Farmers inspect cocoa trees in the fields outside the village of Ebikwawkrom, Ghana, May 1, 2015. Ghana estimates its 2014/15 cocoa season output will be not more than 700,000 tonnes, down from an initial target of more than 1 million tonnes that had already been revised down to 850,000 tonnes, senior government sources told Reuters on Tuesday. Picture taken May 1, 2015. REUTERS/Matthew Mpoke Bigg - RTX1BQGH
Cocoa prices are up

When Japan’s Mitsubishi Corporation acquired a fifth of agricultural trader Olam in August, it was widely viewed as another Asian company looking for a way to tap into rising incomes and growing populations in emerging markets.

But Mitsubishi says its $1.1bn investment was not just driven by growing demand for food, but demand for food grown sustainably, with the Japanese group hoping to access Singapore-based Olam’s expertise and engagement with smallholder farmers and producers in remote regions in Asia and Africa.

“[Mitsubishi] placed a big importance on Olam’s sustainable and traceable sourcing of agricultural products,” says Hiroaki Nakayama of Mitsubishi’s living essential resources division. “It was one of the key attractions.”

Sustainable commodities

In Europe, ethical and sustainable investment approaches have long been part of the investment management offering. There have also been corporate transactions at the consumer level with large food groups looking to buy into ethical brands, such as Unilever’s purchase of ice cream maker Ben & Jerry’s, according to sustainability experts.

The Olam-Mitsubishi deal signals that sustainability— the concept of food production based around caring for the environment, efficient use of non-renewable resources and quality of life for farmers and society — is starting to affect deals further up the agricultural supply chain.

Olam is one of the handful of agricultural traders that buy and sell commodities such as coffee, cotton and rice. As a leading trader in cocoa, for example, one in eight chocolate bars consumed in the world is made from beans handled by the group.

The amount Mitsubishi paid valued Olam at about 16 times forward earnings, more than is typical in such deals. While the deal’s valuation is not entirely about Olam’s sustainability, the price does go some way to confirming that there is added value in sustainable practices and products.

“This is a tipping point,” says Jean-François Lambert, global head of HSBC’s commodity and structured trade finance. “The market has been struggling to value sustainable practices in terms of commodity prices, but this is evidence of the value,” he adds.

With leading food groups such as Nestlé, Unilever and Mondelez pledging to increase sustainable sourcing on commodities including coffee, cocoa, and palm oil, having access to sustainable production is crucial for trading companies and producers looking to secure supply contracts, say sustainability experts.

Friedel Hütz-Adams, researcher at Südwind, a German supply chain research and consulting firm says in some cases, “if [a buyer] knows you don’t have sustainable coffee or cocoa, they will have no interest in doing business with you”.

Mitsubishi believes demand for sustainable products will “gather momentum in emerging markets”. However, it knows it would take years for the Japanese group to build up a sustainable network similar to that of Olam from scratch.

“Sustainability and traceability is a strong part of a brand,” says Mr Nakayama.

While for some in the agricultural trading sector, sustainability is still largely a box-ticking or a PR exercise, many others are actively becoming involved in long-term investments, building relationships with farmers as well as making sure the damage to the environment is minimal, to ensure their supplies of affordable and sustainable raw materials.

Ted van der Put, programme director at IDH, the Sustainable Trade Initiative, which brings public and private organisations together for agricultural projects, says: “In coffee, for example, the brand companies have made the commitment to offer certified coffee, and the traders will make sure that they get it.

“More and more, we see the larger players where they don’t just buy and sell. Companies like Olam, Cargill and Ecom, they have a longer-term engagement with origin,” says Mr Van der Put.

In 2014, Olam provided $184m in short and medium-term loans to farmers, invested $6m in training and community development and almost $30m in corporate responsibility and sustainability programmes. The company had earnings before interest, tax, depreciation and amortisation of S$1.17bn, or almost $840m in 2014.

Sunny Verghese, Olam’s chief executive, says companies acting in a sustainable manner have an edge over competitors as more end-buyers of agricultural products are seeking suppliers who can fulfil the increasing demands of investors, NGOs and consumers.

“Sustainability absolutely brings competitive advantage,” he says.

At farmer level, Olam’s smallholder loyalty initiatives, certification schemes and traceability provides differentiation and added value for customers, while its sustainability efforts can mean favourable terms from governments and funding from partners, says Mr Verghese.

On the other hand, with commodity traders and food companies under increasing scrutiny from NGOs and pressure groups holding organisations to account, companies face the reputational threat if they fail to pursue sustainability.

As an initiation into the business, the Singaporean group’s new intake spend time in remote rural corners of producing countries “in the bush” where they experience “Olam’s place in the community and ecosystem”. Mr Verghese says this also enables them to appreciate the importance of sustainability at ground level.

But staff come to really acknowledge its importance when it leads to financial returns. Mr Verghese says: “The real ‘ah-ha’ moment for securing buy-in for sustainability is when you can demonstrate the real financial value of initiatives either through added revenues or cost-savings.”

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