Rethinking Commodities Trading

ECOM Agroindustrial is a multinational commodities trading company which handles four product streams — cocoa, coffee, cotton, and sugar.

Founded in 1849 by José Esteve, a Spanish cotton trader, the company remains majority-owned by the Esteve family.

Today, ECOM operates in over 40 producing countries, and the company is the largest coffee miller in the world, as well as among the top four merchants globally in cotton and cocoa.

In West Africa, ECOM primarily deals in cocoa, cashews, edible nuts, and spices, particularly in Ghana, Cộte d'lvoire, Nigeria, and Guinea-Bissau, working with some of the world's poorest farmers.

With a long heritage, ECOM has a depth of experience to draw upon, and a perspective which prioritizes longevity and long-term sustainability over the immediate bottom line. Around 30 years ago, ECOM re-evaluated and radically changed its business model. Today, the company continues to thrive where other commodity traders have fallen by the wayside.

“We would call ourselves the largest sustainable agro-industrial trading company in the world,” says Rahul Gopinath, Head of Africa - Cocoa and New Products.

Three decades ago, ECOM noticed a growing demand among consumers for sustainably produced commodities.

“They wanted to know who was actually producing these products,” explains Mr. Gopinath. “They were asking if coffee was being produced in a socially and environmentally responsible manner. That's where the sustainability certifications like Rainforest Alliance, Fairtrade, and 4C came in. We began providing our clients with what we called product-level sustainability. This meant auditing and traceability, allowing them to know the source of a product, the conditions under which it had been produced, that there was no child or slave labor or other unethical practices oc- curring. Because customers were prepared to pay a premium, we'd move the product from its origin while paying the farmer a fair price.”

This transformation began with coffee but soon expanded into cocoa and other commodities as well. Nonetheless, with time, it became clear to ECOM that further work remained to be done.

“About ten years ago we came to realize product-level sustainability provides consumers with guilt-free consumption but doesn't add prosperity to the farmer,” says Mr. Gopinath.

“The farmer's lifestyle and disposable income hadn't changed in any significant way. We began looking at how we understood sustainability. We noticed that our understanding of product sustainability was being defined by the European or American end consumer. Really, though, we should have been looking at the production process itself and the community that produces the commodity. The only way of improving sustainability through this lens was to improve farmer prosperity.”

To achieve this, ECOM began transforming its very infrastructure.

For ECOM, this transformation entailed a wholesale shift from being a risk manager centered between the producer and the consumer to becoming a service provider for farmers.

“Rather than trying to buy cheap from the farmer and selling high to the customer, which is how a normal trader would have behaved, we started being a service provider helping farmers reach their full potential,” says Mr. Gopinath.

“Instead of just sourcing sustainable products, ECOM started selling products and services to farmers that meet two kinds of demands: Increasing the income of the farmer significantly, and reducing his risk and costs significantly. We ended up providing agro-inputs and training to farmers while sending agronomists to their fields. Our hiring changed. We used to hire traders, but today we hire agronomists who actually go down on motorbikes with GPS devices. They tell farmers exactly how they could be better pruning their farms and how they should use inputs to improve productivity. We turned our earnings model on its head by looking at the products purchased more as a service of liquidity to the farmer, connecting the farmer to the final consumer. We began seeing ourselves as providing market access to the farmer rather than simply trying to buy cheap from him.”

The services offered by ECOM were essentials, like health and life insurance, cheaper equipment and fertilizers, and access to reliable agro-inputs. Many farmers in West Africa never previously had access to these formerly costly services.

“It changed our relationship to products and the supply chain from being transactional to a relationship based on the complete prosperity of the farming community,” explains Mr. Gopinath.

ESSENTIAL SERVICES

For ECOM to begin these changes, they first needed to understand the underlying issues that were affecting farmers. The company identified three problem areas: Smallholder farmers were often unable to properly utilize their finite resource of land; farmers often did not have sufficient or correct knowledge of farming; and increasing disposable income alone does not create value.

“To resolve these issues, first, we wanted to create a knowledgeable farmer,” says Mr. Gopinath. “We employed large numbers of agronomists, so there is one agronomist for every 500 of our farmers. Under each agronomist are five technical officers, and each officer has around 100 to 150 farmers working with him. All of these individuals are trained in agronomics. They use motorbikes to drive up and down to farms, giving advice to farmers, providing them with training and scientific knowledge. It was important to get farmers to understand farming can be done scientifically.”

“Second, we knew that graduates and other educated people were living closer to farms than most government organizations or what they could provide,” says Mr. Gopinath.

“So we created a franchise model, where we started franchises instead of having our own staff. Countries were divided into districts and each district is given to a franchisee. They then have full control over the products and services we will deliver on the ground. The franchise holder goes through training on our products and services, how they are delivered, how agro-inputs and financial services are delivered, and how to train farmers. Under the franchise holder are micro-franchisees. A franchise holder has 20 to 30 micro-franchisees, and under each micro-franchisee is about 40 to 50 farmers.”

Third, ECOM began providing essential services, even when they weren't directly farming-related.

“We're creating value by providing healthcare, education, and social activity,” says Mr. Gopinath. “For example, ECOM is working with a couple of insurance companies to create life insurance products for the farmers. These insurance products are launching in West Africa as we speak. Funerals are expensive in West Africa and can send families into debt. By creating life insurance, we can stop farming communities from plunging into debt and offer opportunities to not only stay afloat but to thrive.”

By establishing a service infrastructure that responds to farmers’ needs, ECOM has begun to show what a future commodities trading industry could look like.

“By changing the business case into a farmer-led sustainability model we have done two things,” says Mr. Gopinath.

“One is that we've changed a significant part of our earnings stream into a flatter, more predictable earnings stream that in turn creates value for the company. Two, we've changed our trading environment. There are very few traders who are in existence for more than ten to twenty years because their value drivers disappear over time. There is always someone arriving with bigger piles of cash or a better trading team that can out-compete them. Our model builds trust and commitment with farmers, who are some of the most risk-averse people, over a long time period. Other traders aren't around long enough to build the same kind of trust. It’s like building a moat around our business. When we started producing ethical products 30 years ago, it didn’t yield any significant prosperity to farming communities. It was a good thing for the consumer but we didn’t create value for the farmers and producers, and without them there is nothing. We needed to bring people along with us. We needed to really show farmers what's in it for them to create an ethical and sustainably-produced commodity. That's the difference we've made.”

“We expect to be around for another 170 years — at least,” says Mr. Gopinath.

“The age of trading companies working on information arbitrage or trading companies being extractors of value out of origins is over. As farmers gain better access to the internet, as they understand how to form unions and cooperatives, and as governments themselves start to realize agriculture is going to be the most sustainable way of creating employment, trading companies will no longer be able to have a relationship based simply on transactional value. ECOM knows the next 170 years of our future will not be based on the old practices. It will be based on a long-term sustainable relationship with farming communities, with consumption countries, and with the consumers themselves. We are a bridge between those parties that helps them prosper from each other.”



NOTE: Views of Rahul Gopinath, Head of Africa - Cocoa and New Products at ECOM Agroindustrial on  working with West African farmers to develop better products and sustainable, lasting prosperity.

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