonia and ships mainly to the US. The nitrogen industries are based where the gas is. You must have a cheap raw material. It makes no sense to produce urea in Europe today. It will cost $500 per mt when the market is $360.

“The big producers have a lot of gas: Russia, the Arab Gulf, Iran, Persian Gulf, Qatar, Egypt, and Indonesia. Venezuela used to be a producer, but you know their situation today.

“Demand for this product is mainly in the US, but the country is nearly self-sufficient with only occasional imports from Canada. Brazil and India are the two biggest importers.

“India is trying to increase its production because it costs them billions in their agriculture budget annually to subsidise these fertilisers. The DAP price CFR India is around $620 per mt, but it trades locally at around $500 per mt. The government pays the difference.

This year, India will import 3 to 4 million mt of urea compared to 12 million mt three to four years ago. But if they don’t import urea, they import the liquid gas to make urea.”

“What about the phosphates? I asked. “I see that Morocco is an exporter.”

“Morocco has the most extensive reserves of rock phosphate in the world. The country has 70 per cent of global reserves, enough to last 2,000 years at current yearly consumption rates.

“There are significant phosphate reserves from Morocco and Algeria to Tunisia and Egypt. Morocco used to export much more rock phosphate as a raw material but is investing in transforming it locally. They want to bring factories and jobs to their country. That brings added value.

“Russia is another significant phosphate producer. Russia is prominent in everything that has to do with fertilisers. They have sulphur, ammonia, cheap gas, rock phosphate reserves and potash.

“The US is also quite significant. When I started 25 years ago, there were ten plants in the US. Today, you have maybe three or four. They all belong to Mosaic, which used to be part of Cargill.

“Sulphur comes from the oil and gas refining industry. That’s why it comes mainly from the Middle East and areas with gas and oil. When you mix rock phosphates with sulfuric acid, you get liquid phosphoric acid, which you mix with ammonia to get finished phosphate fertiliser, DAP and MAP.

“And the potassium – where does that come from?

“It’s also a mined product. There are a few big players: Russia again, Belarus, and Canada. Israel and Jordan are also producers from the Dead Sea area.

“How volatile are prices?” I asked.

“The nitrogen price is the most volatile. Like most commodities, it depends on the S&D, but it also depends on the gas price. In Egypt, you could see the cost of urea go from $300 per mt to $350 per mt in one week. Phosphate prices are more stable. There are fewer producers.

“Potash prices are the most stable. The business is 100 per cent in the hands of the producers, with prices fixed every six months. Canadian exporters will go to China and negotiate with the two or three leading state-owned Chinese importers for the next six months. It doesn’t mean prices don’t go up and down, but it’s super stable.

“Energy prices are an essential price driver, but demand is also significant. Farmers have less money to spend on fertilisers when crop prices are low. Demand fluctuates significantly, which is not the case in most agricultural commodities. Fertiliser demand depends on its price relative to the price farmers receive for their crops.

“Farmers must apply nitrogen each year, but with phosphate and potash, what they use in year one, they can still find some in year two in the soil. It’s not that they can skip it, but they can apply less.

“Fertiliser is one of the inputs that affect the agricultural supply cycle. When crop prices fall, farmers plant less area and use fewer inputs, both area and yield fall. They play a role in balancing agricultural commodity S&Ds.”

• For more on the history of fertilisers, I recommended The Alchemy of Air by Thomas Hager.

© Commodity Conversations® 2024

My new book, Commodity Professionals—The People Behind the Trade, is now available on Amazon.

This week, I chatted with Sameer Soleja, the founder and CEO of Molecule, a provider of CTRM and ETRM systems for the commodity sector.

While ERP (Enterprise Resource Planning) systems broadly focus on overall business operations and management, including finance, procurement, and supply chain management,  CTRM (Commodity Trading Risk Management) and ETRM (Energy Trading and Risk Management) systems are specifically designed for the commodity trading industry, focusing on trade management, risk management, and market data analysis.

Sameer described ETRM and CTRM as “systems of record for a company trading energy or commodity derivatives and physicals.”

“About a hundred software companies are competing in the ETRM space,” Sameer told me. “And the numbers are still growing. However, two companies, Ion Trading and FIS, probably own eight of the top fifteen vendors.  Companies like ours make up the remainder of the top fifteen. There is a long tail of providers who specialize in things from gas accounting to silo management to all sorts of things.

“Consumers have a lot of choices,” Sameer added. “But it’s not a very transparent market. Companies like ours have the incentive to promise the world when you’re jockeying for a chunky contract, of which you might only get a half dozen or less a year. But these chunky contracts typically come with bespoke needs. The software buyer must discern who can provide the services they need.”

I asked Sameer what differentiates his company from others.

“It is the same for any enterprise software provider,” he answered. “We must choose the one or two dimensions in which we will compete and focus our efforts. We concentrate on usability and technology, and our marketing drives that home. You can’t be everything to everyone.

“Even so, focus is our biggest challenge. It should be neither too wide nor too narrow. If it is too wide, we won’t be able to meet a client’s specific needs. If it is too narrow, we would have too little software to sell.”

I told Sameer I had recently heard a story about a new hire at a software company who spent his first morning fixing a bug in the system, sighed, and then resigned. Sameer laughed.

“That’s not what you want happening,” he told me. “You want to create a virtuous cycle between your customers, the use cases you develop your software for, the knowledge your implementation support teams have, and then circle that back up the chain. That way, the customers will be happier, and the software will continuously improve.”

Sameer graduated from the University of Texas at Austin at the end of the dot-com boom and went to work for a company that made custom software for the energy market.

“Over the next eight years,” he told me, “I cycled through some of the places that all the usual suspects cycle through, including Constellation Power in Baltimore where I had my longest stint. I then did my MBA and MPA at the University of Michigan, where I realized that the sector was making terrible software.

“Nobody was ever happy with it. I thought, “Okay, there has to be something better. Let’s bring usability and modern tech into the commodities industry as part of the core platform.”

Sameer founded Molecule in 2012 in Houston and now has a team of around 50 employees, most of whom work remotely in the US, Europe, and South America. The company is opening an office in London for employees in the European area.

“Molecule’s approach has been to sexy up the software and focus on tech and usability,” he told me. “We’ve built our reputation on that. Our brand is sort of outsized in comparison to the size of our company. Our angle is that we understand what our customers do and why.”

The trend in the commodity supply chain is towards outsourcing, whether in operations, compliance or even sustainability. I asked Sameer if risk management and record keeping were going the same way.

“We are a software provider,” he replied. “We don’t install our software on a company’s system; we operate it on our platform. We have two multi-tenant instances, one in Europe and one in the US, and everybody’s on one of those.

“Being in the industry for the last decade, we have got to know other vendors that offer products that a customer might need. We can integrate them into our platform. For example, a customer can benefit from a weather forecasting tool integrated with their compliance system.

“We’re working with a biofuels company that has integrated an environmental auditor. You might not think it would have relevance, but it does when it comes to how you put trades on.”

Molecule recently conducted a survey about sector modernization. I asked Sameer about its conclusions.

“Trading organizations are waking up to the reality that modernization is the key to survival. Interestingly, we found people are not undertaking modernization initiatives to increase their bottom line but to make their businesses more agile. Companies still want their ETRM/CTRM system to be a reliable, fundamental part of their trading organization’s ecosystem, but they want it to support evolving business needs.

“Trading companies want agility and reliability, but they also want better speed and usability and direct access to data. The big ask is to get raw data out of the system. Let’s build a data lake. Let’s extract the data, and we’ll smash it together and do interesting things with machine learning and AI. People want to get their hands on data and do interesting things with it.”

A friend told me that ag tech lags metals and energy. I asked Sameer if it was true.

“Energy is where the money has been,” he replied. “Money brings tech and modernization. The lag is a function of the polarization in the entities involved. You’ve got the ABCD+ group on one side, Farmer Joe on the other, and nothing in between. Ag tech lags unless you’re at one of the ABCD+ companies.

“However, the advent of biofuels at a grand scale offers new opportunities for those in the middle. Producers of crops that become fuels must invest in new technology. If the EPA comes to you and asks you to prove that you earned a credit or certificate, you can’t say, ‘Oh, sorry, my record keeping didn’t work, or you know my compliance system is outdated.’ It could cost you real money.”

“AI is revolutionizing software programming,” I said, “But how is it changing the commodities sector?”

“I believe we are in an experimental stage.

“AI is excellent at summarizing enormous data sets. Agricultural data sets tend to be smaller than electricity data sets, which are huge. Even so, analyzing that amount of data for a community with as limited resources as agricultural can be challenging. The big traders have the resources, but I suspect farms and silos don’t. Their supply chains produce enormous amounts of information. The advent of AI will level the playing field and allow small agricultural players to compete with the ABCD+ group.

“I don’t know whether you are familiar with orange juice, where the big brands use satellites to monitor conditions in the groves. They tell growers when to water, add pesticide, fertilizer, or whatever. They use machine learning. Coca-Cola started doing that ten years ago, but AI may now permit a smaller farmer or firm to do the same.

“AI will re-level the playing field just like the web did 25 years ago,” he concluded. “It is the time to take those bets.”

© Commodity Conversations® 2024

My latest book, Commodity Professionals – The People Behind the Trade, is now available on Amazon.