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ADM CEO on the future of food security, food price inflation

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Juan Luciano, CEO of Archer Daniels Midland, joins Yahoo Finance Live to discuss how the company is faring amid the pandemic, outlook on food price inflation and potential threats to global food production in years to come.

Video Transcript

[MUSIC PLAYING]

- Archer Daniels Midland has helped feed the world during the COVID-19 pandemic. But With commodity prices soaring and labor scarce amid the recovery feeding the world maybe a little tougher moving forward. Joining us now is Archer Daniels Midland CEO Juan Luciano. Juan, good to see you on this Friday morning. What are you seeing in terms of demand as all of us or many of us around the world have left COVID-19 quarantines?

JUAN LUCIANO: Yeah, thank you for having me Brian, good to see you. Demand is strong around the world. Demand started with the recovery in China and the recovery in the US of course. And there is this pent up demand and people are going out and spending more.

So demand is still a little uneven as we see the recovery in food service. When we go out because of mandates demand-- destruction of demand reduction is more increased. And as we're trying to go up now, it's a little bit more and even.

Some sectors are having issues with the openness of the different economies. Some sectors are having issues with manpower. Some sectors are having issues with raw materials. But in general, demand is up. And we're seeing food service in May reaching almost levels that they were prepandemic, so. ,

- Juan, it's Julie here. It's good to see you. So I know you guys got a big lift in the early part of the year from trading of grains and of course, we have seen prices for many grains on the rise. How do you see-- let's put the consumer aside for a moment, I'm curious for the trading part of the business how you see that evolving in the second part of the year?

JUAN LUCIANO: Yeah, I think, listen, at the end of the day where the processing company and we managed a big transportation company also too match supply with demand. So the fundamental issue Julie is not that much the price of the raw materials but actually the strong demand we see around the world. That's what drives ADM earnings, not that much the actual prices.

We continue to see that. That's driven a lot by the recovery of China AESF from the AESF the pandemic that affected them for picks. And there is a strong demand coming from the outside. So that's pulling from our origins in Brazil, that's pulling from migrant origins in North America.

And that's where we see the margin expansion that we've seen in the company. We expect that to last for several years. This is not just a matter of high prices. This is a matter of overall structural demand.

- Juan, from where you sit, is inflation transitory?

JUAN LUCIANO: I think, you know, we're a sector at least we're going to see strong prices for the next couple of years. So whether you call that transitory or permanent. We see issues with hiring people, whether those issues will ease on the second half as most of us, maybe have hope, we will still have to see. But today if we-- we have transportation units that are not running because we cannot get people into those units.

- And Juan, as we look at the increase in demand you all have come out with a lot of new products and even new categories and entered new categories for your business nutrition, health and wellness. How important a part of the business are they right now? And what's the goal for those parts of the business?

JUAN LUCIANO: Yeah, thank you. There has been a big transformation of the company as we get closer to consumers and we continue to follow their trends. We build a nutrition division that is about 20% of our profits and there are products there that are growing very fast. Listen, there's no news that everybody is going plant based so there is a lot of demand for alternative proteins but there is a lot of demand also for biomaterials to be made out of plant or renewable green, so some of the fuels.

So we are very well-positioned to thrive in three main trends-- food security around the world, health and wellbeing, and sustainability. Our companies is at the bridge between the farm and the consumer So we see in all this and we continue to innovate with customers to bring new products to the market.

- Juan, given the global push to electric vehicles where is-- how big a component of your business is ethanol? And do you want to stay in that business longer term?

JUAN LUCIANO: We have been public, Bryan, that we would like to get out of ethanol made out of-- in the dry mills, what we call one of the technologies. So we're going to reduce our exposure basically, by half and we are in the process of doing that. Overall, we think that there's going to be-- there's going to be a busfull biofuels, there's going to be certainly a place for ethanol, but we want to reduce our participation. On the other hand, we see biodiesel and renewable green diesel with mandates growing around the world. So all these renewable fuels will be part of the transition.

- Well, it seems like that the, oh, excuse me. It seems like that the reduction in reliance on biofuel on the part of the company might be wise. I just want to mention a Supreme Court decision that just came down on this very topic, which says, essentially, that the various fuel companies that can request waivers to having a certain amount of biofuel in their fuel. It says that they can get those exemptions.

The EPA has wide latitude to exempt refineries from those federal mandates that they mix renewable fuels into gasoline and diesel. Did sort of anticipation of this decision factor into your migration away from biofuel? Or does this decision affect your business at all?

JUAN LUCIANO: Yeah, I would say, we made the decision about two years ago, Julie and it was more related to the lack of differentiation in that part of the market structure, if you will. But certainly, government interventions in this nature tend to affect the business that needs long-term stability for us to plan about it. So yeah, that's part of the consideration as well.

- And Juan, trade tensions have cooled down a touch, just a touch. I would say, between the US and China. Has that had any positive effect on your business in the country?

JUAN LUCIANO: To be honest, we didn't see a lot of-- a lot of problems also Bryan when at the peak of the crisis, if you will, or the disputes. I think, at the end of the day, we have 6, 7 million mouths to feed in the world. So what happened is trade flows adjust.

And food security is one of the top three priorities for China. They have 22% of the world population and 6% of the world there. So they are always going to be importers, whether they import from the US or the imports from Brazil. I think In general, Chinese buyers are very pragmatic. And in times like today when there is a harvest in Brazil they buy from Brazil and then from September onwards they buy from the US.

And they have done that basically, uninterruptedly. So I don't think that's a big issue. We have a very good relationship with China. I would think they will continue to buy us materials.

- And Juan, sort of on a related note, I want to ask you about cyber security because obviously this has been a growing problem for many corporations in the US. And particularly with your exposure to the food chain the stakes are high for these kinds of matters. What are you guys doing on the cybersecurity front? Because it feels like the companies are really playing a catch up game here-- game here and coming from behind with the frequency with which these hacks appear to happen.

JUAN LUCIANO: Yeah, I think you're always blind playing catch up or adjusting, if you will, to the level of sophistication that they're bringing. So we've been exposed to this for many, many years. We started with the relatively small fraud sort of impersonation of executives and things like that, trying to get-- trying to circumvent our policies in terms of money transfers, if you will. So we've been doing top exercises, the tabletop exercises on crisis management on things like these for a long time.

We've been training our employees. You know, one of the biggest vulnerabilities is the people that, you know, click in the wrong link and open up your company's defenses to people that want to penetrate. And we are-- we certainly have agreements with advisors and with companies that help us to improve our security in that regard. So we continue to be prepared although you can never say that you won't be affected by this.

We-- what gives us confidence is that our supply chain has a lot of resiliency and redundancies and alternatives if you will. So we have several modes of transportation. We have several places where we can supply materials. So over the years we've been able to manage to keep our plants running during the pandemic or keep our deliveries happening despite hurricanes or weather events. So we're used to do risk management and this is another risk that we handle.

- And a good reminder, just don't click on strange links to your email inbox. Let's leave it there. Juan Luciano, CEO of Archer Daniels Midland, have a great week and good to see you.