Glencore’s Economics Lessons

Reposted from The Guardian.

What does it take to make the food speculators at Goldman Sachs look like they’re playing for lunch money? A secretive Swiss-based company, and one of the world’s largest commodity trading firms, knows. With its initial public offering announced on Thursday, Glencore – a multibillion-dollar mining, energy and food trader that will soon list in London and Hong Kong – is the envy of Wall Street. When Goldman Sachs was floated, the then CEO Hank Paulson made off with $219m. Glencore’s chief executive, Ivan Glasenberg, has already earned the moniker “The Ten Billion Dollar Man” for his share of the bonanza.

Glencore will be the first company in 25 years to make the FTSE 100 on its first day of trading, with an estimated valuation of about $60bn. The company has had an average return on equity of 38% (compared to Goldman Sachs’s 12%). Its base in the Swiss town of Baar has freed it of even the minimal regulation US-based companies entertain. Not by accident does Glencore find itself in Switzerland. Like the mining and oil trading company Trafigura, Glencore is a descendant of the Marc Rich group. Rich fled the US in 1983 after being indicted by a federal prosecutor, Rudolph Giuliani, for tax evasion and trading with Iran (though he was pardoned by Bill Clinton). As Marcia Vickers reported in a Businessweek exposé: “Rich’s philosophy is that no law applies to him.”

In exchange for going public and raising money for further acquisitions, Glencore will now have to submit to the bared gums of UK regulators – whose rules are far less onerous than their US counterparts. With the funds from its flotation, the company looks set to dominate the fields in which it chooses to operate. Although primarily a mining and energy company, it has substantial interests in food – controlling around a quarter of the global market for barley, sunflower and rape seed, and 10% of the world’s wheat market.

In the weeks before flotation, Glencore allowed us a glimpse of the kind of power it wields. Last year Russia, the world’s third largest wheat exporter, experienced a drought the like of which had never been recorded; fires damaged tens of thousands of acres of cereal.

Glencore has now revealed its traders placed bets that the price of wheat would go up. On 2 August Glencore’s head of Russian grain trading called on Russia’s government to ban wheat exports. Three days later, that’s what it did. The price of wheat went up by 15% in two days. Of course, just because a senior executive at one of the world’s most powerful companies suggested a course of action that a country chose to follow doesn’t mean Glencore made it happen. But happen it did, and the consequences rippled round the world.

At the time, Mozambique experienced a massive uprising in response to increased food and fuel prices. Protests were organised via text messages and, in actions that foreshadowed those of governments in the Arab spring, the Mozambican state responded by shutting down text capability for pre-paid phones and sweeping up hundreds of protesters. Over a dozen people died, many were injured, and millions of dollars of damage was caused. It’s safe to say that tens of thousands were pushed further towards hunger as a result of the higher wheat prices.

According to the Financial Times, Glencore’s speculation didn’t necessarily bring riches to the company. Although the bets on the future price of wheat paid off, Glencore is so big that other parts of the company were tripped up. Its wheat customers in the Middle East had contracts that needed to be fulfilled, and the company was left scrambling after its Russian supplies were walled away.

But Glencore itself admits to prodding the boundaries of how markets ought to work – its flotation prospectus reveals that its Belgian agricultural subsidiary is embroiled in charges of corruption, allegedly involving inside information on European export subsidies.

This story may help economists who are having a hard time understanding how speculation works. In its recent thoughts on the global food market, the Economist defended speculators because “trading cannot drive prices up in the long term since for every buy, there is a sell”. By definition, for every smart or lucky trader who comes out with a yacht, some other trader loses their shirt. It’s all very nicely confined to the paddling pool of the futures exchange, and the yellow water needn’t taint the rest of the market, where the real demand is.

While the economic world ought to work this way in theory, it doesn’t in practice. Goldman Sachs has an investment structure that is only about buying food futures. Despite what the theorists say, speculators have profited from hunger. And there’s now mounting evidence from some economists that the rush of money into commodity funds is indeed driving prices higher.

But even these kinds of analysis assume that there are rational moves made by actors within the market’s confines. When financial powerhouses like Glencore are able to control and engineer the terms on which they are governed, economics has painfully little to say. Rather than being “price takers”, today’s financial behemoths are price makers. To understand the power at play, we’re better served by the insight of the French historian Fernand Braudel – that capitalism is, at its pinnacle, not about the facilitation of free exchange, but about its destruction.

2 Replies to “Glencore’s Economics Lessons”

  1. It´s clear how big companies operate in the market, with no benefits for the society.
    The world must learn how to manage cereals to feed well all the world.

  2. “The question is: why are there markets of food at all?” – Raj Patel

    (http://en.wikipedia.org/wiki/Raj_Patel)

    Brilliant! One of the most noble quotes I’ve read in my life, if not the noblest one! Finally I see a man standing in the mainstream of the thing for such a noble ideas which I’ve dreamt about to be seen in the world since I was a boy, more than 25 years ago! If there’s a God, He placed you there, Raj. And you’re right, we need such a consciousness ourselves, we all together, we don’t need a Messiah. We need freedom, a real revolution – a real re-valuation of our own individual and social concepts, we need to overcome our older, outdated, greedy ideas about dealing with the resources on this planet, and not a new slavery under the old rogue disguise of freedom.

    I’ve always asked myself those same noble questions: Why the hell are there markets of food at all? Why the hell are there markets – no matter of what – at all? Why the hell in a planet where resources are vast are there still markets at all? Why the hell are there many things which are still forbidden by law even if natural (like marijuana in many places, for example), when they can’t even stop the basic needs – which should be granted for free to all – to be marketed? Such an ignorance has to go and the noble idea of sharing has to take place, and by sharing we have to assure that everything on this planet may be accessible to all.

    I’m sure that at this very moment there are noble-minded people like you standing for such a re-valuation. I invite all the people – from the simplest person reading this to the world rulers and leaders and bankers and everybody – to pounder about such a NOBLEST WAY OF BEING and start engaging this right now, this is ‘the’ moment! We’re going to turn the planet into a place where every being without an exception will be surely happy to be living in, and this is the ultimate goal that everyone, no matter if a ruler, a leader, a simple guy or a simple animal – is seeking. Now is the time to make it real!

    Thank you, Raj! You have my support and the support of the whole of mankind, I hope so! And the support of all beings on this planet! Keep it up! Cheers from Brazil!

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