The purpose of agricultural futures contracts is to reduce risks for farmers and the people they supply. But as speculators in search of safe investments pour capital into soft commodities markets, they are driving 'price inflation way beyond the effects of demand and supply pressures,' writes Khadija Sharife.
This issue of Pambazuka News carries a piece on role of speculation in the cocoa futures market. The futures market is important, chiefly because - prior to unchecked speculation, futures contracts (agreements between buyers and sellers to exchange a certain on a certain day) could be used as a vehicle to diminish risk and volatile curves, caused by lack of information, disinformation, etc across global lines. Prices then reflected several crucial elements, namely three, as regards agricultural or 'soft' commodities: planting, availability of 'old crop', and demand for numerous agri-crops during different growth cycles.
'Prices are determined the way most prices in moderately open market system through the aggregation of buyers and sellers in a market place,' said Lincoln Ellis, managing director of the US-based Linn Group, a 35-year old clearing and trading business located at the Chicago Board of Exchange. Since inception, the company, a family-owned entity, has focused on agricultural markets, rooted in community faming and the commercial cash grain merchandising business.
According to Ellis, 'the biggest problem facing African farmers in the US tax payer subsidies paid the US farmers,' artificially elevated by EU and US protectionist subsidies, chiefly benefitting mega-corporations like ADM - subsidies estimated at US$1 billion per day. Volatility in the grain markets, claimed Ellis, would be five times higher were it not for futures contracts. While there is no such thing as 'perfect information', a regulated agricultural futures market (where weather plays a detrimental role) is one way in which buyers/sellers and importers/exporters can engage one another, accessing crucial data.
But in recent times, following the recession, volatility - playing on deregulated markets, has drastically increased thanks to the collective shift of investment capital, by monopoly interests into 'safe golden investments' such as agri-commodities markets, increasing from US$13 billion in 2003 to US$318 billion in July 2008. Gerry Gold, editor and author of 'A House of Cards: From Fantasy Science to Global Crash' stated that during the first two months of 2008, markets were flooded with some US$55 billion investment. 'A great deal of the money found its way into the commodity markets, driving price inflation way beyond the effects of demand and supply pressures,' wrote Gold.
Similar to 2008 - when global prices, especially concerning basic staples like corn, wheat and maize increased by over 140 per cent, driving 100 million people below the poverty line - the skyrocketing capital flow towards soft commodities, sent a further 44 million people falling, once again, below the US$1.25 poverty line since June 2010, claims the World Bank Food Price Watch.
What matters, then, is the nature of investments and the intentions underpinning the financiers' rush to capture contracts. As I point out in my cocoa article, the UN's Food and Agricultural Organization (FAO) disclosed in 2010, that less than two per cent of commodities futures resulted in physical delivery of produce. Artificially elevated or gamed prices enable financiers to cash in, exacerbated by the lack of regulation limiting the number of speculators, type of speculation etc, pitting heavily constrained farmers against the unleashed power of unchecked capital from financiers.
Since the deregulation of the 1980s, initiated by former US President Reagan and others, multinationals have consolidated power through monopolies, including that of the futures market. No trading corporation holds as much power as Glencore, controlling 10 per cent of wheat, 45 per cent of lead, 50 per cent of copper, 60 per cent of zinc, to name a few commodities.
Between 2003-08, for example, Glencore frequently controlled as much as 90 per cent (and not less than 30 per cent) of the aluminium warehoused by entities listed in the London Metals Exchange. Unlike other 'pure trading' firms only recently engaging in vertical integration through acquisition of resource-producing assets, Glencore's farsighted corporate executives - fashioned into form by Marc Rich, the world's most controversial commodities trader - began purchasing assets such as Mt. Holly smelter in the US (1987), moving on to Bolivian tin, Zambian copper, Angolan oil, amongst other assets such as 300 000 hectares of farm land. This was a policy taught to Rich by Phillip Brothers, the trading firm that shaped him.
Glencore, said Devlin Kuyek, a writer and researcher with non-profit GRAIN to Al Jazeera, is ' of the world's largest farm operators,' making markets through financialisation of every tradeable commodity. The opaque commodities firm, the largest in the world, recently launched a multi-billion IPO (initial public offering) enabling the corporation to access more capital more easily.
But despite its transformation to a public company, in theory, subject to the restraints of shareholders, boards and other components of corporate governance, Glencore's base in the globe's leading secrecy jurisdiction - Switzerland, guarantees the same level of 'business-as-usual' privacy, characterised by banking secrecy, zero disclosure of company accounts and other economic activities, nominee shareholders and directors etc.
When asked about the potential impact of the IPO on Glencore's trademark secrecy, Rich was alleged, in one interview, to have just smiled. He might have been remembering the statements of Zug's public prosecutor who 'forbade' Rich to share confidential corporate documents with the US, and who responded to the US authorities large-scale tax evasion investigation (described by then US District Attorney Guiliani as the 'largest scheme every prosecuted') with the words, 'the defendant trades in...and with...countries which are from a political aspect sensitive. It is not difficult to understand under these circumstances that especially governments or state-operated companies prefer to use intermediary trade for trading with other countries. The reasons for this are many (including) to cover up contradictions between economic and political action. A disclosure of such transactions and their details would have disadvantageous consequences for all participants.'
All participants - including apartheid South Africa, which exchanged uranium (earmarked by Rich for the Soviet Union) for Iranian oil that in turn was bartered for arms. Carpe diem?
Khadija Sharife is southern Africa correspondent for The Africa Report.