PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore. And welcome to this week’s edition of the PERI report with Gerry Epstein, who now joins us from Amherst, Massachusetts.
Gerry is the codirector of the Political Economy Research Institute and a professor of economics.
Thanks for joining us again, Gerry.
GERALD EPSTEIN, CODIRECTOR, PERI: Thanks, Paul.
JAY: So what caught your attention this week?
EPSTEIN: What caught my attention is a fabulous expose by The Financial Times (it was published online over the weekend) into the super-secret world of commodity-trading companies, huge commodity-trading companies like Cargill and Dreyfus, ADM. But most of them are privately owned. There’s very little information about them. And so they’ve been looking at all kinds of reports and secret memos and so forth and have discovered the massive scale of profits and trading that these companies have been amassing in the last ten years, and it’s really astonishing.
JAY: Yeah. Let me read you—I’ll read a quote from The Financial Times piece. It was published on April 14. The world’s top commodity traders have pocketed nearly $250 billion over the last decade, making the individuals and families that control the largely privately owned sector big beneficiaries of the rise of China and other emerging countries. The net income of the largest trading houses since 2003 surpasses that of the combination of mighty Wall Street banks Goldman Sachs, JPMorgan Chase, and Morgan Stanley, or that of industrial giants like General Electric. They made more money than Toyota, Volkswagen, Ford Motor, BMW, and Renault combined.
So the scale is off the map, but it’s amazing how it’s off the radar and you really only see this in the financial press.
EPSTEIN: That’s right. And this area, these firms are virtually completely unregulated. They have virtually no reporting requirements. And that’s why the scale of this is so little known. And there’s been this massive increase in profits and power of these firms in the last ten years. The Financial Times reports that in 2000, the annual profits was about $2.1 billion, and by 2008, at the peak, $36 billion. And now they’ve come down just a little bit, to $33 billion. And there’s little understanding of exactly how they make all of this money.
JAY: There’s one window opened up into this world, and that’s Glencore did an IPO a couple of years ago in London. And the other commodity traders were very angry at Glencore, because to do the IPO in London, where I think they raised about $1 billion plus in two days in selling this IPO—but it also meant they had to do a certain amount of transparency into how Glencore operated, including, for example, things like manipulating the price of wheat. Glencore, apparently, it turned out, owned 7 percent of the Russian wheat crop and knew that there was going to be a drought in 2010 and got Putin to ban exports of Russian wheat. Well, of course, Glencore had bet in the hedge funds and made a killing on that.
So part of the problem here is not just the amount of profits they’re making but the integration, because these are physical traders and they speculate and they have a tremendous influence over the markets.
EPSTEIN: That’s right. There’s this big debate now, as you know, about how much influence this kind of speculation has on food prices and oil prices and so forth. And there are lots of studies that have been done, some here at PERI by James Heintz and Bob Pollin, and lots of others. And a lot of the studies show that up to 70 percent of the movements in prices in some of these commodities is really caused by speculation.
But what this Financial Times article suggests is that even if you put speculation aside, these firms are getting massive margins. I mean, how can they make $250 billion unless they’re charging massive margins? And that’s largely because of the collusion in these firms, and also the fact that it’s so heavily concentrated.
JAY: Yeah. I don’t know why in the Financial Times articles the Koch brothers are not on that list, because they’re also one of the big trading companies involved in all this. And apparently during the 2000s, at some point some of these companies were making 50 to 60 percent return on equity during the 2000s.
EPSTEIN: Still a pretty penny.
JAY: Now the poor babies are down to only 15 or 20 percent return on capital, and Financial Times is talking about how they’re hitting head winds. I think a lot of businesses would like to hit those kinds of headwinds.
EPSTEIN: Yeah. A lot of businesses would also like to pay the kinds of taxes that they’re paying. The Financial Times article talked about how these trading firms are able to get tax rates of anywhere from 5 percent to 15 percent, whereas many corporations pay 30 to 40 percent. Even the banks that have fabulous tax rates only pay something like 20 percent.
Part of this is because of a tax competition and these tax havens, some of them set up in Cyprus, which is now in a bit of trouble. A lot of them are in Switzerland. And Singapore, competing to have these headquartered in Singapore, have been offering 5 percent or even zero percent tax rates.
So not only are they making massive before-tax profits, but the tax rates are so low they’re making massive after-tax profits.
JAY: But I think there’s a point that The Financial Times misses in this whole process is that a lot of other commodity traders, and particularly mining owners and companies that own agricultural enterprises and land, they’re also hitting these somewhat lower commodity prices right now, but they didn’t make these kind of profits in the 2000s. So it’s affecting them a lot, creating much more challenge for them, which means they’re far cheaper acquisitions. So what’s happening now, even though the big commodity traders may only be making 20 percent, they’re on a buying spree. And so when—assuming there ever is an end to this recession, these commodity traders are going to end up in an even stronger monopoly position and a position to even increase their prices and profits even more than it was in the 2000s.
EPSTEIN: Right. And I think The Financial Times does miss that, because they’re suggesting there’s going to be increased competition. But as you suggest, there might be increased consolidation.
One thing that’s going on that the report’s—indicates and we’ve talked a bit about here before is the fact that big banks, like JPMorgan, Morgan Stanley, are moving beyond their typical operations in these markets, derivatives and so forth, but they’re actually starting to buy up physical properties—the oil, gas, mining—and we expect the financial sector to get more involved in that, as well.
So one question that The Financial Times raises is: are we creating or has there been created these new too-big-to-fail firms in the commodity markets? They’re engaging in speculative financial transactions, perhaps highly leveraged transactions. And if there is a decline, rapid decline in some commodity prices, could there be some financial instability created by these firms that are totally unregulated? And the regulators are starting to look at this. But given their likely political power with having amassed all that wealth, don’t hold your breath for more regulation.
JAY: Yeah. They’re mostly based in Switzerland, and even those that aren’t are really not regulated.
And they’re also starting to do things like banks. One of the things The Financial Times talks about is a major acquisition of an oil company that wanted a $55 billion loan. And instead of going to the traditional banks, they went to a couple of the commodity traders, including Glencore.
But as you mention, there’s also on the other side JPMorgan. I understand the commodities desk at JPMorgan, it vies with size with some of these big commodity traders, and they’re very much into this, both speculating derivatives and physical ownership.
EPSTEIN: Right. And the bottom line is it’s important to remember that we’re talking about the commodities that really are at the core of the whole world economy—people’s livelihoods in terms of food, oil that fuels the economy. And so we’re talking about these companies that control what’s really at the core of the global economy with almost no transparency at all.
JAY: Yeah. I mean, some people call it the real Hunger Games because a lot of this is about food and the price of food and starvation and malnutrition around the world to a large extent because of some of the artificial raising of food prices.
EPSTEIN: So two cheers for The Financial Times. And we need to get some economics graduate students to do some dissertations on this topic.
JAY: Yeah, please do. Thanks for joining us, Gerry.
EPSTEIN: Thank you.
JAY: And thank you for joining us on The Real News Network.
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