TROUBLE IS BREWING in America. The reopening economy’s hunger for goods from China, and for the containers that carry them, has left importers of coffee, of which the average American guzzles two cups a day, struggling to ship the stuff from Brazil. They are using whatever they can get, says Janine Mansour of Port of New Orleans, where much of America’s raw coffee lands. That includes much bigger boxes, which reach the maximum allowed weight before they are full. Importing part-empty containers adds extra costs, Ms Mansour says, and these will ultimately be swallowed by consumers.
It isn’t just coffee prices in America that are rising. Transport logjams and paltry harvests in producing regions have conspired with surging demand to stoke food inflation across the smorgasbord. The UN Food and Agriculture Organisation (FAO) expects the value of global food imports to reach nearly $1.9trn this year, up from $1.6trn in 2019 (see chart). In May its index of main soft commodities hit its highest value since 2011, after rising for 12 straight months. Another benchmark index, by S&P Global, a research firm, has risen by over 50% since July 2020. On July 22nd the boss of Unilever, the Anglo-Dutch maker of everything from Ben & Jerry’s ice cream to Hellmann’s mayonnaise, said that pricier raw materials have caused his firm’s costs to swell at their fastest pace in a decade.
Central bankers warn that the price spikes could feed broader inflation, which is already on the rise in many countries. That would be bad for consumers. But their loss is a gain for the giant firms that source, store and ship foodstuffs on behalf of state buyers and multinational companies. These opaque traders, which possess the networks of silos, railways and vessels, as well as the data and relationships, necessary to redraw supply routes, thrive on volatility. The four biggest—ADM, Bunge, Cargill and Louis Dreyfus, collectively known as the ABCDs—have been adding to their total workforce of 240,000 and ploughing billions of dollars into new businesses that rely less on cycles of feast and famine. Their prospects offer a foretaste of global food markets in decades to come.
The ABCDs have been matching buyers and sellers of foodstuffs for more than a century. The youngest of the four, ADM, was founded in 1902. The oldest, Bunge, dates back 84 years before that. In the decades to the early 2010s they thrived on the back of population growth, rising prosperity and accelerating globalisation.
Then they began to wilt. A prolonged glut of crops kept prices low and stable, squeezing margins. Smartphones and other technology put real-time data on local conditions and global prices at farmers’ fingertips, reducing the middlemen’s market power. Producers bought storage to ride out price swings, which decreased opportunities for arbitrage. Challengers emerged, including Viterra, the agricultural arm of Glencore, a large commodity-trader-turned-miner, and COFCO International (CIL), the overseas trading arm of China’s state-owned food giant. Between 2013 and 2016 the ABCDs’ combined sales plummeted from $351bn to $250bn.
The revenues have stayed flat since. Yet last year was a bumper one for the ABCDs, whose combined net profits more than doubled, to $6.3bn. Analysts expect ADM and Bunge, which reported solid second-quarter results this week, to do even better in 2021. All four benefit from changing patterns of demand for crops and of supply.
Start with demand. As covid-19 spread in early 2020, it altered diets. Lockdowns and crimped incomes led people to eat out less and cook more at home. Meat, fish and dairy gave way to vegetables and cheaper packaged foods. As restaurants, canteens and cafés reopen, and wages rise thanks to the economic rebound, the reverse is happening. “A year ago we were trying to get rid of milk,” says Alain Goubau, a farmer in Ontario. “Now we are adding as many cows as we can.” China has been rebuilding its vast pig herd, which an epidemic of swine flu in 2018 had chopped by half.
This has had a multiplier effect on demand for crops, since more grain is needed to produce an animal calorie than if the plant were consumed directly, says Sebastian Popik of Aqua Capital, an agribusiness buyout firm in Brazil. Alfonso Romero of CIL expects China to buy a record 30m tonnes of corn (maize), one of the world’s most-traded crops, this year, in part to feed all its new pigs. That is up from 11m tonnes in 2020, itself an all-time high.
At the same time, high oil prices make energy crops look like an attractive alternative. And the more crops are turned into fuel, the less is left in the food system. The volume of American soyabean oil used to produce energy could rise by 39% between 2020 and 2022, reckons the US Department of Agriculture (USDA). Brazil’s production of ethanol from corn shot up by more than half last year and is forecast to increase by another quarter in 2021.
Even as hunger for crops has surged, other factors have squeezed supply. Droughts in the Americas have curtailed output. Brazil’s winter-wheat harvest is down by a fifth—and that fifth was meant for export. Besides the container crunch that affects speciality crops such as coffee, the grounding of commercial flights is stranding fresh fruit and vegetables. Higher bulk-shipping rates, up by 150% this year, are affecting grain freight. Part of that is the result of rising oil prices, which also raise the cost of petroleum-derived fertiliser and of running farm equipment.
The cocktail of forces is boosting global wholesale prices. Soyabeans and corn are, respectively, 56% and 68% more expensive than a year ago. This has filtered through to consumer prices: the cost of a home-grilled cheeseburger is up by 11 cents from 2019, says the USDA. The uncertainty and shrinking stockpiles are creating volatility. IFPRI, a think-tank, has had corn on high “excess price variability” alert for nearly four months. The prices of wheat and coffee have been volatile, too.
Big traders are enjoying the ride. Higher prices give the ABCDs more margin to play with. Bigger volumes, as farmers sell more to lock in the high rates, let them recoup fixed costs more quickly. And more volatility allows them to exploit price discrepancies across time and space. Despite a recent dip, the share prices of ADM and Bunge are still up by around 45% since 2019. Rumours of Bunge’s takeover by rivals, which swirled in 2018 as it embarked on a restructuring, have subsided. Dreyfus, the most troubled of the four, has been steadied by market conditions (and by Abu Dhabi’s sovereign-wealth fund, which bought a 45% stake in the family business). Cargill has not reported its annual profit for last year, but was heading for record earnings after the first three quarters of 2020.
In the short run, conditions will help the traders. Demand is likely to stay strong. Josef Schmidhuber and Bing Qiao of the FAO reckon trade volumes will grow by 4-5% in each of the next two quarters, year on year. Though prices have softened in the past two months, thanks to better planting forecasts in big regions and the winding-down of China’s pig splurge, they are higher than before the pandemic.
They will probably stay that way until at least next year, thinks Carlos Mera of Rabobank, a Dutch lender. Mr Popik says that the food businesses in Aqua Capital’s portfolio, which export to 45 countries, must finance two months of stock instead of the usual one. This implies that it will take time to iron out supply-chain wrinkles. And meteorologists place a high probability on another La Niña—a weather event of the sort that caused droughts in late 2020 and early 2021—before the end the year.
To deal with the longer-term challenges, the ABCDs are diversifying. ADM’s recent capital spending has gone into less cyclical and more lucrative businesses such as flavouring and colouring for fast food, soft drinks or vitamin supplements, says Seth Goldstein of Morningstar, a research firm. In the second quarter its nutrition-ingredients unit generated $201m in operating profit on revenues of $1.7bn. That is 8% of total sales, and ADM expects it to expand twice as fast as its core business, which tracks global GDP.
Bunge has sold dozens of mills, elevators and other assets to invest in plant-protein and edible-oil factories. Cargill now derives most of its profits from animal feed and animal protein. Its food-production facilities include a fish farm in Norway, a poultry farm in the Philippines and cultured-protein factories in America and Israel. It has become one of America’s largest meat processors, and a big venture-capital investor in food and life sciences. Dreyfus has backed Leong Hup International, a big integrated producer of poultry, eggs and livestock feed in South-East Asia.
As the traders become ever-larger producers of foodstuffs and consumers of crops, they may welcome a bit more stability. But not too much. As the populations of Asia and Africa grow bigger and richer, the middlemen will be called on to supply them with crops from countries in surplus, says Jos Boeren, a former Bunge executive now at Stafford Capital, an investment firm. The policies of big hoarders such as China, India and Russia look more unpredictable and their stocks less transparent. Climate change will ensure mismatches between supply and demand of foodstuffs. With six centuries of experience between them, the ABCDs will be evening out soft-commodity cycles well into the future. ■
Clarification (July 26th 2021): This article was amended to clarify the FAO’s analysis.
This article appeared in the Business section of the print edition under the headline “Field day”