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The Real Hunger Games – Big Commodity Traders Control World Grain Market

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

The devastating heatwave that’s overtaken the United States is destroying a great part of American agriculture. Forty-five percent of the corn crop has been destroyed, 35 percent of the soya bean crop, pushing the price of commodities to record highs. Overall, the global food prices have risen by 6 percent in July alone.

And what is the reaction of one of the biggest commodity traders in the world? Well, here’s what the head of food department for Glencore had to say about all this. Chris Mahoney, who’s the traders’ director of agricultural products, said on a conference call, quote, "In terms of the outlook for the balance of the year, the environment is a good one." I have to add, a good one for Glencore. "High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities"—and that’s "the purchase and sale of an asset in order to profit from price differences in different markets." Glencore, it should be added, reported pretax profits last year of $2.2 billion.

Now joining us to talk about what some people might call the real hunger games is Sophia Murphy. She works as a consultant and senior adviser on agricultural, trade, and governance issues with the Institute for Agriculture and Trade Policy. She’s co-author of a new research report, Cereal Secrets: The world’s largest grain traders and global agriculture. And she joins us now from Squamish, British Columbia. Thanks very much for joining us, Sophia.

SOPHIA MURPHY, SENIOR ADVISOR, TRADE AND GLOBAL GOVERNANCE, IATP: It’s my pleasure.

JAY: So you took a look at the grain traders in particular, which—a big piece of the commodity traders’ world, and you looked at the biggest companies. What did you find?

MURPHY: We found that the four big traders have anywhere from 75 to 90 percent of the global trade in grains around the world. We don’t know exactly (because nobody knows, because the companies don’t have to publish their holdings) the stocks that they hold or their—full detail of their financial businesses. Those four companies have that share of trade for a long time. We know they’ve all been in operation over 100 years, some of them nearly 200 years.

We found that they’ve all opened financial investment companies to move away from strictly trading in physical commodity, to look at investment in lands and to look at speculation as financial investors in the commodities sector. They have all created subsidiaries with fairly significant holdings, some of them working only for the company internally, but most of them actually offering themselves as experts, if you like, for other people who wish to invest in the commodities sector.

JAY: Now, they argue that they’re an important part of the food chain: they produce food, they get food to market, and given the scale of the global economy, you need big companies to do that; and that they don’t make prices go up; if anything, their efficiencies and scale help keep prices down. So they argue. What did you find?

MURPHY: I think that—well, they don’t produce food. That’s key. They provide all the inputs, seeds. They’re involved in every aspect of the input provision to enable farmers to grow food. And they definitely buy that food and process it and move it up through vertical chains through integrated production chains toward supermarkets. But they don’t run the risk of actually producing food.

They do provide a service. I would say that the industry of moving bulk commodities around the globe is one that requires significant capital, significant logistical capacity. And what I would say is that the companies need to be much more tightly regulated because of that, because of the natural or the inherent oligopoly that we have—not a monopoly, one company, but just a few. And it’s a complicated thing to regulate oligopolies, but it’s a necessary thing as well, because you can’t have proper competition in a situation that permits only very large companies to do the job, as they would say, efficiently and relatively cheaply.

JAY: So, in your report you talk about food prices having gone up. And I’ll quote your report. "Between 2006 and 2008, average world prices for rice rose by 217 per cent, wheat by 136 per cent, maize by 125 per cent … soybeans by 107 per cent." And if I understand it correctly, wheat even went through the roof in 2010, is actually worse, higher again than 2008. But again these companies argue this is because of natural causes—there’s droughts, there’s various other reasons; it’s not anything to do with their manipulation. What evidence is there that it is as a result of their manipulation?

MURPHY: Well, it’s certainly not a simple, cut-and-dry question, and there are clearly things that happened. There were supply shortfalls.

I think there are key responsibilities that lie clearly with these companies, however. They have lobbied for changes in legislation that free them to be more active as speculators in commodities markets, and thereby they’re affecting prices that everybody else uses as the reference price for how much to pay for grains and what to expect future supply will be, and they clearly have had an impact. And they’re not the only ones, but they’ve had a big impact.

They have been part of driving the biofuels industry. ADM in particular stands out as a company that lobbied for decades to get biofuels, from the early 1970s. And in succeeding in getting public mandates and subsidies behind biofuels, they created a very significant new demand for food at a time where the growth and productivity in agriculture was tapering off and where people were asking a lot of hard questions about what we were going to do with limited land and limited water.

So they’re part of shaping the context in which they’ve been able to profit significantly, even if there are other things beyond their control, or certainly beyond most of our control, such as climate change and broader changes to financial regulation that have more to do with banks and insurance [crosstalk]

JAY: So why is Glencore so happy there’s a drought?

MURPHY: Well, because you want there to be scarcity. That means volatility. If there’s volatility and you know more than the next guy, that’s how you make your money. You are all running a risk that you will misjudge where the prices go.

And last year there was a lot of speculation about Glencore’s role in the Russian decision to initially, I think, ban and then gradually just slow their wheat exports, because Russia suffered a drought, as they have again this year, and they were worried about meeting domestic demand. But it also helped Glencore out enormously, because Glencore was caught in a bad position with certain wheat contracts, and the announcement of that limit on Russian exports.

So your interest as a company is that you know more. Cargill, for example, [it’s] in 160 countries. It knows—it has people everywhere looking at what the crop is, what the outlook is, where the demand might come from. And so they’re in all of the places you need to be to have the information you would want, to anticipate the direction prices are going to take.

JAY: So what should be done? If the evidence is that these big companies either through their ownership or through their hedging and speculative activities are helping take advantage of natural crises and driving up prices higher than they might be otherwise, what should be done in terms of public policy?

MURPHY: It’s difficult to get at some clear, sharp this is what you do. I think the first thing the report was aiming to do was to throw some light on this and start a discussion. And I’m happy to say I think that discussion is underway. I think statements like Glencore’s recent statement about the profitability of crisis is another great opening for the debate.

I think that more regulation is clearly needed, and the regulation probably has to come at some different levels. There needs to be national regulation, especially in the United States, because that’s where so much trading is done and that’s the reference price. Chicago provides the reference price for a lot of transactions around the globe. You also need to reform the European Union commodity markets, and there’s work underway to make that happen.

I think you need the companies to commit: are they hedging, or are they speculating? And I think there needs to be clarity about what role they will play. And I think if you’re going to have an oligopoly, which may or may not be desirable but may be a fact, just like there’s a natural monopoly around providing electricity, for example, to a city, then you regulate that differently.

The grain companies always want to have it both ways. It’s a fiercely competitive world. They want to operate under free-market principles. But actually they’re not in a free market. There are very high barriers to entry. There’s very imperfect information, very unequal economic power between farmers and grain traders or between grain traders and consumers. And so you need to deliberately regulate for that. And there are ways in economics that can address that, but only if the governments would be more honest about just exactly who the traders are and what role they play, and if the traders themselves would be more honest about what it is that their interest is.

JAY: Given the extent of the drought in the United States and what everybody is saying is going to be another food price bubble, what would you say in terms of short-term demands that people should make in public policy?

MURPHY: In terms of public policy responses, I think the U.S. ought to look hard again at the holding of public stocks. One of the planks of the National Farmers Union going into this farm bill debate that we have right now in the United States is that farmers ought, again, to be empowered to hold grain reserves. That gives farmers bargaining power with the companies, which is important. It also gives us a lot more information about just what grain is available and some call on that grain. I think that the government, that the public sector ought to reestablish its right to have a call on grain in order to meet food security demands and to be able to place that in priority above biofuels or industrial feedlots or other ways in which the food supply is currently used.

JAY: So what’s stopping farmers from doing that?

MURPHY: They would need to be—they would argue they need to be under it to do that. They can’t afford to just hold that stock and wait. The history of the farm program was that the government paid them something to hold that stock, because it’s expensive to hold stock. You’re forgoing your profit—or you’re postponing, rather, your profit, and you’re incurring a cost with the grain actually in storage on your farm. So it’s not something the average farmer can do very readily within their business, but it’s something that if they did, in exchange for some public control over what happened to that stock, it seems to me that that would be a service worth paying for and it would have a corollary benefit in the transaction between farmer and trader, because the trader would maybe have to pay a little bit more to get that grain.

JAY: And in times of drought, there would be some reserve.

MURPHY: And, of course, critically, in times of drought there would be a reserve. I would argue further than the farmer-owned reserve idea, which is an interesting mechanism, that we need at a global level to be coordinating on stocks. It’s the one issue the G-20 refused to even put in their menu. They haven’t actually acted on their menu of actions proposed last year, 2012, in France, but one of the issues they didn’t even want to entertain was some kind of global coordination on stocks.

JAY: And if I understand it correctly, there’s virtually no reserve in the U.S. now at all.

MURPHY: I believe that’s right, virtually no reserve at all, and so no cushion. One more—another bad year. So this year I think we might ride it out. But what about next year and the year after? And, of course, building a stock now in a crisis is the worst possible time to do it, sadly. It’s where there’s political energy, but the most expensive time possible, something that needs to be thought through and implemented as a long-term plan.

JAY: Alright. Thanks very much for joining us.

MURPHY: My pleasure.

JAY: And thank you for joining us on The Real News Network.

End

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