Wednesday, March 27, 2013

Cargill's 2012 Report: Thinking About Food.

Cargill's 2012 revenues of $133.9 billion increased by 12% over the prior year. Earnings from continuing operations were $1.17 billion, down 56% from the 2011 record level of $2.69 billion.  Cash flow from operations in 2012 was $3.51 billion.  The company deployed $4 billion in capital, including $2 billion to acquire Provimi, an animal nutrition company.

Despite the sharp drop in earnings, one third of their businesses exceeded the prior year's results.  The Food Ingredients business, comprising 26 business units, produced record earnings in 2012.  Among other 2012 record-setting businesses:

  • Brazil--grains, oil seeds, cocoa and foods
  • North America--corn milling
  • Trade finance
  • Specialty canola oils and industrial oils.
So, where did things go badly wrong?  Cargill's agricultural supply chain results were well below the prior year, as the CEO noted the trading giant "misread markets."  Cargill has operations in 65 countries, of which two-thirds are classified as "emerging market economies."  

One of the hot topics at forums on global food issues is that of food security.  The big question is "Can the world feed itself?"  Cargill's CEO noted in a 2012 presentation, "It's demonstrably true that the power of the currently existing technology--without the need to invent new technologies--will allow us to use existing water and soil to feed the anticipated 9 billion people expected to inhabit the planet by 2050."  This view is not out of the mainstream, and it's certainly encouraging, as it should allay the neo-Malthusian concerns expressed by professional alarmists.  

Cargill uses the num√©raire of calories to measure the output of world food production, and it is certainly convenient.  While the total supply of calories produced is adequate to satisfy demand, there are surplus and deficit areas, as the theory of comparative advantage would suggest. World trade in agricultural products and foodstuffs should reallocate the supplies to satisfy demand.

Unfortunately, some 85% of global agricultural output is consumed where it is grown, and only 15% enters the world trading system.  So, part of Cargill's "essential work" is described as trading and logistics that connects surplus calorie areas with deficit calorie areas. Some of the trading vehicles, such as management of agricultural pools in Australia provide a flexible menu of options for grain farmers.  

Of the 15% of global output that is traded--such as corn, wheat, soybeans (whole, milled, and oil), rapeseed oil, cocoa, sugar, coffee, rice---Cargill's largest share of any particular commodity is said to be 25% or less.  

Price volatility shows up only in the traded commodity sector, as governments manipulate their own stocks in order to keep local food prices stable for political reasons.  Recent periods of higher price volatility have been laid at the feet of corporate commodity traders.  These arguments are unconvincing and unreasonable.  So what else is going on? 

Biofuel mandates in the United States are certainly a factor, as forty percent of our corn production is absorbed by ethanol as a result of non-market, Federal mandates.  All this for food which goes into the fuel tanks of our SUVs.  Also, ethanol has a marginal, if any, benefit to net GHG reduction.  So, in the words of Cargill CEO Page,
 "If we have the demand for 40 percent of our food production as completely inflexible (because of government mandates) then movements in supply..are going to have an outsized impact on price.  Today, 2 and 3 percent changes in supply are causing 40 percent changes in price, and much of that volatility is caused by the inelasticity in some portions of the mandated demand." 
A second factor is a global transportation, distribution and storage infrastructure which contributes to delays, higher costs, and significant crop spoilage. In the U.S., our inland waterways, including canals and river locks, have been neglected for decades and slow the movement of goods along major arteries like the Mississippi River.

Even in poster child success stories like Brazil, the picture isn't rosy for realizing its agricultural potential.  As a recent Bloomberg story points out,
"However, some problems may take years to sort out. The growth of the past decade has left Brazil's infrastructure straining to keep up, and cash crops often rot while trucks wait in lines to get into overcrowded ports. Companies struggle to find qualified workers due to poor quality schools." 
So despite Cargill's 2012 success in moving certain Brazilian commodities, Brazil itself lost potential export or consumption volumes to infrastructure inefficiencies that cannot be cured in the short term due to the inability to finance significant investments.   Today, paradoxically, the US imports corn from Brazil because of our own ill-conceived ethanol mandates.

According to Robert Zoellick, the President of the World Bank,
"First, we need to increase food productivity and production in developing countries, especially in sub-Saharan Africa and with smallholder farmers. To do so, we need to fix problems all along the value chain, including property rights, research and development for seeds and inputs, irrigation, fertilizer, agricultural extension, credit, rural infrastructure, storage and connection to markets."
Writing on the issue of food security, Roz Naylor, of Stanford's Center on Food Security and the Environment, notes,
"The third and much more difficult issue is the lack of political stability that would enable markets to work efficiently so food producers could sell their commodities and consumers could buy them at a reasonable price."
In fact, global companies like Cargill and Bunge step into this breach by providing training, agricultural extension services, and financing to small farmers in Asia and Africa.  People in the developing world need their own governments to step up and take responsibility for their own food security.

To put the somewhat abstract discussion of global distribution of calories into perspective, here's a story about the experience of one village in India.

There's no doubt that we've made progress, but there is so much more to do.

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