Grains take on vital global importance
March 5, 2013
by Chris Lyddon
The grain trade — from farm to processing to the consumer — has to be viewed in the context of the world economy, delegates at the Global Grain Conference in Geneva, Switzerland in November were told. As it has become increasingly volatile, more people have realized the importance of the grain trading sector.
Philippe Chalmin, professor at Paris-Dauphine University, pointed out that commodity markets have become the most interesting financial sector. He looked at world economic growth.
“In a time of globalization, the world economy has kept, since the early 1990s, above 3% except for a hiccup during the horrible second half of 2008,” he said. “We are back to more dull times, although world economic growth right now is probably not below 3%.
“It’s slightly less than Europe knew in the 30 years after the Second World War,” he said pointing out that those were known as the 30 glorious years. “The world is moving ahead.”
Although the economy has improved since bottoming out in 2008, the U.S. and Western Europe are still struggling.
“Everybody knows that Congress and the White House have to have some kind of agreement before the end of the year, otherwise the U.S. economy will be in recession,” he said. “Europe is in recession. How long will it last?”
The U.S. is not really out of the crisis, as it still needs to reduce unemployment.
“Housing is getting slightly better,” he said. “Companies are not, right now, investing.”
He said the U.S. is in the midst of an energy revolution, which is one reason why ethanol will not be as important as it has been for world grain markets.
“The U.S. will be the biggest oil producer in 2020 thanks to shale oil production,” Chalmin said. He pointed out that natural gas in the U.S. costs one-third of what Europeans pay and one-fifth or one-sixth of what Japanese or Chinese importers pay.
“I don’t imagine the U.S. will have growth of more than 2% in the next year,” he said. “It won’t be the driver of world economic growth.”
Meanwhile, Europe is also in recession. “The mood of the German businessman is in decline,” he said. “Never have French consumers been so pessimistic. What will be the place of a de-industrialized Europe in a 21st-century world? The old world will have to make its own revolution,” he said.
Agricultural production will have to be multiplied by two to satisfy the needs of the population of the planet by 2050.
“People will be more numerous but also will be richer and will have to eat better,” he said.
He also addressed the problem of what he called the most important commodity of all: currency. “Never has the world been so unstable and the mother of all instability is currencies,” he said.
He highlighted the mistake made in financing what became an oversupply of shipping. “In economic history, there is a constant,” he said. “There are always stupid bankers.”
In Europe, the grain sector has been through a huge change.
“Between 1936 and 2006, grain prices in Europe were stable,” he said. “The real cultural revolution for European farmers began in 2006. Suddenly, the European market became an unstable one and all our farmers became inefficient speculators.
“We need speculation. We need liquidity. Agriculture began to interest investors in 2006. We need those investors. We need the tools to hedge risk.”
Alain Butler, senior advisor, soft commodities, at BNP Paribas, praised the performance of the food sector in the face of previous challenges.
“Whenever there was a change in society, agribusiness has responded by changing its model,” he said.
“We have a fast-growing market,” he said, noting the changes in the emerging countries. “More mature markets are requiring higher grades, sustainability and so on. The volume market has been fulfilled by a trading sector that has been consolidating in recent years. When you drink coffee, you want it to be sustainable. Consumers are ready to pay for the added value.”
He noted the effect it was having on the palm oil market. Ten percent of palm oil is said to be sustainable, he said.
“If that model is extended to palm oil, why not other commodities, such as soybeans for instance?” he asked. “Since 2008, the margins in food processing have started to shrink considerably. We have today a greater balance between the northern and southern hemisphere. Export origins are getting more balanced.
“That phenomenon is getting more pronounced in oilseeds. If you have everything in one hemisphere, your cycle is one year. If you have equal crops, your cycle is halved.”
That would mean more flexibility, Butler said.
“You can afford to have lower stocks-to-use ratios,” he said. “This is diversification to deal with volatility. The intermediates today are getting more and more service providers between farmers and processors.
“Farming resources are getting scarcer and scarcer. There’s a human resource issue. There’s a land issue and water. There’s an issue about investment.”
More land is cultivated by companies which are different to the owners of the land, he said. “Agribusiness is attracting more and more capital,” he said. “In the short term, agriculture is a hedge against inflation.”
Governments are getting more and more involved in agriculture, he said. One example is the sovereign funds. “Governments are getting more and more concerned about food security,” he said. “States will take more measures to control the agribusiness sector.”
You need to add value, and the sector needs capital to invest and have more sustainable profit, he said. “Trading will need to attract more capital,” he said. “Today, information technologies are globalized. Farmers know the prices. Everybody knows the prices. There isn’t much money to be had by taking a product and moving it to another part of the world.”
EXPERTS DISCUSS FINANCE
A panel of experts looked at how traders will secure credit over the next few years.
“2008 was a wake-up call for a lot of the merchants in grains,” said Karel Valken, global head of Grains and Oilseeds at Rabobank International. “They call themselves more supply chain managers than traders. Ten years ago, there were very few traders listed on exchanges. Investors didn’t like the seasonality of the P&L.”
The increased size of trading companies and their movement back into the supply chain is a reaction to the power of consumers and supermarkets, said Rick Torken, global head of agricultural commodities, ABN Amro.
“Power is moving back to the farmers. The margin is somewhere in the chain,” he said. “The amount of cocoa in a Mars bar is very little. The traders are trying to get some of that margin back.”
BLACK SEA DISAPPOINTMENT
Ludwig Striewe, global head of research and government relations for Toepfer International, described the role of the Black Sea region.
“Even 20 years after the fall of the Iron Curtain, we are still talking about potential,” he said. “It is a little bit disappointing.
“We have all lost money on defaults, third-party risk in that region. The investment the trading companies have done in the Black Sea region has brought markets together. In times when we really have a supply problem, farmers need to react to high prices. But they can only react if they have the logistics in place.”
Despite the drought problems in the U.S. last year, the Black Sea suffered 55% of the world’s crop losses. This shows how much more technically efficient U.S. farmers are than their peers around the world, Striewe said.
“We had the worst drought in the U.S. in 50 years, and U.S. farmers still produced yields twice as high as the Ukraine in a record year. Ukraine is struggling to reach world average yield. The region has still not really touched the potential it has.”
Russia’s production is still below the drought year of 2010. Much of the shortfall will be made up by imports from Kazakhstan.
“This will be lost to world markets,” he said. “Kazakhstan export potential will not reach the world market.”
He also expected Ukraine’s exports to be limited.
“One way or another, Ukraine will close exports very soon,” he said. “Ukraine cannot afford to export grain. The government has to do something.
“We have reached months in the past where all three countries have exported 6 million tonnes. The port facilities have improved a lot. That is really a change. The problem really was from the shortage of rail cars,” he said.
That was reflected in a large difference between prices ex-farm and fob.
“You’re not able to export because you do not get the rail cars allocated,” he said. “The railcar allocation is not clear.”
He also complained about bureaucracy in Ukraine. “We had to certify the quality of grain three times even within the country,” he said.
Chris Lyddon is World Grain’s European editor. He may be contacted at: email@example.com.