"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected."– George Soros
Senior Manager Sales CIS
Above citation of billionaire investor in financial markets is very true in respect of the grain markets. The new year started with the shake-up at a top agriculture commodity trader Louis Dreyfus, who announced a cost cutting program and “systematic review of hiring and salary increases” to combat low profits. Similarly, Western Australian bulk handler and one of world’s biggest grain exporters, CBH Group has recorded a loss of $119.3 million in the year 2019. CBH Group blamed it on “global and political circumstances”. Another leading trading house Glencore has to make increasingly painful provisions in its accounts for legal woes ($24 million in legal and other in the first 6 months of 2018 as opposed to $45 million in the first 6 months of 2019). The Glencore (LSE: GLEN) share price has fallen from record highs of more than 400p at the start of 2018 to finish this year at some 235p. On the same note, end of the year saw a slump in Cargill’s 2019 earnings. “Throughout the year, we faced a very challenging global business environment that slowed earnings,” said David W. MacLennan, chairman and chief executive officer of Cargill. As a result, in the fourth quarter, net earnings of $235 million were down 67% from $711 million in the previous year’s fourth quarter. Over in the US, Bunge sells stake in U.S. ethanol plant as biofuels business struggles due to Trump administration’s expanded use of waivers to exempt oil refineries from mixing ethanol into gasoline, while in Argentina, soy crushing giant Vicentin, founded in 1929, has suspended most of its operations as the company battles to restructure its debt after defaulting in December 2019. Vicentin was Argentina’s top exporter of processed soy and an iconic brand in the South American grain scene. Vicentin's financial meltdown exposed the challenge of operating in the economic climate of a country, where financing costs are a well-documented problem with the benchmark interest rate at a whopping 63%.
To sum it all up, Tolstoy's quote on happy families being all alike while every unhappy family being unhappy in its own way is certainly true when coming up with a plethora of plausible reasons for profit meltdowns and personnel shake-ups, whereas the crux of the matter is that they all happen against the backdrop of tough trading conditions. When information was difficult to obtain, and markets more opaque, large trading houses with established financial instruments and trading channels had a significant edge. Today’s commodity markets are characterized by increased competition, transparency and unrestricted access to information making pure trading less profitable. On the other hand, owning cash generating assets in strategic areas have become key to success. Grain trade is capital intensive, it requires investment in storage, facilities, port and transport infrastructure. As a result, companies are forced to restructure in order to improve their financial strength and investment grade rating enabling finance further growth which facilitates trading. It all boils down to the evolutionary survival of the fittest as a natural selection mechanism.
In a recent development heavy weights in commodity trading, among which ADM, Bunge, Cargill, Dreyfus and more recently, COFCO and Glencore, have joined forces to digitize its supply chain and commodity trading systems. This blockchain initiative started by world’s largest agribusiness firms is set to explore solutions for grain and oilseed post-trade processes and supply chain efficiency with technologies including blockchain and AI, streamlining contract execution processes to make them more efficient, more accurate and more transparent.
Changes in phyto- and quality requirements of importing countries are evolving and changing constantly. Thus, Egypt - the world’s top wheat buyer, has recently announced revival of its travelling delegations of agricultural inspectors, who are to resume checks of wheat cargoes purchased during state tenders at the port of origin. Government quarantine inspectors had in the past travelled at the expense of supply companies aiming to secure smooth passage for their wheat, incurring a fixed cost per ton. Retrospectively, it proved a lesser of two evils, after several cargoes were rejected at Egyptian ports on arbitrary and unpredictable grounds incurring huge costs.
News travel fast today. There is a big demand for news from various market players, and a growing number of news agencies and analysts, large and small, cater to that need. Information supply is extensive and of variable quality and accuracy. The spread of inaccurate and misleading information is a significant and growing global problem. It is a major challenge for journalists and a source of alarm for governments, institutions and individuals internationally. So much so, that Thomson Reuters and Facebook partnered to explore the significance and extent of this growing global problem in their new online course "Manipulated Media".
Back to trading. More often than not, marketing and trading still uses Chicago Board of Trade (CBOT) futures as a risk management tool to hedge accumulated wheat and corn quantities, but an increasingly big proportion of the price – the basis - cannot be hedged with all its consequences. At the same time, relatively flat commodity markets have spurred some young opportunistic traders to form international trading service entities aiming at selling applied trading services to the industrial users who consider outsourcing trading altogether.
Furthermore, as trading becomes more transparent, and information flow less restricted, the profitability of conventional news terminals is also coming under pressure from cheaper alternatives, which unbundle various services making them more affordable while securing some valuable features, like Excel analytics plugin, connecting data to Excel sheets with in-house analytic calculations and corporate messaging with its advantages of being connected to other influential traders through a professional platform enabling pitching real-time ideas and gaining feedback from the community and analysts.
Meanwhile, market volatility is increasingly kept in check by modern agriculture, which is characterized by most innovative production practices and growing techniques, employed by today's farmers in order to maximize the production of agricultural produce while minimizing adverse influence of weather. Nowadays proactive farmers make use of innovative hybrid seeds, which are more resistant to adverse weather, along with technologically advanced equipment and lots of energy inputs in the form of irrigation water, fertilizers and pesticides. Weather has lost the shine of its importance as a crop limiting and market rally igniting factor when it has become increasingly possible over the last couple of years to produce bumper crops under less than perfect weather conditions. Notable production gains in the past decade have been seen in the Black Sea region, in Brazil and Argentina.
Among latest developments we should note the growing desire of local farming companies to market their grain. For example, the ongoing trend of the last few years in Russia, Ukraine and Kazakhstan shows local grain exporting companies on the rise at the expense of multinational companies with trading volumes steadily increasing. With 123 million hectares in arable land - the world’s third-largest area - Russia has the potential to become an agricultural superpower. Following imposition of sanctions, the Russian government launched an “import substitution” program subsidized loans and tax incentives for investment in agriculture and food processing, and even state grants for certain acquisitions of agricultural equipment and agricultural advancement.
There are no quick fixes. And yet, current markets are offering new lucrative opportunities for those willing to take risks, which usually go disguised for those lulled into complacency. Naturally, according to Soros, “imperfect understanding of [markets and market trends] is the human condition and there is no shame in being wrong, only in failing to correct mistakes”. In view of the ongoing trends and developments, opportunities arise for those traders, who are looking for a worthy challenge in a less conventional and more stimulating environment of the global village of today. Nowadays, commodity markets provide opportunities to use data science and market analysis for profits maximization, be it in logistics and improved trade flows, or increased efficiency in the hedging of commodities, or in more efficient use of available resources.