Unholy trade of making millions out of misery
Chris Mahoney's candour has shed light on secretive industry which impacts on the world's poorest
Every so often a business titan forgets himself, drops his guard and tells us what he’s really thinking.
So it was that a big cheese at the world’s largest commodities trader bragged that the worst drought to hit the US since the 1930s – and the worrying volatility in food prices around the world – will be “good for Glencore”.
On one reading, Chris Mahoney, the business titan in question, appeared to be celebrating the destruction of 45 per cent of America’s corn and 35 per cent of its soya bean crops this year. The crisis threatens to push cereal prices to a new record in a move that will put further pressure on the world’s poorest people and raises the prospect of a fresh round of food riots.
Mr Mahoney’s comments have put the spotlight firmly back on food prices, which rose by an average of 6 per cent globally in July, while cereals accelerated considerably faster still, jumping by 17 per cent to within a whisker of their record in April 2008, according to the UN.
“The US weather starting mid-May...has been among the worst three or four years of the century, comparable to the dust bowl years of the mid-30’s,” said Mr Mahoney, Glencore’s head of agriculture, suggesting that it won’t be long before cereal prices hit a new record.
“In terms of the outlook for the balance of the year, the environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities [the sale and purchase of an asset to profit from price differences in different markets],” he added.
“I think we will both be able to provide the world with solutions, getting stuff to where it’s needed quickly and timely, and that should also be good for Glencore.”
His boss, the Glencore chief executive Ivan Glasenberg, described the current volatility of the food market as “a time when industry fundamentals are the most positive they have been for some time.”
Of course, Mr Mahoney is entitled to profit from the trials and tribulations of the food market and in some ways a commodities trader like Glencore, which is listed on the London Stock Exchange but headquartered in Switzerland, can help to ensure that the world is fed as efficiently as possible.
But a growing army of critics, including the United Nations, argues that traders and speculators are making the food crisis far worse than it needs to be.
Some banks – among them Germany’s Commerzbank and Deutsche Bank and Austria’s Volksbanken – have even removed agricultural products from some of the investment funds they offer their clients, sensitive to accusations that speculation is pushing up prices. However, other big fund managers in this area, such as ETF Securities and iShares, say they have no intention of stepping back.
Jose Graziano da Silva, the director-general of the UN’s Food and Agricultural Organisation (FAO), has blamed food price volatility on “excessive speculation in derivative markets, which can increase price swings and their speed” while Argentina’s President Fernandez warned that “financial speculation is exacerbating market fluctuations and this exacerbation is generating uncertainty.”
The flood of speculative money into food dates back to 2000 when the US – which dominates the global food market – substantially deregulated trading in commodities. This paved the way for investors to pile into wheat, coffee and all manner of other “soft” commodities, allowing London and New York to build substantial trading hubs to benefit from an explosive new market.
Orchestrating the mushrooming industry from their phones and computers in the City and Wall Street, bankers from institutions such as Barclays, Goldman Sachs and Morgan Stanley have collectively channelled an astonishing $200bn of investment cash into agricultural commodities in the past decade.
The trading in question is mostly in so-called futures contracts – an agreement between two parties to supply a particular quantity of a commodity on a certain date for an agreed price. These can be sold on to someone else before the settlement date, giving speculators the opportunity to come in and make a profit.
Futures perform an important function in the trading cycle allowing, for example, a farmer to “lock in” a guaranteed price for their crop, to hedge against the possibility of falling prices, while a baker can protect against rising prices.
A certain amount of speculating “middle-men” are useful to oil the wheels for futures trading between parties who are involved, in some shape or form, in the food industry, says Thilo Bode, executive director at the German lobby group Foodwatch. “The trouble is that the relation of commercial to non-commercial speculation has been reversed,” said Mr Bode, pointing out that futures trading for speculative purposes now dwarfs traditional “ hedging” deals between farmers and bakers in the course of their everyday business.
The financiers, many of whom make huge profits from trading in futures, insist that their speculation makes little, to no, difference to food prices. They argue that there is no proof that their activities distort the market and point out that the commodity futures market is tiny compared to the physical market – where buyers acquire the food itself, rather than a piece of paper entitling them to a delivery of agricultural products at some point in the future, which they will probably sell on anyway.
“I think more and more investors are sensitive to banks’ exposure to agriculture,” said David Bicchetti, economics affairs officer at the United Nations Conference on Trade and Development (UNCTAD).
Christine Haigh, policy and campaigns officer at the World Development Movement lobbying group, agrees. “There has definitely been a shift in sentiment in the right direction. But we still need to do a lot more.”
Her answer is simple. “ It’s not rocket science. It’s not like climate change, which is extremely difficult to address. We can solve this simply by strengthening regulations. Having giant companies profiting at the expense of people feeding themselves is morally abhorrant.”
The EU and the US are both working on changes in their commodity trading regulations. A lot could hinge on their outcome.
Food shortages: Where pain is felt
As the world's largest exporter of maize, soya beans and wheat, this summer's severe drought has seen maize prices rise by 40 per cent, pushed up the price of corn by 23 per cent and increased global wheat prices by more than 20 per cent.
Fears of a humanitarian crisis have been fuelled by the 10 per cent rise in both food prices and poverty in Yemen this year. Reports indicate that the price of rice, a staple food, is up 60 per cent.
An estimated 1.6m people will need food aid next year, according to an annual report by the UN and Zimbabwe's government – a 60 per cent increase on the 2012 figures. Drought, lack of fertilisers and poor farming practices have been blamed.
The cost of chicken has more than tripled over the past year. The government blames rising demand, but international sanctions are said to make chicken feed unaffordable.
Despite government farming schemes, Venezuela still imports about 70 per cent of its food. This year there are shortages of basics such as corn meal, black beans, cooking oil and powdered milk.
High food prices are believed to have fuelled the Arab Spring last year. In 2008, a bread crisis caused by the rising global cost of wheat and surging inflation saw prices rise five-fold at some Egyptian bakeries.
Protests in 2008 broke out when a dramatic rise in the cost of corn flour drove up the price of tortillas – the staple Mexican bread – by more than 66 per cent. Analysts blamed US demand for corn to make ethanol.
A $61bn Business
Glencore, founded in 1974 and headquartered in Switzerland, is a multinational trading and mining company. Its operations influence the global price of zinc, steel, copper and oil, and a range of agricultural products. Last year the company launched an IPO that valued the business at $61bn. Its planned takeover of Xstrata this year will be the biggest mining takeover in history. And Glencore's £4bn takeover of the grain handler Viterra will see it take control of most of Western Canada's and South Australia's grain storage capacity.
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