Anyone who has seen “Field of Dreams” or any movie based in the American heartland has the vision of vast fields of grain blanketing the landscape to the horizon. Non-Midwesterners still believe there is nothing in the country’s center except corn, soybeans and wheat. In many ways they are right, as the Midwest still is the engine behind the agriculture business in the United States, but much has changed.
Although ethanol as a fuel source had been part of the lexicon for decades, during the early 2000s ethanol plants began to be built in earnest. In 2005, the Environmental Protection Agency (EPA) came up with Renewable Fuel Standards mandating that 7.5 billion gallons of ethanol needed to be blended into fuel by 2012. That truly set in motion the push to produce ethanol, and corn prices (CBOT:CZ13) went from a sleepy $2.50 to $3.00 per bushel to more than $8.00 a bushel. Throw in some very bad weather years and price volatility escalated for all agricultural products.
Step in market forces, which basically saw a jump in consumption both from a growing demand from Asia as well as the need to make ethanol, and this ignited a global move to produce grain crops that the world needed. South America always was a grain producer, but today it is out producing the United States in soybeans. The Black Sea region, again always a grain producer, now is an expanding force in wheat.
Another push came from the major agricultural trading companies, or the ABCDs, that is: Archer Daniels Midland (ADM), Bunge, Cargill and Louis Dreyfus. Although always giants in agricultural processing and distribution, these groups went global in all aspects of the business. Joining them on another end were the commodity trading companies, not there for the end user, but global traders who would work to move world products: Firms like Noble, Glencore and Olan all grew over this period, over-lapping in some areas with the ABCDs, but basically focusing on trading for their core revenues.
Today, other new players have joined the fray, including large hedge funds who are purchasing land to grow products. Add to this other new players, such as high-frequency traders and prop houses, and it makes for turning the former U.S.-centric ag business into a global mega-industry that still is growing.
Despite this global explosion, the futures markets haven’t necessarily kept up; open interest has been relatively stable while delivery points have yet to be expanded beyond the United States. This means brokers who typically thrived on the futures side of the business began to look elsewhere to expand.
To get an insider’s view of this change in the ag business, we spoke with Pete Nessler, CEO of FCStone, the commodities arm of INTLFCStone. Pete has been in the ag business more than 30 years, learning early the realities of hedging globally when he began trading just as the Falklands war heated up. From there he worked with elevators and farmers to hedge product, as well as pushed FCStone into the ethanol revolution. (See “Pete Nessler is good Midwestern stock”). With FCStone being one of the largest clearing firms in grain products, Pete has seen from the inside what changes occurred, and what still needs to happen.
Because of the changing industry, FCStone has moved beyond American shores, working the ag business globally, as well as expanding into other commodities, such as softs. And, MF Global’s demise had one silver lining (literally) for FCStone; it picked up MF’s London Metal Exchange group, and quickly became one of the world’s largest precious metals brokers.
Next month we’ll be doing our Top Brokers review, but with the changing makeup of the grain markets, we believed it was a good time to look at how one firm changed with the business it grew up in, moving from the Iowa grain fields to new countries and new commodities. No doubt, this is a template most firms would like to follow as the commodity business, especially grains, explodes.