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

US

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.

Yemen

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.

Zimbabwe

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.

Iran

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.

Venezuela

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.

Egypt

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.

Mexico

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.

James Cusick

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine