Cereal Secrets: Lifting the lid on the World's big 4 grain traders
Campaigners and journalists love a brand – targeting Nike, Walmart, (maybe even Oxfam) virtually guarantees you a bigger audience. Unfortunately, that means brand-less companies can get away with murder (hopefully just a figure of speech). Cereal Secrets, a new research report for Oxfam by Sophia Murphy, David Burch and Jennifer Clapp, lifts the lid on some of the biggest and most influential firms you’ve never heard of – the ABCD group of grain traders, whose joint sales are over $300bn (see table) and have been doing very well during the recent food price spikes (see graph – Cargill’s been having a particularly good crisis).
“This report introduces the four big commodity traders – Archer Daniels Midland (ADM), Bunge, Cargill, and Louis Dreyfus, often collectively referred to as “the ABCD companies”. It looks at these traders in relation to a number of the global issues pressing on agriculture: the “financialization” of both commodity trade and agricultural production; the emergence of global competitors to the ABCDs, in particular from Asia; and some of the implications of large-scale industrial biofuels, a sector in which the ABCDs are closely involved. It includes a discussion of how smallholders in developing countries are affected by some of these changes, and highlights some development policy implications.
1. The ABCDs matter. They are not alone, nor unchallenged, but they remain the overwhelmingly dominant traders of grain globally, and what they do is central to understanding international markets (and the domestic politics of food in many countries, too). Too often invisible in policy debates about farmers and consumers, these companies are careful about where and when they get involved in such debates, rarely seeking the limelight. They do not have brand names to protect in the way that a food processor such as Nestlé does. ADM is publicly listed and Bunge is also a fully public company. Dreyfus and Cargill remain essentially family-owned businesses. None of the companies is very forthcoming about its activities, and to track their activities requires patience and guesswork. However, despite the difficulties, it is important to understand their role and their interactions with other companies, national and global.
2. The ABCDs are evolving. This is inevitable, given globalization. At this stage in their evolution (and some of the companies are over 150 years old), they have begun operating in some cases like banks (and banks, in turn, have found themselves trading on commodity exchanges). The ABCDs continue to trade grain, but grain is not their only activity, nor is it where their growth is most impressive. As they grow, they need more capital, and there is constant pressure for the historically family-owned company, Dreyfus, to undertake public share offerings. With that will come legal demands for greater transparency, although probably not enough to satisfy concerns about the potential for abuse of oligopolistic market power.
3. The ABCDs do not operate in a vacuum. New realities, particularly the rise of new economic powers, including China, Brazil, and India, as well as the re-emergence of Russia and some of the former Soviet republics as agricultural powerhouses, are reshaping the global economy. The ABCDs are responding and adapting to those changes, as well as playing their part in deciding the direction that events should take. The new emerging powers are not as wedded to open trade, deregulated markets, and deregulated capital flows as are the governments they now challenge (the United States and the European Union, in particular). One effect of this change in the balance of power has been to make the likelihood of a meaningful outcome to the Doha negotiations at the World Trade Organization (WTO) improbable.
Between 2006 and 2008, average world prices for rice rose by 217%, wheat by 136%, maize by 125%, and soybeans by 107%. Rising and volatile prices define the context in which policy debates on food and agriculture are taking place today.
Many explanations have been offered for these steep increases, and recent summaries can be found in the intergovernmental agency report to the G20 and the High Level Panel of Experts’ report on food price volatility. Explanations ascribe higher food prices to increasing demand for meat-based products, which require animal feed made from grains; higher oil prices, which have led to higher costs for fertilisers and other inputs; the increased use of maize and soybeans for biofuels production, in part due to government policies in Europe and the USA; and deregulation of financial markets opening the way for commodity derivatives, which link food commodities in significant ways to other commodities in financial markets.
There has been a particularly heated debate among economists over whether the increase in investment in agricultural commodities futures markets via new financial derivatives is a main driver of recent food price volatility. However, a growing number of analyses link at least some of the food price volatility of recent years to increased investment in these markets. The Bank for International Settlements, for example, has noted that financialization affects commodity prices, especially in the short term; a conclusion that several UN reports have also recently come to recognize.
While supply and demand fundamentals remain important, herd behaviour among investors, which is often linked to the availability of imperfect information, may make price swings more dramatic than they otherwise would have been. Financial actors who know little about the physical production of food are affecting the real world of food production and consumption through investments on commodity futures markets. As such, financialization has further abstracted food from its physical form. This financialization has occurred in a broader context of capital deregulation that has reshaped the way in which food markets interface with financial markets.
The report does provide some new evidence on these complicated issues and suggests some avenues for further work. It starts from the analysis (by Oxfam and others) that (a) food price volatility is a problem and (b) speculation and biofuels, alongside other factors such as export bans, are helping to drive volatility. It goes on to show that the role played by the ABCD trading firms is important, but that how to address them and limit their power is not obvious, and regulations and changes will probably need to target broader reforms. But understanding the economic and political power of the ABCDs is essential to developing a smart strategy to realize changes that will protect the interests of smallholder farmers and poor consumers in developing countries.”