Anna: Hello, and welcome to this Argus AgriMarkets podcast. My name is Anna Harouni, and I'm an associate editor, covering agricultural commodities markets in Southeast Asia. I am joined by Rubens Marques, head of South and Southeast Asia at Louis Dreyfus company, one of the largest operators in the global agricultural market, covering the entire ags and food value chain, founded over 170 years ago, in 1851. Rubens, it's great to have you here with us.
Rubens: Thank you, Anna. Very nice being with you today. Thank you.
Anna: We will start off today with talking about how market participants are reacting to the heightened volatility in agricultural markets, and how they are managing risk in the grains market, particularly in Southeast Asia. And then we'll move on to a slightly more niche market, namely pulses. Rubens, how do you view the outlook for importers' buying habits in Southeast Asia going forward? Do you think they are likely to stick to the currently popular spot buying, or shift to covering their demand with forward contracts, and ensuring that they have larger stocks?
Rubens: Thank you. That's a very relevant question. We believe that the spot market approach will remain for the foreseeable future. We've seen buyers taking a more hand-to-mouth approach for some time now, and especially since geopolitical disruptions became more of a factor. And we don't see that really changing much in the near term. And obviously, in buyers, especially buyers within our region, they prefer to remove complexity from their procurement strategy. So, the further forward you go, the more uncertainties you have to manage. And especially in today's environment, you're not only talking about the commodity risk. You also have the freight component, which has been extremely volatile, which then links to the bunker cost. And bunker has been moving sharply since the beginning of the conflict in the Middle East. So, by buying more on the spot, you know, the buyers can at least ensure that they know what they're paying for. They are not really gambling too much with those different components, namely the commodity, and also freight.
So, we think that that will remain the predominant procurement strategy for... And you have to keep in mind, buyers in the region, they tend to be quite sort of medium-sized, small-sized type of family companies. We are sitting in a very fragmented region. And I think, traditionally, you know, buyers do not really want to take too much risk. They want to make sure that they get what they need, in terms of quality, and at the right time, to focus on, you know, running their assets efficiently.
Anna: All right. Thank you. So, how are market participants handling the freight volatility, price risks, and procurement uncertainty in the current environment? Is it just really leaving to the last minute, and dealing with the risk that something might get disrupted?
Rubens: I think it has to be a combination of having a bit of a buffer, but not extending coverage too much. As I mentioned, if you start buying too much on the deferred positions, then you're really taking an opinion, and taking a risk, on freight. And, you know, the way bunker prices are moving so sharply, that could go either way. So, unless you have a very strong opinion, and you have visibility on what's happening, not only with bunkers, but logistics in general, and also with dynamics at the origins, and all the different aspects of trading, you know, basis trading, or even flat price trading, you're better off, you know, staying more on the spot market, so, it's kind of a flight to safety. And then you leave it to the sellers, basically, to take on those risks.
Anna: All right. Thank you. That makes sense. In terms of risk management using financial instruments, how do you see market participants in Southeast Asia, and elsewhere at destinations, managing basis risk, and the disconnect between benchmark futures markets and the physical market, especially during periods of heightened volatility, or when predominant origins fundamentals contradict the supply outlook in France or the U.S., which form the basis of the main grains derivatives markets on the Chicago and Euronext?
Rubens: No, it's a real challenge. We obviously don't have very liquid futures markets in the region, apart from palm. So, in terms of, you know, hedging mechanisms, buyers in the region still rely a lot on derivative markets that are sitting outside the region. And you mentioned two very important markets, the MATIF and Chicago Board of Trade in the U.S. So, we are seeing more and more dislocations, and that relates to freight, of course, but that also relates to, you know, macro developments, that relates to, you know, currency, you know, geopolitical disruptions. So, it's becoming harder, you know, to rely too much on correlation between those futures markets and, you know, our physical markets in the region.
So, the buyers in the region are predominantly flat price-oriented buyers, right? We don't really have too many players in the region, irrespective of size, that play too much with basis. So, they tend to be, and I'm talking specifically about grains, they tend to be a little bit more focused on flat price positioning. And that is especially true in, as you mention, periods of heightened volatility, and especially in bullish markets, they'll just go and buy flat-price CIF, lock it in, and then, you know, with limited downside, and some upside, you know, they'll be able to maybe capture a little bit more margin from that strategy.
So, we don't really see buyers relying too much on a basis strategy, when it comes to grains, and pulses, of course. So, it's really up to the sellers, then, to take on that risk. And, you know, just using LDC as an example, we are in a very strong position to do that, you know, with presence in over 100 countries across 6 regions. So, obviously, that gives us a very good visibility of what's happening at all the main origins, what's happening, you know, with logistics, with freight, and currency, and all other components of basis trading. So, I think, going forward, we should see buyers in the region sticking to that strategy.
Anna: All right. Do you see a larger role in the future for more regionally relevant pricing or risk management tools? So, for example, ones based on assessments of grain prices delivered at major destinations on a CIF or CFR basis. So, like, CFR basis swaps or something like that.
Rubens: I think...look, there's always space for growth in that space, in having a little bit more of a benchmark and price discovery. We're, as I said, sitting in a region that doesn't really have that many futures markets, or at least with, you know, good-enough liquidity. So, this assessed markets price indexes are important reference points, I think. And we definitely need more of that. Now, that being said. Our experience with buyers have been maybe not so conducive. Buyers tend to be a little bit skeptical about adopting new hedging options, risk management tools. We get feedback from a lot of them that they've done it in the past, and they haven't really seen the benefit. And another thing to keep in mind, as volatility increases, then the prices of those options, it's like any insurance premium, they also go up. So that also disincentivize buyers to go and use this kind of strategy. So, I think, yes, there is room to grow in that space, and I'm sure you guys play an important role in providing that price discovery, but especially in high, high volatility times like this, you know, buyers will tend to be a little bit more on the safe side. And in their mind, you know, that means a hand-to-mouth procurement strategy, and especially in a market that seems to be, you know, more bullish, they'll just take a flat-price position, and then sit on it, yeah.
Anna: All right. Great. Thank you. That's, yeah, it's a little tough to get something new going in a market, especially with futures as old as something like Chicago.
Rubens: Yeah. And it requires some education, perhaps, or socialization. You really need to dissect the region. We have many countries within the region. We talk about South and Southeast Asia, you know, you're dealing with different countries, different cultures, and a different type of dynamics. So you need to basically look at each country individually, and then within those countries is also, it gets very fragmented. You know, we have a lot of medium, small-sized buyers that, you know, perhaps they are not even aware of this type of risk management tools, or they don't have access to it. So, you know, that's a bit of what we do. You know, when we set up our business in the region, and we have a very strong marketing presence, we want to get as close as possible to customers, and not only, you know, large regional customers, but also medium-sized, small-sized buyers, that require grains and pulses to run their businesses, and they need risk management services and supply chain services.
Anna: All right. Great. Thank you. Let's move on a little bit, to something that you already mentioned in passing. Let's talk about pulses. So, where do you see the largest and most stable import market? Size-wise, India is the largest, but they tend to have a slightly unpredictable trade policy with pulses.
Rubens: Mm-hmm. That's right. Yeah, I mean, as you rightly said, India is by far the most important player in pulses, largest producer, largest consumer, and also the largest importer, so... And that will only continue to grow. We do see, obviously, strong demographics in India, and an increasing need for nutritional, you know, plant-based protein. So, consumption will continue to grow. You know, obviously, there is a food security agenda in India, to ensure that there's enough local production to fulfill domestic requirements. But then, when you add the weather, you know, disruptions that we're seeing, you know, climate change, you know, I think India will continue to be a very big, you know, swing country. You know, we will have opportunities to import pulses into India, like we are seeing in the last couple of years. But then, obviously, you know, that can change, as you mentioned. If there is enough local production, then you then need to be locally present to trade domestic crops, like LDC is, with our pulses business. So, India, very important, and we remain so. We do see countries like Pakistan and Bangladesh, also in South Asia, coming up with, you know, a lot more import requirements, as consumption locally increases. You have also strong demographics in those countries, urbanization, and increasing middle class and, you know, very, very large population, so we do believe that those countries will continue to draw a lot of pulses from the market, from the main origins, that being Australia and Canada. And then, obviously, the Middle East. That is such a strong staple food in the Middle East, this, and increasing, also, interesting in pulses. So, we think that Middle East, and to some extent, Africa, will continue to play an important role in pulses demand going forward.
Anna: All right. Thank you. Yes, that's, pulses is definitely a market that's growing, and up and coming. What do you see currently pulses traders using to manage risk?
Rubens: That's a good question. I'm glad you asked that, Anna. Look, there's not many options available today. I mean, pulses is an unhedgeable commodity. You don't have any available futures market. There used to be one in India, that is no longer available. So, it's, like, really old-school trading. You have to manage your risk based on core fundamental supply and demand. So, being very close to your pulses growers, in the key origins, and also very close to customers in key markets. And without a doubt, research is key. So, luckily, we have that as a backbone in LDC, and we always put a lot of effort into our research capabilities, and more and more bringing innovation into research, you know, with AI, with satellite monitoring. We have an AI hub in Singapore, that was launched two years ago. And we have a lot of projects that are focused on crop modeling, you know, weather forecasting, mid/long-term as well. And that has been instrumental for us, especially in countries like Australia, where you have larger farms and land plots, so it becomes a lot easier for you to really use satellite monitoring, and then use AI to, you know, basically analyze that data. And we've been very successful in using innovation on research. And then you have, on the other end of the spectrum, you have countries like India, where farming is a lot more fragmented, and then you really require having boots on the ground, and having a network of agronomists and researchers to collect that data, so that we can feed into our models, but again, just to summarize, it's really about understanding supply and demand fundamentals, and then forming an opinion, and trading around that.
Anna: All right. Well, great. Thank you. I think that's pretty much it for us today. And thank you again for joining me, Rubens, and giving our listeners a view on risk management in agriculture. And thank you all for listening. If you would like to find out more about Argus coverage of agricultural markets across the globe, please reach out to
ags@argusmedia.com.
Rubens: Thank you. Thanks for having me.
