Below is the transcript of a CNBC interview with Sunny Verghese, Co-Founder and Group CEO, Olam International. The interview played out in CNBC's latest episode of Managing Asia on 31 July 2020, 5.30PM SG/HK (in APAC). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan (CT): You have steered Olam through many crises. When you look at the fallout in commodity prices. How would you compare the impact the agri-food industry is feeling from the current pandemic?
Sunny Verghese (SV): This is clearly for me the worst crisis that I've faced in my lifetime. The crisis has four clear shocks. The first, obviously, is the health shock. The problem with the health shock is that there is so much unknown. The probabilities are very uncertain. The outcomes are unbounded. So, it is very difficult to model and do any kind of scenario planning. So, our first priority is towards protecting the safety and lives of our employees. We have 89,000 people in 67 countries. So, our first focus priority is to keep them safe.
The second is really to make sure that we're able to service our customers in a safe and healthy way for all the food, ingredients, feed and fiber products that they need. The second big shock that we see is demand shock. Fortunately, 85 percent of our portfolio is in food and feed ingredients, and that is very recession proof. People have got to eat even in a recession. Therefore, we have been quite fortunate in terms of our sector and our business of not having a significant demand erosion that we see in some of the other sectors. However, within that, the feeding regions that we are supplying to which goes to out of home consumption or dining consumption vigils and restaurants and quick service restaurants of full-service restaurants or cafes, those have clearly come off. We also see demand for discretionary food items quite subdued. But the center of the plate food items - the food that is essential like food staples - demand is actually going up because of pantry restocking effect at the consumer household level and at the retailers as well.
The third shock that we are contending with is the supply side shock in our industry. In our industry, that is a bigger shock than the demand shock, and that is because of the forced lockdowns and the regulatory restrictions. We have many supply chain disruption impacts. So, we find it difficult to get labor for our farming and upstream operations. We find it difficult to get labor for our logistics, manufacturing and factory operations. Therefore, our production is not at full capacity in many of these countries, although we have been saved from some of the worst aspects of supply chain disruption because our industry and our operations in many of these countries are deemed to be essential. Therefore, we were given the permission to operate through the crisis. But we had logistics issues, labor-related issues and other things that disrupted our supply chain.
The final shock is really the financial market shock, with credit to smallholder farmers, provision of inputs to smallholder farmers - and this is the Northern Hemisphere's main planting season - those were substantially dislocated as well. So, cost of credit for smallholder farmers has gone up significantly, the availability of credit has come down, and all of these financial market accelerants including currency devaluations - many of these countries have suffered significant currency devaluations, whether it's in Brazil, whether it is in Nigeria, Ghana and many parts of Asia as well - that has meant for imported food, price inflation has occurred. Therefore, consumers are finding it difficult to afford food. Just to give you an example, Africa alone, 150 million people have lost jobs during this crisis. Each of them supports a household size of four to five dependents, which means we have about 600 to 750 million people who have completely lost their jobs or significantly reduced the amount of time that they can really work. 60 to 80 percent of their consumption expenditure of these folks are in food consumption... are allocated to food consumption and therefore, increase in food prices as a result of currency devaluation and the supply chain disruptions has resulted in many of them having to eat less calories than they used to or eat less nutritious foods.
Also, you've seen in some parts of this in many parts of emerging Asia and Africa, schools have been completely closed and locked down. In many parts of Africa, children get their only meal as known day school meal program and that that has also got discontinued. And many of the children are now under the threat of having to go back and work on farms. So, child labor issues are going to increase.
CT: In your mind, Sunny, is the world now seeing a global food crisis as a result of the pandemic?
SV: The world is well supplied in terms of food. But the accessibility of that food, the affordability of that food, the food being wasted are the bigger issues. That is why we are worried that in developing economies and in emerging economies where people are losing their jobs and there isn't a job support program like in the developed world to protect their incomes. In many of these countries, if they don't earn their daily wages, they have no way of eating on that particular day. They are daily wage earners, they are in the frontline. If they don't get paid and they don't get to have work on that day, they can hardly feed. So, if you look at the World Food Programme, they have now estimated that at the end of 2019, we had 135 million people around the world who are at the level C stage of food insecurity, which means they can only survive if there is some external food assistance. Because of the COVID pandemic, they have now estimated there's another 130 million people added to the level C stage of food insecurity. So, the health pandemic has now become a hunger pandemic because people are not able to access the food which is in plentiful supply but not able to reach them or they can't afford it.
CT: What lessons did you learn that helped you respond quickly to the Coronavirus pandemic?
SV: Because the epidemiology on this virus is still being discovered as we speak, whether it is going to be airborne is the question. Is it aerosol? Is it droplets? We thought it was only droplets. Now we're talking about aerosol. So, I think there are many things about this virus that we don't know. What is clear is that people have to take individual responsibility, and how do we educate people who we can't reach – the farmers in a lot of the countries that we operate? In the past, we had an army of extension officers on the ground who could go and visit them and personally train and educate them on good agricultural practices. But now, with the social distancing requirements and the inability to meet people in groups, we have to really innovate and try and do this by digitizing precautionary conditions that the communities in these countries have to observe in terms of safe distancing or wearing masks or hand washing and providing them this stuff, because there isn't masks, gloves, hand sanitizers or obviously hospital facilities, or availability of ventilators, so Olam has worked very hard in identifying the vulnerable areas within our supply chains. We have spent almost $6 million now to provide protective equipment, to use our digital tools and mechanisms to train and educate farmers, households and their communities. We've reached about 560,000 farmers, despite all of these lockdowns and restrictions to help them understand how to be safe. That, I think, has been the biggest impact that we have been able to create within our supply chains, within the farmers and villages that we work in.
CT: Among the regions that you operate in, Africa is obviously one of the worst hit during his pandemic reporting one of the highest increases in new infections. Olam sources commodities like coffee, cocoa, cashew, even rice in plantations across western and east Africa. What's the status of your operations there?
SV: We operate in about 24 countries in Africa. Our first focus is to help the most vulnerable parts of the population, to get them food. We want to amplify and supplement the efforts of the World Food Programme to provide our farming communities and suppliers food on time for them to have a nutritious meal. We are seeing how we can plug in and play an important role by leveraging our reach and our relationship with these farmers in these rural communities. So, that is the first thing. The second is we want to make sure that the farmers get the production inputs they need, because this is the crux of the planting season, the height of the planting season, and they need access to fertilizers, improved seeds and varieties. They need agronomic advice. They need crop protection chemicals. You'll see that one million acres have been lost in East Africa as a result of a locust infestation -and the locust swarm which has significantly impacted food production in that part of the world. The third is really labor availability because many of the workers are not able to come and work on the farms. So, how can we help them mechanize or improve the productivity so that they can cope with that situation. Market access is a big problem because the factories are shut. Many of them are wasting the produce because it cannot reach a factory or there is no off-take in the factory. So, how do we provide storage or how do we help off-take the produce of the farmers producing, even if it is not going to be a commodity that Olam deals in, but can we provide a solution in terms of market off-take to the farmer. The farmers are struggling to access credit at this point in time because of Covid, so how do we help provide microfinance and credit to the farmers? So, these are some of the things that we have to focus in terms of the immediate actions that need to be taken, and we are leveraging our configuration of assets, people and reach to make an impact in all of these areas.
CT: Let's talk more about labor, and you brought it up as well. There are reports that a pandemic has caused a labor shortage and that in turn is impacting crop harvest. To what extent is this affecting the yields at your farms? Are you seeing a lot of these farmers dump their crops because yields are so low?
SV: So, in fresh produce as well as in fresh livestock production, you're seeing farmers having to actually dump stocks because the abattoirs are closed, the meat processing facilities are closed, or the fruit processing facilities are shut down or closed. So, in many countries, there is an increased food loss as a result of lack of demand or as a result of supply chain disruptions with factories and logistics being shut down. So, that is definitely happening in many parts of the world. Definitely, it is accentuated or amplified in Africa. So, keeping the supply chains open and helping keep the supply chains open is critical. Let me give you one quick example. In Ethiopia, in our coffee supply chains, farmers or labor who come to pick the coffee are now expecting their wages to be at least doubled because food prices in that locality - because some of the food has to be imported and not locally produced and with what is happening to currency, etc. - the local prices of that food have gone up significantly. So, they are saying that unless their wages go up, we can't even afford to eat. If we can't afford to eat, we cannot come to work. So, you can see that there are ramifications in terms of how all of these inter-connect and we have to provide a holistic solution and support for the farmers. But let's get to the first milestone of getting the global community to support Africa in providing what the World Bank is saying is the $115 billion dollars that is required because they don't have job support programs. So, if people are out of jobs, they are out of work, they are out of wage, they can't eat or feed their households.
CT: We know that Olam is the world's largest or leading raw cashew nut trader. When you look at a pandemic, it has caused havoc on demand. Border closures have simply meant that major buyers from Asia can't travel to West Africa. How much pressure is this having on cashew prices? Is cashew farming now becoming unprofitable?
SV: Cashew prices have definitely declined. Even before the crisis, it was declining because of excess supply. The crisis has sort of accentuated it. Prices are still at about cost of production levels. But definitely farmer profitability has significantly come down as a result of much lower cashew prices. Demand for cashews is being impacted only at the margins, not major substantive decline in demand, but it is more the supply chain disruption issues and its excess supply that was there before the crisis, that the overhang continues. As a result, prices are lower.
CT: Olam is also one of the world's largest coffee traders as well. Before the pandemic, coffee prices were already at record lows. Now, with the pandemic, cafes are shut, restaurants are shut. To what extent has this exacerbated the coffee crisis? Are you seeing more coffee farms go out of business?
SV: Coffee prices at these levels in many countries are below the cost of production. Brazil, which is the world's largest coffee producer and the marginal cost producer, although coffee prices came down, the Brazilian real devalued considerably. As a result, in U.S. dollar terms, the Brazilian farmer as a result of the Brazilian real depreciation is still able to make money. But on the demand side, as you mentioned earlier, because some part of coffee consumption is out-of-home consumption in restaurants or cafes like Starbucks or Costas or whatever, the lockdown and the shutdown of out-of-home consumption in restaurants and cafes having come down, have definitely impacted the demand for coffee.
CT: How much pain are coffee farms feeling at the moment?
SV: In many parts of the world, including other parts of Latin America and even in Asia, coffee prices today are below our farmers' cost of production and therefore, we will see a reaction from the growers and the farmers of applying less fertilizers or taking less care of the crop. Therefore, we will see a cyclical downturn in production and we will see, therefore, coffee prices once the global crisis is out of the way and demand is restored cyclically then it adjusts itself. But at this point in time, coffee farmers around the world are suffering because their cost of production in many cases is higher than the current coffee prices.
CT: Are you doing everything at Olam to keep them in business?
SV: Yes, significantly. I can give you many examples: D.R.C., the Democratic Republic of Congo - we ordinate and source some specialty coffees and we have a cooperative for our specialty coffee called Virunga in one of the remote areas in DRC where we have 11 hundred women workers working in our factory there. We have increased their wages by 25 percent, and that is higher than anybody else in the industry. We are providing them free meals and we are providing them a clean safe working environment with all of the clothing precautions that we need to offer. Similarly, in another region of DRC as well, we are supporting 11 hundred coffee farmers. I'm just giving you some examples, but we are doing this at scale. We are reaching more than 560,000 farmers in various countries with various Covid support programs and packages to help them, their families and those communities.
CT: Sunny, you know, I love my chocolate and Olam is the world's third largest processor when it comes to cocoa. When you look at the pandemic and how things have really taken an impact on supply chain, your customers include some of the world's top makers of bulk chocolate, has the pandemic brought down chocolate consumption?
SV: Chocolate in some sense, is also a comfort food, so people during crises in the past actually consumed more chocolate. But this time, what we're seeing is because of the lockdown, for example, the airports are all shut down. People buy a lot of chocolates at the airport as gifts when they travel. So, we can see that demand for chocolates in the recent past has soften compared to many years of strong consumption growth. We see some softness in demand as a result, mainly of shut down. Retailers were shut down, so people can't go and buy chocolates as easily as they could do before the lockdown. All of these things are happening, which has resulted in demand coming down in the recent past, actually, in the latter half of this crisis. In the first half of this crisis, we still had fairly solid demand. But as the lockdowns took hold across the globe, it offered less opportunities for consumers to indulge in their favorite pastime of eating chocolates, and we can see that the impact of some restrained demand in the recent past on chocolate consumption.
CT: Whether it's cocoa, cashew or coffee, where do you see overall demand? You say right now it is pretty constant, but do you worry that in future, if the pandemic continues to drag on, it might start to hurt the purchasing power of the very consumers you're trying to sell to?
SV: I think that will vary from country to country and the economic situation in each of these countries and what kind of COVID support packages are there. So, in the developed world, even if people are out of jobs, they're given a job support program-package which allows them to maintain basic lifestyle in terms of consumption, et cetera. But in many countries where they can't afford it, that is where the bigger crisis is. We are seeing very, very strong demand across our food staples portfolio. So, our wheat flour business, our pasta business, our rice business. So, across the food staples, we are seeing extremely strong demand. We are seeing good demand in our dairy business. We're seeing very strong demand in our spices business. We are seeing quite strong demand even in the cocoa business so far - pretty strong demand and that business has done very well for us in the first quarter. We are going to be announcing our results soon. We are in a quiet period, so I can't talk specifically about our results, but we have given an update at the end of the first quarter, a business update, and you can see that the cocoa business did well in that first quarter. 80, 85 percent of our portfolio is doing quite well. More of the industrial raw materials is where we have seen demand more significantly impacted. So, our cotton business, which is the fiber business, which is an industrial raw material going to textile industry, the textile mills have been closed down in many parts of the world. As a result, the capacity utilization rates in the textile industry has come down and that means demand for cotton fiber has come down, from a normal demand 120 million bales per annum. This year, we expect the demand to come down to about 105 million bales, which is a significant contraction in demand. We see a contraction in demand for our rubber business, which is a de-prioritized business which we are planning to exit during this period. Rubber demand has come down because automobile demand has come down so tire demand has come down and therefore, rubber demand has come down. But in the food products, demand has only been affected where there is a big out-of-home consumption component or it is a very discretionary impulse purchase product. So, if it is a discretionary impulse purchase category, then demand is a little bit more impacted. If that is a significant segment of the consumption that goes into out-of-home consumption, then demand is also impacted there.
CT: So, in short, people really still need to eat and that's why demand is still there for you. But when you look at your customers, are they starting to source more domestically and locally because of the supply issues? Are they changing where they get ingredients from?
SV: Yes, you've hit a very important point and that is happening. But I have to say that that trend, which I call de-globalization trend, was beginning to take shape even before Covid, primarily triggered by the trade war or the trade wars between the U.S. and China, between the U.S. and Europe, and the increased protectionist measures that different countries, as a result of the trade war, were beginning to start imposing tariffs and counter tariffs. So, we were already seeing a trend toward de-globalization and therefore many, many customers were trying to sharpen or near shore the supply chains rather than have offshore supply chains and particularly having full dependency or high dependency on one origin or one country to source their requirements from. So, we already had seen that trend, but Covid has dramatically catalyzed that. We believe that post-Covid, that trend will accelerate, of people saying that we have been focused in designing our supply chains for cost efficiency and optimizing these supply chains for cost but we can't do that any longer. We have to optimize the supply chains for resiliency and not only efficiency, but reliability and resiliency. So, we are seeing a big shift in efforts of customers to shorten supply chains. Even in the food sector, you can see many countries are saying that we can't be dependent on our food consumption from far, faraway imports, because in this crisis, 14 countries imposed food export restrictions which accounted for roughly four percent of global calorie consumption was impacted by export restrictions that many countries put during the Covid crisis at the beginning of the crisis. Many of them are now unwounded, but that impacted food prices as well. Therefore, consuming countries are saying that we have to have buffer stocks, we should arm up on resilience and we should have more security of food supply. We should produce more locally. You can see that the Singapore government now has a plan of producing 30 percent of its food by 2030. Similarly, many countries are saying that we cannot depend hundred percent of our food requirements from imports and from faraway supply chains given these kinds of developments. So, de-globalization is going to be a trend that is going to continue for this as well.
CT: I know you're in a quiet period, so you can't talk about earnings, but as a global agri-food giant, you have a good pulse on the global economy. What's your sense of when a recovery will take place? When do you expect things to start normalizing again?
SV: So, as I said at the beginning, Christine, this is a problem, statistically speaking, with unknown probabilities and unbounded outcomes. So, nobody knows whether we will have a big second wave, as is expected in the first quarter of next year at the height of winter. Because what we are seeing in terms of the resurgence of cases in many, many countries, it's still the first wave. Because of unknown probabilities, unbounded outcomes, it's very difficult for anybody to forecast. My own personal view is quite a bearish view. I think the economy is being propped up and supported by unprecedented monetary and fiscal support that is being provided by many governments that can afford it and that is what's keeping the economy afloat at this point in time. So, the question is, why are asset prices in terms of stocks and other asset prices going up the way they are going up if the real economy, as you see from the IMF updated forecasts in July, they have revised the forecast down by almost 2 percentage points, 1.9 percentage point, and saying that the global economy this year will contract 4.9 percent, with the advanced economies contracting 8 percent and the developing economies, emerging economies are contracting about 3 percent.
CT: Are you saying the worst is yet to come?
SV: I am saying that we came down in this pandemic as far as the economy is concerned, we rode it down on an elevator, but we are going to recover climbing back the stairs. I do not believe that there's going to be a V shaped recovery. I think our recovery will be patchy. It'll be uncertain and prolonged.
CT: As chairman of the World Business Council on Sustainable Development, what are you doing to build a more reliable and more stable food system that can weather sharp knocks and sharp breaks in the supply chain due to events like COVID?
SV: So, the World Business Council on Sustainable Development, as you know, WBCSD is a CEO-led coalition. We have about 200+ CEOs from across the world, across sectors as members, and we are trying to usher in a transition to a more sustainable one. One of the big trends that started pre-Covid but which will accelerate post-COVID is the move towards becoming more sustainable. I think there is a heightened sensibility that the way we did business in the past is not going to serve us going forward. We have to do more with less. So, coming to the World Business Council for Sustainable Development, we are trying to achieve systems transformation across six meta systems. One is climate and energy. Second is waste and circular economy. The third is food and nature. The fourth is mobility, particularly urban mobility and urbanization. The fifth is about the people and the future of work. And the sixth is about redefining value: how we measure value and performance in companies, because what we measure is what we manage. So, we are trying to achieve systems transformation across these six areas which we believe will help us meet our purpose of ushering in a transition to a more sustainable one.
CT: So, you're saying that COVID has accelerated the sustainability agenda?
SV: Dramatically catalyzed and changed the sustainability agenda. Our membership has never been stronger than right where we are - the commitment that the member companies have towards contributing and pivoting significantly as a result of Covid. Covid has definitely catalysed that. This is one of the big trends that is going to accelerate post-Covid. And our companies are now bringing the action gap between what they have announced as goals and really taking concrete action to achieve the U.N. Sustainable Development Goals within the planetary boundaries framework, recognizing that the three biggest challenges that confront us this century is climate emergency, the biodiversity collapse and the growing inequality. Also, we are seeing digitalization as another big, big trend. Accessing farmers in remote areas, smallholder farmers doing it only physically through an army of field agents, we are now found innovative digital ways of reaching the farmer. We are developing something called an agronomy nudge brain, which advises the farmer through remote sensing technology - each individual farmer on what is the next best action that he can take on his farm. This is using machine learning and delivered digitally to him, but because the farmer does not read, etc., it is all through a voice brain informing the farmer or a visual instruction to help the farmer take the next best action on this farm on that particular day. So, I think there is a dramatic digitalization revolution that is happening in our sector and globally across sectors.
CT: At the start of the pandemic, Olam embarked on a restructuring exercise where you're essentially going to split the businesses into two operating units. Is the pandemic causing a distraction for you in your reorganization efforts?
SV: We have announced where we are splitting the company into two distinct operating entities. One called Agri Food Ingredients which consists of on trend food ingredients which are natural, sustainable, traceable, that is cocoa, coffee, edible nuts, spices, dairy. Another distinctly different entity, Olam Global Agri which is all about providing the food, feed and fiber requirements to a growing population, particularly in emerging markets in Asia, Latin America and Africa, leveraging on our traditional strengths of origination, processing, farming, et cetera. So, we believe that we will be able to get the right kind of investors or interested in these two themes which are complementary but different. Therefore, by making the business simple, more focused and less complex, the investors we hope to bring on board to invest in these two entities will re-rate the company and we will be able to raise additional capital to take these two entities to full potential. So, we are on track. We are following a sequenced stage-gated approach and implementing this. So, the first issue was for us to re-segment the business into these groups. The second stage is to reorganize in terms of the operating model design and the organizational design. We are well into that at this point in time. The third phase will be carving these two businesses out. The fourth and final phase will be to IPO these businesses or to list these businesses. So, we have said that it will take between 18 and 36 months to complete this exercise, but it'll be in a sequence where we won't do both at the same time. We will do it in a sequence way, and right now, we are on target to do that.
CT: So, pandemic or no pandemic, you will still spin off these two operating units eventually?
SV: Absolutely right. So, we are focused on that because we believe that it will unlock significant value, but more importantly, sustainable long-term value.
CT: And finally, as a co-founder and CEO of Olam International, what leadership will you provide to steer the agri-food giant out of this crisis?
SV: It's not just me steering it out of this crisis, I have a great leadership team and great overall team in Olam. We have the strong support of our board and our shareholders. So, digitalization, sustainability will be the heart and engine while we differentiate these two businesses, OFI into a value-added ingredient solutions business and OGA into premier high return, high-growth food, feed and fiber business.
CT: Sunny, thank you so much for talking to me. Please stay safe and well during this time.
SV: Likewise, you also. Thank you very much.
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