Beyond the ‘Big Four’: The new reality of global grain trading [Podcast]

Steven Kilger - 00:01

Hello! My name Steven Kilger, I’m the Managing Editor for Feed & Grain Magazine and the host of the Feed & Grain Podcast. Thank you so much for joining me today as we dive deep into the issues affecting the feed manufacturing, grain handling and allied industries.

Today’s episode is brought to you by The BinWhip from Pneumat Systems. The powerful Dual Impact BinWhip removes the toughest buildup and blockages in industrial storage silos – without hazardous silo entry. Learn more today at binwhip.com.

Today my guest is Doctor William Wilson, CHS Chair in Risk Management and Trading and University Distinguished Professor at North Dakota State University. Dr. Wilson recently published a paper called “Dynamic changes in the structure and concentration of the international grain and oilseed trading industry.” This paper shows that the narrative of the “Big Four” dominating the grain trade is far from the truth with their share of the market only equaling around 30% of the market. We talk about who these new players are, why the market has changed, and where it might go in the future if these trends continue.

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Now onto the show.

Thank you so much for joining me today, Dr. Wilson. I really appreciate you being here.

William Wilson - 01:35

Likewise.

Kilger - 01:36

Your paper is really fascinating and I really, I'm going to get, we're going to get to it soon, but I really just want to ask you a little bit about yourself, your background, well, how you're related to the grain industry, all that fun stuff, if you wouldn't mind giving us a little bit of a bio on you.

Wilson - 01:51

So I went to school at the University of Manitoba in Stanford, and I've been North Dakota State University since then. I'm a University Distinguished Professor and a CHS Endowed Professor, focusing on trading and risk. I teach commodity trading and I teach risk and strategy at North Dakota State University. I conduct a lot of research in that area.

In addition, I consult for a number of larger agribusiness companies around the world on topics related to risk and trading. Related to the grain industry, I was on the FGIS Board of Directors. The Minneapolis Grain Exchange Board of Directors for about 15 years, and I'm on the Board of Directors of four other companies worldwide that are involved in commodity marketing and trading in one way or the other.

In addition, I have an endowment at my university that focuses on commodity trading and risk. I teach a seminar every year that's now twice a year that's two weeks in duration to foreign grain buyers on commodity trading, particularly focusing on importing. And I'm kind of proud to say the last year we had students from 20 different countries.

Kilger - 03:01

Wow, that is amazing. It's always nice, especially when you hear about younger people getting into the industry. Always a plus.

But you're here today because you wrote this really interesting paper on the current state of the grain trading industry. For as long as I can remember, it's always been the ABCDs. They're the big ones in charge. But your study found a lot of interesting things that kind of challenged that.

Can you tell me a little bit about what motivated you to start this study and write this paper and why you thought it was important to have a better look at the entire grain training industry?

Wilson - 03:36

Yeah, so I've been teaching this for a long time. And I think even before you, when you said ABCD, you went back to the 1970s, we would talk about the big five as describing Morgan's book. And he said there were big five companies that were primarily private and family. They were non-transparent and nobody knew anything about what they did.

Several of those companies went bankrupt. Several of them were acquired by other companies and the rest have become public companies in one way or the other. In the 1990s, we evolved towards the acronym ABCD.

And I would say commencing in 2014, we had major changes in the industry worldwide with a greater focus on food security. We see the development then of the Chinese trading company called COFCO. And there was a headline in one of the Asian newspapers in 2014 that said China wants their own cargo. And that was the beginning COFCO International.

And then in 2014, we had sanctions first time imposed on Russia. That is when They decided that they did not want to completely depend on Western companies and began developing their own trading company.

So now today, instead of saying ABCD, we would say ABCD plus CHS plus Gavilan or Viterra, Marubeni, the Japanese trading companies, Olam, Wilmar, COFCO, Russia and others.

So it's a much more diverse industry than previously thought. The primary motive behind this is There's been a number of studies and media publications on the structure of this industry in the past couple of years, and they primarily rely on pretty old data and pretty old ideas of how this industry operates.

And I'm thinking the most recent quantified estimate was in 2012, and that was the basis of the studies in media in the recent years, and that's why we thought it'd be important to study this industry.

Kilger - 05:29

The new acronym doesn't quite have the same ring to it doesn't.

Wilson - 05:33

You got to talk pretty fast.

Kilger - 05:35

Yeah, well, they do if you're in this industry all the time, right? Because from the outside looking in, if you're not dealing with it on a day-to-day basis, you see more news about the industry consolidating than you do with different big players being involved.

And you also mentioned one of the big things with anything in our industry, which is the lack of available data. Can you tell us a little bit about where you got your data set? Did you have challenges finding and gathering what you needed? Because some of that still seems like it's behind closed doors.

Wilson - 06:04

So the older studies, 2012 and before, relied on very aggregated data, maybe coming from Figus in this country or other countries. And in fact, the study in 2012, this oftentimes studied and referenced, they actually used was dollar value of revenue of the largest five companies and used that to infer market shares.

Since then, actually, I used to work for projects for the Panama Canal. and they had shipment level data. This goes back to 2002. Since then, that shipment level data, which comes from chartering companies, has become more widely accessible and available.

And through digitization, makes it fairly, well, it's not easy, but makes it accessible so that you can put it in a position where you can use it for analytics. So our data is shipment level data, where we identify the charterer, and whether it's a FAB or CNF shipment.

And that allows us to more accurately define market shares and the distribution of market shares, which is a measure we call the Perfindall Index. Now, ironically, when I say it, I thought I had a monopoly on this information, but I've discovered that a number of trading companies, I'm sure not all, but a number of them, including former students of mine, have brought to my attention that they use this data all the time.

Ironically, I thought I was the only person in the world that did it. And then in our commodity trading room, we subscribe to another number of information companies who make this type of data fairly accessible. It's not easily accessible, but it's fairly accessible. You got to spend a bit of time making it work.

Kilger - 07:45

It seems important in what these papers are for, right? It's to get this information out there. That's why we have people in academia looking at this stuff.

Can you tell me a little bit more about Well, just a little more about the traditional narrative, I guess, of this kind of ABCD dominance. And how long was it actually even a thing? When did this really start to change?

Wilson - 08:07

My guess would be the acronym ABCD probably evolved from the mid-1990s after the Gap Agreement in 1996, which began liberalizing trade around the world. I'm guessing that would be when this began. And as late as 2014, I would see reference to ABCD. And then after that, it evolved with the development of Chinese and Russian grain entities and a lot of other companies.

And then through this process, governments around the world, including USDA, became worried about or concerned about concentration in the agricultural industries. USDA was primarily concerned about seeds and meat packing. They have not expressed interest about grain trading, but a number of other studies and other geographic entities around the world, including Australia and the European Union, and I'm sure others have had concern registered about the growing concentration of the grain trading industry.

Kilger - 09:08

That concern is, I think, warranted. And also, and it is still common. You still probably hear people say the ABCD thing today if you went to a trade show. It was a very common nomenclature.

Has the industry changed in general that made it easier to be a competitive grain trader? Or have countries just kind of decided to invest in this instead of letting companies take kind of the lead like we have here in the US?

Wilson - 09:33

Yeah, I think if you go back to the history of this. Again, the first study was done by Richard Caves. And he identified two sources of economies of scale, which is the reason why there were so few firms in the industry. And those were the economies of scale of facilities and logistics management, and the economies of scale of information. That's the 1970s.

Since then, What's happened is we've had a proliferation of digitization, which has made information much more easily accessible. So the informational advantage that those companies had has really been dissipated substantially. And now virtually everybody knows everything. So that's a radical change in the industry.

So in addition to that, During this time period, we've had a pretty massive build out and expansion of storage and shipping capacity around the world, particularly South America and Australia, but not exclusively.

The other change is that in the 1970s, we say these companies were really good at risk management because hedging didn't work very good. But now hedging and other types of mechanisms have evolved that makes fairly accessible to manage risk, data analytics, digitization of trading and logistics. has made it easier and lower cost way of consummating business.

Kilger - 10:56

I'm going to move towards kind of some individual regions and countries that I'm just curious about mainly because like you said, the data we've had before has been pretty old, so it's interesting to see some newer data sets coming out.

The Russian grain industry has been more or less ostracized from the western side of things. How has... the Russia grain industry adjusted to Western sanctions and having to get around them and move things in a different way than I imagine they would have had to three, four years ago.

Wilson - 11:27

Yeah, in the paper I write quite a bit about this, I have separate papers on that, and actually, just for information, I've been involved in Russia since 1991, and I was involved in the first liberalization of that industry and continue to be involved even today, both in Russia and Ukraine.

The purposes here is in 1991, the Russian government and the Ukrainian government wanted to encourage Western companies to enter their businesses in general, in agriculture in particular and more specifically in commodity trading. So they encourage all of the Western companies and embrace them as they enter that industry. And that evolved to be a fairly efficient and effective commodity trading industry.

And to the best of my ability, I think the breaking point was in 2014 after the Crimea invasion and a first round of US sanctions. And VTP Bank said, you know, if we're being sanctioned by the United States, probably risky not having a viable and competitive Russian industry. So that began a process unfolded over time.

They facilitated the development of an efficient and competitive Russian grain trading businesses. And so consequently today, then in 2022, like it was 2022 or 2023, because of the position of Western countries, we call them non-friendly countries. As a result of the war, the Russian government forced the remaining Western companies to leave Russia. to liquidate their assets and exit the industry.

So what came out of that was a cobble of Russian companies, I think at first there were 20 or 40 different types of Russian companies involved in trading, but that quickly changed and were evolving towards just a few Russian trading companies, but the top traders of grain from Russia and shown in our report are Solaris, Aston, GTSC, and others. None of the Western companies involved.

And one of the biggest countries in the world as an importer is Egypt, and Solaris, which is a Russian-backed company, is now emerged to become one of the dominant suppliers there.

Now, interestingly, I just did a recent study, companion study on import tenders by Egypt, and we studied the effect before and after the war. And one of the effects of the war was that for Egypt, which always used tenders, the effect of the war was to have fewer bidders, there was increased variability of bids and increased margins.

But taken together, what's significant about these changes in Russia is we have much less transparency with respect to prices, bases, export sales, and shipments, as opposed countries such as the United States world were highly transparent. This really is a major concern of the world grand trading industry.

Kilger - 14:21

That's a situation that's evolving so quickly and all the time, as everything does now, like you said, it's a digital world, everything moves so much quicker than it used to. These grain training movements, a lot of them seem to do this thing where they're half private business, and then they also seem to be slightly connected to the government a little bit.

For traders that are focusing on specific regions, North Africa, China being the huge one, even though We all know things aren't exactly great with the grain trade in China right now. Is there differences in the market structure or the difference of the way they do business that North American grain trading companies or grain traders should really be aware of?

Wilson - 14:58

Firstly, on North Africa, I think it's important to note it's one of the largest and faster growing markets in the world. Those countries in many cases have government-affiliated buying agencies. and the industries make extensive use of tenders for their purchases. And the Black Sea in the EU have tremendous logistical advantages in terms of that marketplace. Because of its size and its growth, that is one of the most competitive marketplaces in the world.

But the success of companies really depends upon their management of logistics and tendering XTs. Historically, the Russian grain was represented in those countries by Western companies, but rapidly the Russian grain has evolved be marketed by Russian companies and the top company in Russia is by the name of Solaris, and is evolving be one of the dominant suppliers in that region of the world.

In the case of China, everyone knows that They're the biggest importer of soybeans in the world, but in recent years, not every year, but in recent years, they're one of the biggest importers of corn and one of the biggest importers of wheat. So it's much more complicated than just saying soybeans is a big market and they're a big player.

Of significance in China is in 2014 to establish COFCO International, which is operating as a trading company and competes with Cargill, Bungie and Dreyfus and everybody else as if they're a competing company, but technically, they're a state trading enterprise and they're labeled as a state trading enterprise.

In our study, they are the largest CNF shipper to China. Everyone thinks it's Cargill ADM, it's COFCO.

And that's not only significant, but because they're so large, historically, they've had restrictive phytosanitary standards on certain industries and countries, for example, corn from Brazil and Argentina, wheat from Ukraine, and some of the grains out of Russia in there.

They have since the war began quickly to reduce the restrictions of those to facilitate trade through that. That's a significant event. And so consequently, what goes on in China is very critical and COFCO plays a very important role in that function.

Kilger - 17:16

Put on your futurist hat for a second. How might the structure of the industry continue to evolve this next decade? I mean, AI, data availability, all these things are increasing and happening so fast. What kind of trends have you identified where the industry might be going?

Wilson - 17:35

A couple of points to note on that, and then I'll tell you exactly. Our results show that the largest four firms control about 30% of the international marketplace in grains and oil seeds. So that's substantially lower than the other studies, which were about 70. I think the industry today is characterized as having numerous niche type traders. We refer to them as the competitive fringe, which specialize in very specific flows like across the border in the Black Sea, etc.

But we have a growing importance of state-back trading entities driven by the word food security. And if you go to origins of every one of these, I'll list them. It's all about food security.

That includes COFCO and China, the Russian industry, the way it's emerged. In recent year or two, Louis Dreyfus has taken on a major investment from the Abu Dhabi Sovereign Wealth Fund. And Olam has been acquired by Salik, which is a Saudi Arabia Sovereign Wealth Fund.

So that's four of the biggest buyers and sellers in the world who are affiliated with state trading industries in one way or the other.

And every one of them are probably unique, and I'm sure I don't understand the intricacies of all of them, but taken together, it has the effect of big powerhouse that never used to exist. Now that is not counting the emergence of state buying or government buying agencies on the import side. Our results say competition is very, very intense.

By every measure that we measure it in academics, strategy studies, we use the word competitively fierce. So it's a highly competitive industry and anyone who suggests something different than that is underrepresenting this. And what that means is no single firm can or is dominating the industry.

What do I think will happen? I think we'll have more and more mergers and joint ventures in one way or the other. We recently saw Bungie Viterra. Ola Nisalik is technically a merger, and I can see other types of joint ventures emerging to exploit the economies of origination and exporting.

A classic example, probably the best example in the world, is that of Temco. Shipments out of the United States. And they've recently expanded the scope of that. And I'm sure that's just success of it. I think it was we look forward.

It's really important that we have to recognize there's going to be greater risk. And normally when people like me talk about risk, they talk about risk and futures markets.

But I would go beyond that because the risk and futures is relatively easy to manage. But we're going to have greater volatility in the basis. We have seen that already as a result of these events. As well as shipping costs and routes. That's going to be caused by developments of climate change. Second one I'm going to call logistical bottlenecks.

To me, it's very interesting and important that in the year 23-24, I'm recently studying this pretty intensively, we had reduced flows on the Mississippi River because of the reduced water depth.

At the same time, we had reduced flows through the Panama Canal, which diverted shipments. We had major problems in the Red Sea and we had backlogs in the Black Sea, all at the same time. So is this going to happen again? I'm sure it will.

I don't know in what order and how, but the combination of that creates for greater risk and crucially for the trading industry basis and shipping costs. I think as we get more government involved in industries, it has the effect of changing flows of commodities. There was a quote in the Financial Times a few weeks ago by the President of Olam that said that in the case of grains and oil seeds, there were 154 countries that had varying types of restrictions on trading, even our price war that was going on with China right now.

This probably would not be going on if China were operating a completely liberalizing competitive marketplace and at the same time, we're not intervening in the marketplace. And the last thing that I think will be important is more and more stock holding by importers. I've worked with importers all the time, and my advice all the time is best way to manage risk is hold stocks. So taken together, we'll see greater emphasis on economies of scale, data analytics. And I use the word analytics for the following reason. Data is very easily available now. Challenge is how do you analyze And how do you analyze it in a sophisticated way, in a timely way to make decisions?

So that's why I call data analytics. I use the word optionality, and this is written in one of the books recently. And we say that commodity traders have to be masters of optionality. We've always had optional origin shipping in the case of grand trade, but I'm seeing it with greater frequency, certainly importers canceling and switching origins more frequently in the past. And the last point is risk and financial importance will become just more and more important for everyone in that industry.

Kilger - 22:43

Yeah, keep doing the great work because it's going to be a struggle to keep up with it. And we need people out there constantly looking at Well, thank you. Thank you so much for joining me today. I really appreciate it. I could listen to you talk for hours about Is there anything else you want to support? We're going to have a link to this paper in any description.

Wilson - 23:01

Turns out we're in the business in academia of writing papers. This ended up being a very popular paper. So make sure they get a link to it. And then there's a research report that goes behind that, which is even longer that would be accessible. Anybody have an interest in that.

Kilger - 23:17

Excellent. And I hope you're come on again and keep us informed on what you're doing. It really is interesting. I could talk to you about grain trade in Russia. We could easily do another 30-minute podcast on that alone.

Wilson - 23:28

Actually, I'm on the board of directors of one largest farm corporations in Russia, Ukraine, and trading companies. Since 95. So that's before you were born probably.

Kilger - 23:41

No, not quite that. I was seven. But yeah, no, really fascinating. You're incredibly busy, man. And I really do thank you so much for joining me today. I hope you come back again. Everybody out there, thank you so much for listening.

Until next time, stay safe.