By Sasha Breger, a lecturer at the Josef Korbel School of International Studies at the University of Denver and author of the recent book Derivatives and Development. Her research includes global finance, derivatives, social policy, food, and farming. Cross posted from Triple Crisis
In my last post, I discussed the role of debt relationships and farmland acquisition in redistributing wealth from global agriculture to finance. This post discusses another mechanism for such injustice: commodity hoarding by financial firms. Over the last several years, as agricultural commodity prices rose, large financial institutions took the opportunity to speculate in both virtual commodities (via derivatives markets, to be addressed in part 3 of this post), and physical commodities. Speculating in physical commodities involves selectively storing and releasing food crops so as to profit from movements in price (and, sometimes to influence prices) over the time the crop is stored. Financial institutions factor into this dynamic in two ways: directly, as commodity hoarders; and, indirectly, as lenders to and shareholders in major global food trading companies that hoard commodities.
Despite reports that many prominent financial firms are exiting commodities markets (responding to public pressures to stop gambling on food, and higher regulatory costs), there is ample evidence to the contrary. Global metals markets illustrate some new, scary methods for institutional hoarding and spot market speculation, methods that are likely to be transferred to food commodities moving forward.
For example, in 2011, reports surfaced about Goldman Sachs’ new foray into commodities warehousing. Goldman has purchased and is operating large warehouse facilities in Detroit used primarily to store aluminum before it is redirected to end-users. Engaging in what’s called a “warehouse play”, Goldman profits in two ways from this arrangement. First, as a warehouse operator, the company earns rent from other actors who store metal in Goldman’s warehouses, an estimated $165 million a year. Second, as a commodities trader, the company makes money off rising aluminum prices, as global market supplies are reduced via warehousing. In fact, complaints surfaced in 2011 that Goldman was releasing as little aluminum as possible, allowing a backlog of delivery orders to accumulate in order to influence prices (warehousing rules set by the London Metal Exchange have made this scheme workable, at least in part). This led not only to complaints of Goldman’s conflicts of interest, but also a perverse market result in 2011—as global aluminum supplies rose, prices for end-users were also rising. Quoting market analyst Robin Bhar, Hudson notes, “I think it makes a mockery of the market. It’s a shame. This is an anti-competitive situation. It puts (some) companies at an advantage, and clearly the rest of the market at a disadvantage. It’s a real, genuine concern. And I think the regulators have to look at it.”
Further, Reuters reporters note that other bank activities in the aluminum market are also driving up prices—some 70% of the world’s aluminum inventory is caught up in “bank deals” in which “a bank buys aluminum from a producer, agrees to sell it at some future point at a profit, and strikes a warehouse deal to store it cheaply for an extended time period. The combination of the financing deals and the metal trapped in Detroit depots, means only a fraction of the inventories are available to the market.” Thus, consumer prices rise as finance companies earn rents and hoard commodities for speculative profit.
Even more disturbing, in December 2012 JP Morgan received approval from the SEC to launch a copper-backed fund. Shares from the fund will be backed by stores of copper, and the more shares that investors buy, the more copper will be removed from the market. Thus, as the fund becomes more successful and demand for shares rise, physical copper prices will rise, and copper producers and consumers will shoulder the cost. Linda Kahn writing for The New Republic explains, “The change may seem arcane. But long-time participants in the copper market say the effects will be immediate: Manufacturers looking to make productive use of copper will find themselves competing with speculators backed by some of the richest banks and funds in the world, raising prices for many consumer products.” Marcus Stanley, policy director for Americans for Financial Reform and quoted by Kahn, states: “It means a manufacturer won’t be able to procure copper because the copper will be tied up in somebody’s retirement fund. That’s not what commodity markets were intended for.”
Kahn further notes the future consequences of the SEC decision: “The long-term result may be even more disturbing: The SEC’s ruling all but invites bankers to increase speculation in other, even more essential goods, like grain and oil.” Funds backed by wheat, rice, corn, soy and other food crops—based on this new model—will produce much the same results as those backed by copper: reduced market supplies, more competition for food, rising prices, and a redistribution of wealth from commodity market actors to the financial system.
Not only do financial firms speculate directly in physical markets, they also speculate indirectly by financing other commodity hoarders, like major multinational food trading companies. A 2012 Oxfam report by Murphy, Burch and Clapp isolates the “ABCDs”—ADM, Bunge, Cargill and Louis Dreyfus—as the world’s largest food trading companies, controlling over 70% of the world grain market. In some cases, these firms speculate on food prices by selectively warehousing crops. The Oxfam report notes: “In many cases, it is almost impossible to know for sure the size of the commodity stocks these firms hold – much of that information is a tightly held secret. Since the elimination of most public stock-holding programmes in the big exporter countries, including the USA and the EU (a gradual process that started in the 1980s), the ABCD firms have themselves begun to hold more physical stocks. The existence and control of these physical stocks can have an important impact on grain prices…” In fact, there are lots of recent examples of the ABCDs being investigated for hoarding. In 2011, Hugo Chavez of Venezuela ordered public officials to “hunt speculators”, and Cargill was specifically singled out for hoarding food oil. Other sources report that “Many [trading companies] amass speculative positions worth billions in raw goods, or hoard commodities in warehouses and super-tankers during periods of tight supply.”
And, who finances this hoarding activity? The usual suspects—large, multinational financial institutions. ADM and Bunge are both publicly traded, and their major shareholders are virtually identical. The largest positions in both companies are held by funds like Fidelity and Vanguard (T. Rowe Price, Prudential and TIAA-CREF are also listed as major shareholders for one or the other firm). Privately owned Cargill and Louis Dreyfus are also underwritten by some of the largest financial firms in the world. For example, when Cargill’s revolving line of credit was up for renewal in 2012, Deutsche Bank, RBS, Bank of Tokyo-Mitsubishi, and Lloyd’s all ponied up to renew the financing.
Thus, it is not only debt and farmland acquisition, but also commodity hoarding arrangements that help finance suck wealth out of agriculture, to the detriment of food system participants worldwide. In the next and final post of this series, I address the role of derivative and insurance markets in redistributing wealth away from food towards finance.