{"id":1547,"date":"2019-07-08T14:46:52","date_gmt":"2019-07-08T14:46:52","guid":{"rendered":"http:\/\/commodityconversations.com\/wordpress2\/?p=1547"},"modified":"2019-07-10T09:11:04","modified_gmt":"2019-07-10T09:11:04","slug":"is-history-repeating-itself","status":"publish","type":"post","link":"https:\/\/commodityconversations.com\/wordpress2\/2019\/07\/08\/is-history-repeating-itself\/","title":{"rendered":"Is history repeating itself?"},"content":{"rendered":"

Part One of a Conversation with Howard Jay\u00a0O\u2019Neil<\/strong><\/p>\n

\"\"<\/p>\n

I spoke with Jay by phone from his home in\u00a0Southern Oregon. He has recently taken semi-retirement from the faculty at Kansas State University, where he managed the commercial operations of the International Grains Program; he now operates his own private consulting business. When I spoke with him, Jay had recently returned from speaking at a buyers\u2019 conference in Thailand\u00a0organized\u00a0by the USSEC, the US soybean export council. Prior to that he was doing similar workshops in Central America for the US Grains Council.<\/p>\n

Jay told me that he started in the business in January 1973 straight out of college. \u201cI joined Continental Grain in Orinda California,\u201d he continued. \u201cIt was right at the beginning of what was later described as \u201cThe Great\u00a0Russian\u00a0Grain Robbery,\u201d and I was right in the middle of it.<\/p>\n

\u201cI stayed with Conti until May 1977, when I was hired by Pillsbury to work as a grain merchandiser in the\u00a0export\u00a0grain\u00a0organization they had at that time.<\/p>\n

I worked in Omaha, Nebraska for one year, moved briefly to St Louis\u00a0Missouri, their regional office for export trading, and then to their Minneapolis headquarters. I stayed with Pillsbury until 1984, when they sold their grain origination business to Cargill.\u00a0Pillsbury had\u00a0quite a sizeable operation\u00a0at the time\u00a0with over 90 domestic facilities.<\/p>\n

\u201cWhen the Soviets came in for grain in the 1970s, the US just didn\u2019t have the transportation logistics to handle the volumes that they wanted to buy. The US agricultural industry was not ready or equipped for that much demand. There simply weren\u2019t enough rail cars, barges, or export facility capacity to handle the volumes.<\/p>\n

\u201cBy the early to mid-eighties\u00a0the U.S. had built the export capacity needed to meet what we expected to be long-lasting Soviet grain demand. But then the Russian demand slowed down. They didn\u2019t have enough money to continue buying the volumes that they had been buying.<\/p>\n

\u201cThe industry found itself in a horrendous position\u00a0with an over capacity of transport equipment and export capacity.\u00a0 People were driving around the US looking for empty rail sidetracks where they could store their surplus railcars. We were using old military sites,\u00a0unused industrial sites, anywhere we could find to store them.\u00a0 We parked our empty railcars in the expectation that we would need them one day.\u00a0But it would be many years, and hundreds of millions of dollars in industry losses, before the excess rail and barge capacity would diminish and balance out with cargo demand.<\/p>\n

\u201cI remember one particular meeting at Pillsbury in Minneapolis where the management group turned to the Vice President of our barge division, and told him to send out teams to look for trees along the Mississippi and its tributaries that were big enough to tie off barges to let them sit.<\/p>\n

\u201cEveryone was shouldering excess transportation assets, as well as export assets, and everyone was\u00a0hemorrhaging\u00a0red ink. In the mid-eighties the grain division in Pillsbury lost more than $200 million in a single year; that was a huge sum at the time. I imagine that many of our competitors were in the same position. We were only a medium sized grain company: the bigger companies must have lost even more. Every single company in the grain business at that time was losing money.<\/p>\n

\u201cThe management group at Pillsbury did a study to\u00a0answer\u00a0the question, \u201cWhen will the surplus railcars and barges\u00a0rust away to the point where they go to scrap, or when will demand pick up enough to use those cars?\u201d The answer the group came up with was\u00a0sometime around\u00a01999\/2000! It was a\u00a0surprisingly\u00a0 good projection. The excess capacity\u00a0situation\u00a0continued through the 1990s as well, although of course to a lesser extent than in the 1980s. But boy, were the 1980s bad! We all suffered! We had all over-expanded!<\/p>\n

\u201cWhen Pillsbury sold their grain merchandising operations in 1984 I joined Ferruzzi down in New Orleans, managing their feed\u00a0grain\u00a0export business in\u00a0Myrtle Grove\u00a0Louisiana.<\/p>\n

\u201cWe are all dependent on the market in this business. You can\u2019t\u00a0dictate\u00a0what sort of profit margin you can obtain. You can only extract whatever profit margins the market will allow, and back then it wasn\u2019t allowing any. During my time at Ferruzzi,\u00a0many of the vessels we were loading\u00a0had negative fobbing margins. The entire industry was in a\u00a0down cycle\u00a0and\u00a0incurred\u00a0negative profitability\u2014negative fobbing margins. We were paying more for the barges and the railcars than we were getting back\u00a0from many of the ships\u00a0we were exporting.<\/p>\n

\u201cWe closed our facility for\u00a0two months in an attempt to stop the losses, but the fixed costs of maintaining the facility were higher than we expected. We found that it was better to continue throughput\u00a0loading,\u00a0and have at least some revenue coming through to cover some of our variable costs.<\/p>\n

\u201cThat rule still applies today; it is better to keep facilities running, even at low throughput\u00a0margins, than to close them. It is better to try to extract some revenue to,\u00a0at least,\u00a0cover something against variable expenses, than to have no revenue and\u00a0still\u00a0have to pay your\u00a0full\u00a0overhead\u00a0costs. So we opened the elevator again, but things didn\u2019t really get better.<\/p>\n

I left Ferruzzi in\u00a01986\u00a0and\u00a0took\u00a0 a job with Bartlett Grain Co in\u00a0Kansas City\u00a0Missouri, where I managed their cross-country grain trading\u00a0group\u00a0and export grain operations\u00a0for 17 years.\u201d<\/p>\n

I asked Jay if the Carter grain embargo in January 1980 had made the situation worse.<\/p>\n

\u201cThe US has had two grain embargoes,\u201d he explained. \u201c One was under the Nixon administration, the other under\u00a0Jimmy\u00a0Carter. They were effectively soybean export embargoes. Both were very detrimental to the US grain industry. The Nixon and Carter embargoes motivated the Japanese to go to South America and invest capital in the development of the South American soybean industry.\u201d<\/p>\n

\u201cWouldn\u2019t that have happened anyway?\u201d I asked.<\/p>\n

\u201cIt\u00a0would\u00a0have,\u201d Jay replied, \u201cbut not as quickly, or on such scale. We created our own competition by imposing those two embargoes.<\/p>\n

\u201cIs history repeating itself now?\u201d I asked.<\/p>\n

\u201cI have no doubts that history is repeating itself with the current trade war with China. We are once again helping to create our own competition. China has been put in a very difficult situation in terms of grain, both politically and economically. The Chinese are almost certainly saying to themselves that they can no longer depend on the US as a reliable supplier, and they will certainly try and diversify their buying\u00a0options. China is already investing in South America, Sub-Saharan Africa, in Russia and the Black Sea looking to encourage soybean production outside of the US.<\/p>\n

\u201cWe are once again creating our own competition and that won\u2019t be reversible. We will see grain production increase around the world, and that will make it more difficult for US grain farmers for next ten or twenty years,\u00a0and beyond.\u201d<\/p>\n

\u201cBut to what extent can China find alternative sources of supply of beans?\u201d I asked. \u201cI know that the Black Sea region, particularly Ukraine, has expanded corn production,\u201d I continued, \u201cbut is corn a substitute for soy?\u201d<\/p>\n

\u201cNo they are not interchangeable. Animal feed has a percentage of starch, usually from corn, but you also need protein, and that comes from the soya meal.<\/p>\n

\u201cChina has a substantial soybean crushing industry that has to be fed by imports. The country only produces 2-3 million tonnes of beans each year, pretty much all of which goes to direct human consumption.\u00a0They must import the vast majority of their oil seed needs every year.<\/p>\n

\u00a0<\/span>\u201cYou can grow corn in a lot of places, but it is a\u00a0 bit more difficult to grow soybeans. Then again, you have the seed technology companies that are coming up with better, shorter-season soybean varieties that can do well in colder climates such as Canada and Eastern Russia, areas that have previously not\u00a0previously\u00a0been able to grow\u00a0soybeans.<\/p>\n

\u201cNo one is predicting that these new areas will ever be major oilseed exporters. They will sell a few million tonnes here and there, but nowhere near the 85 plus million tonnes that China needs each year. China will have to depend on South America and the US, but with a growing percentage of that coming from South America.\u201d<\/p>\n

\u201cAfter you left Ferruzzi they tried to squeeze the soybean futures market in Chicago. They failed, and the company went out of business. Is there is a danger that history repeats itself in that sense as well?\u201d<\/p>\n

\u201cUnfortunately, squeezed margins may have prompted some trading companies to try and replace that lost income by taking bigger risks\u00a0in the futures markets or\u00a0on the flat price.\u00a0This\u00a0has rarely\u00a0 worked.<\/p>\n

\u201cI have been in the business for 45 years and I have seen some great companies, Continental Grain, Cook Industries, and Andr\u00e9 either go bankrupt or exit the grain business. The ones that went out of business did so because someone speculated, took overly big risks, didn\u2019t hedge. Andr\u00e9 got out of the business after big losses in their soybean department. Cook Industries went bankrupt because of bad positions on crush spreads in soybeans. Even Conti\u2019s sale to Cargill followed losses in the Russian bond market.\u00a0 It was always something foolish.\u201d<\/p>\n

\u00a9 Commodity Conversations \u00ae<\/p>\n","protected":false},"excerpt":{"rendered":"

Part One of a Conversation with Howard Jay\u00a0O\u2019Neil I spoke with Jay by phone from his home in\u00a0Southern Oregon. He has recently taken semi-retirement from the faculty at Kansas State University, where he managed the commercial operations of the International Grains Program; he now operates his own private consulting business. When I spoke with him, … <\/p>\n

Continue reading “Is history repeating itself?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"advanced_seo_description":"","jetpack_seo_html_title":"","jetpack_seo_noindex":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[8],"tags":[],"class_list":["post-1547","post","type-post","status-publish","format-standard","hentry","category-blog"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9fIT3-oX","jetpack_likes_enabled":true,"jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/posts\/1547","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/comments?post=1547"}],"version-history":[{"count":4,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/posts\/1547\/revisions"}],"predecessor-version":[{"id":1568,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/posts\/1547\/revisions\/1568"}],"wp:attachment":[{"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/media?parent=1547"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/categories?post=1547"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commodityconversations.com\/wordpress2\/wp-json\/wp\/v2\/tags?post=1547"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}