Volatile commodity markets are allowing international agricultural trading companies to rake in big profits in shadowy financial markets even as food insecurity increases in some of the most vulnerable regions of the globe, says a new analysis from the United Nations Conference on Trade and Development that calls for regulations to rein in the excesses.
“Profiteering from financial activities now drives profits in the global food trading sector,” the UN agency says in its 103-page annual Trade and Development Report 2023. “Yet commodity traders circumvent existing regulations: they are not regulated as financial institutions but are treated as manufacturing companies.”
Noting that they account for about 70% “of the global food market share,” the report takes particular aim at Archer Daniels Midland, Cargill, Bunge and Louis Dreyfus, which experienced rising profits in 2021 and 2022 as global prices spiked for key commodities like wheat, rice and corn.
Spokespersons for the companies weren’t immediately available for comment.
“Like a non-bank financial institution, food trading companies take positions and function as key participants in financial markets,” the UN report says. “This shadow banking function is not regulated in the current financial system. As a result, these companies are motivated to increase their already significant role in profiting from price differences in food markets.”
While speculation is a necessary part of commodity futures markets, extreme speculation can drive prices far higher than supply and demand factors warrant, the UN says.
The report stresses that “profits from financial operations appear to be strongly linked to periods of excessive speculation in commodities markets and to the growth of shadow banking – an unregulated financial sector that operates outside traditional banking institutions. During the period of heightened price volatility since 2020, certain major food trading companies have earned record profits in the financial markets, even as food prices have soared globally and millions of people faced a cost-of-living crisis.”
Central to the problem, as the UN sees it, is the blurring of lines between grain trading companies that are increasingly acting as unregulated financial institutions and their traditional roles as “manufacturing corporations.”
“The concept behind this distinction between commercial and financial market participants is that an industrial business should only look for security in prices; not betting for the sake of it,” the report explains. “However, large grain processors with access to a wealth of information regarding food markets have a clear interest in using their hedging activities as a profit (center).”
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While the UN has no authority to make regulatory changes, it is proposing specific actions to address volatility and its impact on food prices and insecurity.
First, the UN says companies should have to provide more transparency on their grain stocks: “Excessive speculation is made easier by a lack of transparency on stock levels. Information about one’s inventory can be made a pre-condition to act on the derivatives market. The information can also be used to evaluate whether combined positions correspond to a hedging strategy or to excessive speculation.”
The UN is also calling for more competition “to curb the concentration of market power in the hands of a few large players.” That could mean breaking up large corporations, helping encourage new market players and “supporting the participation of small farmers and producer organizations in commodity markets.”
But above all else, the UN agency is asking for a “strategic use of agricultural buffer stocks to help avert a global food security crisis” and a new “systemic approach to regulating commodity trading generally, and food trading in particular, within the framework of the global financial and trading architecture.”
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