2020 was a challenging year for many of the physical trading merchants in Asia, driven by a trade war between the US and China (with many ripple-effects and political crises as a consequence of tension – this will be discussed in our next article), a global pandemic which placed restrictions on travel and business, and a credit crunch resulting in a significantly tougher financing environment. But whilst business conditions were tough in 2020, the agricultural industry has somehow managed to outperform negative economic sentiments.
Initially affected by worldwide supply chain disruptions (a direct consequence of COVID-related lockdowns), the agricultural markets rebounded rapidly as strong demand and concerns around food security grew. A significant trend across nations (including emerging markets and developing economies) is that they have focused on the need to secure additional buffer stocks of essential items to hedge against volatility and further supply disruptions. This has essentially led to a significant level of support in prices as countries seek to procure and maintain their own stores of emergency provisions.
Despite the positive performance of the industry which in many ways has outperformed oil and metals, most organizations are aware that the current status quo is unlikely to last. The mainstream agricultural trading industry, driven by transparency and well-established supply chains has begun to take on the appearance of a sunset industry. Many industry veterans have been vocal in decrying that the final days of third-party trading are just beyond the horizon.
As the markets continue to evolve, the industry has set its sights on disrupters to the status quo that just might create enough value to prolong the longevity of the trading business:
Container-based trading organizations are on the rise and are on track to establish strong market shares within their specific niches. Traditionally a business strategy more suited for smaller independents, this is something larger trading houses admit their business models are not ideally structured for. Requiring significant administrative and operational focus, these high-margin, high-effort models have recently come to the fore for their surprising ability to move dynamically and leverage an underutilized container and freight industry.
Whilst the ABCDs have a long-established advantage (a global presence from origination to destination, economies of scale, large operational/functional efficiencies, and deep balance sheets), over some of the smaller firms which enables them to rapidly establish and develop new vertically oriented value structures in new markets, they may still be threatened by the ability of smaller traders to access niche areas within the market where they are unable to pivot to as effectively.
Above all, one of the most telling trends we have witnessed has been an organization’s focus and ability to connect supply and value chains up and down the value stream. This, combined with the ability to secure and retain talent has seen them extract the most value out of such flows. As more firms look to entrench themselves further downstream, a significant trend towards “de-commoditizing the commodity” has emerged.
With the emergence of different consumption patterns (due mainly to evolving end-user demographics such as education and affluence), there has been a significant rise in industries such as the Asian dairy sector, aquaculture and aquafeed businesses, as well as a growing market for alternative and innovative proteins.
As the world continues to evolve, these rapidly growing segments represent huge potential for companies to expand their customer base by diversifying their end-user segments. New protein sources and industries such as lab-grown and plant-based varieties of protein represent a new path to consumers. Further to this, we are seeing insect and fungi protein industries begin to emerge (albeit still a ways off from being commercial alternatives). Most of these newer industries still require a prohibitive amount of R&D and investment for them to become commercially viable short of a paradigm shift. It is important to note that there has been a large trend amongst start-ups to investigate and develop technologies within these specific areas. This industry sector is also supported by governments who are sponsoring research into such markets.
Ultimately, such new segments always carry their own dangers, primarily uncertainty around pricing mechanisms and high initial investment costs before they become economically viable. This is particularly relevant for more novel products such as insect proteins and lab-grown meat. Organizations choosing to enter this arena will also be faced with high barriers to entry: most pressingly, marketing costs (and challenges) to shift customer perceptions that they would prefer to pay a premium over traditionally farmed meat. Opponents to this fledgling industry have made suggestions that the groundswell towards such products may ultimately be an unsustainable trend, a fad which might evaporate, ultimately leaving investors high and dry.
Despite these opponents and perhaps as a reflection on the challenges the agricultural trading industry has encountered over the past decade, it is becoming evident that the ‘old school’ and more traditional bulk trading mentalities must make way for a more comprehensive and holistic approach to the business.
Given the amount of transparency and the ease of accessibility to data both on supply and demand sides (not to mention the processing segment in-between), the traditional advantages of a multinational trading platform are slowly being eroded. Coupled with a constant stream of new entrants into the market ever looking to capitalize on any and all niche opportunities, and the emergence of new market segments, there is now much less room for complacency in this modern trading world.
The question will ultimately resolve itself as we witness the beginnings of a shift – how will the agricultural trading industry reinvent itself to survive the future?
by John Ongview my profile