Changes in International Grain Marketing Since the Great Recession
Jan 22, 2018
Along with the rest of the global economy, global grain trade stagnated due to reduced demand during the Great Recession of 2007-2010, as well as the market disruptions from the food price spike that occurred roughly a decade ago. According to FAO data, the quantity of grain exported globally (corn, wheat, rice, and other coarse grains) grew only 2.2 percent annually between 2008 and 2010, while it had grown at an annual rate of 2.7 percent in the prior ten-year period.
Commodity exchanges, including trade in grain and oilseeds, were also swept up in the backlash against the role that deregulation of financial markets, especially in the United States, played in the collapse of the housing market in 2007 and 2008. These actions allowed major players in financial markets, both regulated investment banks such as Lehman Brothers and unregulated financial entities such as AIG to proliferate trade in financial instruments known as swaps or derivatives, which were essentially bets on the financial health of a range of markets and individual business entities. When the housing market began to crater, with defaults spiking as a result of both poor mortgage lending practices and declining home values, it kicked off a cascading decline in the value of those swaps, casting doubts on the ability of the sellers of the swaps to make good on the bets. Lehman Brothers, with estimated assets at more than $600 billion but greater debts, collapsed into bankruptcy in the fall of 2008, the largest bankruptcy in U.S. history. Within weeks, confidence in the overall global financial system crashed, leading to the years-long financial recession.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress sought to rein in these practices by requiring that banks and other financial firms involved in these transactions provide more transparency to regulators and the public by clearing and reporting swap transactions, as well as minimize the systemic risk created by such transactions by imposing margin requirements. It also bars entities which hold customer deposits from engaging in speculative activity.
Entities engaging in swaps based on agricultural products were not pleased to be covered by the new rules, claiming they had not contributed to the problems which caused the Great Recession, and would not do so in the future. However, after the collapse of MF Global, one of the largest commodity brokers on U.S. markets, in 2011, and Peregrine Financial Group, another large swap dealer, a year later, those claims seem a bit optimistic.
Under Dodd-Frank, end-users utilizing swaps for hedging purposes were exempted from margin requirements. After a federal court vacated the initial effort by the Commodity Futures Trading Commission (CFTC) to establish position limits on speculative trading of physical commodity futures contracts, the CFTC proposed new rules in December 2016. The final rules are not yet in place, but the most recent nominees to the Commission pledged to work to complete the rules once they are seated, during their 2017 confirmation hearings.
During 2014, the Chinese government-owned food and agriculture conglomerate Cofco, acquired two multinational grain trading companies, the agricultural trading arm of the Hong Kong based Noble Group, and the Netherlands based grain trader Nidera. On its website, Cofco International describes itself as a global agri-business with more than 13,000 employees in 35 countries, responsible for delivering 100 million tons of products in 2016 alone.
Over the past two weeks, the U.S.-based grain trading firm Archer Daniels Midland (ADM) and Swiss-based Glencore appear to have entered into a competition to acquire Bunge, another major grain trading firm. Bunge was founded in the Netherlands nearly 200 years ago, and is now headquartered in White Plains, NY. In 2016, Bunge reported revenues of nearly $43 billion. If a deal is concluded by either of Bunge’s suitors, a merger of this scope would certainly face major challenges on anti-trust grounds by regulators in a number of major countries. In 2003, it was estimated that the top four grain trading firms, known as ‘ABCD’, for ADM, Bunge, Cargill, and Louis Dreyfus, already controlled 73 percent of the world’s grain trade.
On January 7, 2018, the CME Group, which is the largest commodity and derivatives exchange in the world (nearly twice the size of its nearest competitor in terms of numbers of contracts traded in 2016), announced plans to offer its customers so-called block trades in agricultural commodities. These instruments are large, privately negotiated deals struck away from the broader market by phone or otherwise and cleared by the exchange. The National Grain and Feed Association opposes this move, asserting that it would threaten market transparency.