Diversification Across the Agricultural Commodities Market

The processes of diversification and value add have always been important in the constantly evolving world of commodities. As priorities shift post pandemic, it has become evident that the commodity trading world is entering a period of transformation.

Consumer trends are constantly changing and at times can be short-lived. One major trend we have witnessed, which is likely to become a permanent fixture, is the need to think and act responsibly when it comes to the environment. More specifically, what we as both individuals and businesses can do to reduce our carbon footprints. This movement has significantly influenced the global commodity markets ranging from oil, gas, and metals (both ferrous and non-ferrous), through to the softs and agricultural markets. Within agriculture, the movement has extended beyond emissions to include sustainability and traceability across the value chain.

The new proteins on the block

The shift in the market has seen commodity buyers focus on investing into innovation. This has been demonstrated by organizations such as Nestlé, who have invested into plant-based products as a way of offsetting their carbon footprint (with a target of reaching net zero carbon emissions by 2050). Most recently, they have launched a pea-based milk alternative. Subsequently, they are exerting pressure on trading merchants to follow suit and lower their own carbon footprints. Across the agricultural markets, we have seen many of the major merchants invest in alternative plant-based proteins, such as soy and pea proteins, as they tend to complement their current trading operations.

However, niche-focused businesses (for example within the coffee, cocoa, or dairy segments) have also been investigating new ventures or innovations in this sector that they can use to tap into this movement. Majors such as ADM and Cargill have also investigated alternative protein sources such as mycoproteins (fungus-based proteins) and insect-based proteins (crickets, black soldier fly larvae, etc.) in an attempt to diversify their offerings and while also establishing themselves for the future of downstream animal feed. New downstream livestock markets such as aquaculture also offer better protein conversion ratios compared to traditional protein sources (poultry, hogs, cattle), though obviously face significant impression issues.

A lifeline for smaller players?

A common sentiment shared across the market is that niche commodities allow smaller merchants to develop their own supply chain; within the supply chain itself or centered on end users and demand in various geographies. More recently there has been a number of new entrants into the market focusing on niche ingredients (specialty grains, alternative / plant proteins etc.) coupled with entrants that are purely focused on innovative business structures and strategies. But history dictates that the smaller firms will eventually be acquired. This was notably observed in the Asian rubber industry, where many smaller independent trading companies were acquired and consolidated to form larger conglomerates.

The alternative proteins market is relatively immature and not yet dominated by larger trading merchants which provide opportunities for boutique firms to establish market share and develop specific niches to fuel future growth. They can create their own marketplace and develop their own supply chain by establishing a long-term customer base reliant on their niche offerings and formulations. Due to relative immaturity of this segment, barriers to entry are still manageable while higher margins can be extracted from trade compared to the now mature and heavy volume traditional grains or oilseed trading industries. As traders, they also sidestep the issues common to principals of investing into assets and managing the cost of such overheads.

Building infrastructure in these new lab-grown and alternative protein businesses is resource intensive, with large amounts of capital required for the R&D, innovation, formulation, and governmental approval of such products. This is not to mention the marketing, branding, and distribution required to industries or retail consumers. It does seem fairly certain that such investments are beyond the reach of smaller trading companies who do not have the capital or global reach that such ventures may require. It may be worth observing the trends within these product segments as the different brands are consolidated and the market grows more stable. Ultimately, trading within the mature, mainstream agricultural markets is exciting at the moment, but diversification and innovation are seen as key factors towards sustaining both the industry and new entrants for the next decade and beyond. In fact, with such significant barriers to entry, the only way to survive for smaller players may be to innovate or risk being acquired.

Global trends

We have seen similar trends transpiring across Asia, primarily due to the vast amount of land allocated to palm and coffee production by both large conglomerates as well as independent farmers across the region. Despite reliance on traditional (and less environmentally friendly) fuel and energy sources, there has been a strong push towards the renewables industry across the region. Large international businesses across multiple sectors have been investigating the forestry and hydro sectors for potential investment opportunities with the aim of securing carbon offsets.

Whilst the global push across the agriculture and softs markets has been centered around sustainability and traceability, there has been a strong drive towards establishing alternative protein sources targeting aquaculture (tilapia, barramundi, etc.), specialty pet foods, and other high margin downstream segments. Additionally, we have seen the emergence of alternative lab-grown or substitute proteins; this segment has emerged as a by-product of the global trend towards alternative proteins as opposed to a ground level interest. Prices for these products remain extraordinarily high, however South East Asia has stayed a key target market for many international businesses as they try and keep up with demand.

Further questions for the future

The softs and agriculture trading markets are continuing to evolve at a rapid pace. This is occurring as consumer appetite for alternative products increases. We have witnessed a significant increase in the number of venture capitalist and investment professionals who are investing in small and medium-sized alternative product enterprises. We have also recognized a number of trading merchants and hedge funds looking to scale their softs and agricultural derivatives desks. As the world starts to reopen post-COVID-19, we have seen an increased demand for agricultural and softs products. With supply limited, firms are looking to capitalize on the market rally and volatility.

A number of questions still remain:

• Is this boom short-lived for small, innovative firms?
• Does it put them at risk of being swallowed by large global agribusinesses who are looking for opportunities to innovate, diversify, and grow off the back of a profitable year?
• Will this boom cause consolidation or will the market continue to fracture and expand?

At Proco Commodities, we specialize in the end-to-end supply chain and are constantly staying abreast of trends and developments in the energy and commodities markets. Be sure to follow us on LinkedIn to stay up to date with all the latest developments across the commodities supply chain space. For more information, please don’t hesitate to get in touch with either John Ong (APAC), Joe Russell (EMEA), or Ross Gregory (North America).