Why we're all food speculators now

You might not know it, but you're probably invested in Glencore. The commodities giant - "the biggest company you've never heard of" - has just fast-tracked into the FTSE 100. If you have a pension, you'll want to take notice of this controversial addition to your portfolio.

Glencore's core business is commodities trading: the production, sourcing, processing, refining, transporting, storage, financing and supply of metals and minerals, energy products and agricultural products, including grain, oilseed and sugar. Glencore controls 10% of the world market in wheat and 25% in barley, sunflower and rape seed - all vital staples across the world. After the disastrous spike in food prices in 2008, which prompted demonstrations across the developing world as people found themselves unable to afford even basic staples such as maize, much attention has been focused on the cause of the crisis and of ongoing food price volatility.

Clearly, many factors are at play. Widespread drought in grain-producing nations is commonly accepted to be the initial factor in the 2008 crisis, exacerbated by rising oil prices, which push up agricultural costs such as for fertilizer and food transportation. Food prices and food security can also be affected by factors including disruption from civil conflict, land-grabs for production of biofuels, climate change, corporate tax evasion in the developing world, and the imposition of economic policies by the World Bank and the IFM, as outlined in a new Christian Aid report on global hunger.

Most recently, financial speculation on food has been grabbing the headlines as one possible cause. WDM are spearheading a new campaign, arguing that financial speculation on food derivatives (commonly in the form of commodity-linked investment products, created by major investment banks and bought by institutional investors such as pension funds) actually has an impact on real food prices. This runs contrary to market theory, by which supply and demand dictates real prices which inform futures markets, but is an argument which has rapidly been gaining ground, with support from former hedge fund manager Mike Masters, UN Special Rapporteur on Food Olivier de Schutter and the head of the Food and Agricultural Organisation, among others.

In the case of Glencore, financial speculation is accompanied by physical commodities trading. And there can be little doubt that when one player not only holds a physical product but also is a key financial player, there will be consequences. Perhaps the most famous example of this is Anthony "Choc Finger" Ward, the British City trader whose hedge fund purchased 241,000 tons of cocoa beans in July last year, worth £658m - the largest single purchase of cocoa in over a decade. Whilst most commodity transactions do not involve physical transfer of the product, in this case the beans themselves were delivered to the hedge fund and stored in warehouses across the UK and Holland, with this stockpiling effectively giving them control over cocoa supply. The effect was immediate: cocoa prices reached their highest level in 33 years.

Some investors have avoided food commodity investments. However, with the arrival of Glencore in the FTSE100 with a £37bn flotation, those same investors may now find themselves automatically exposed to the risks they sought to avoid. This is not going to be the only source of concern for investors. Glencore's track-record allegedly involves illegal oil deals with Iran during the hostage crisis of the 1970s, supplying oil to South Africa's apartheid regime in the early 80s, and the indictment of company founder Marc Rich for $50m tax evasion. Its arrival in the FTSE was also accompanied by some colourful statements from its newly appointed Chairman, Simon Murray, on women in the boardroom ("I know they're going to get pregnant and they're going to go off for nine months") and on asylum seekers ("people who claim to be running away from some place in Africa because they're being beaten up or something... and then it turns out to be fraudulent").

And the list goes on. Glencore is also implicated in tax avoidance in Zambia, according to an OECD complaint lodged by five NGOs; fighting a legal case in Namibia in which the government accuses it of plunging state oil company Nancor into crisis by locking them into high fuel prices; and has a subsidiary on trial in Belgium for alleged bribery. Just a week after Glencore entered the FTSE, the European Investment Bank - which in 2005 gave the company a £30m loan to reduce pollution at its copper smelting site in Zambia - announced it will no longer fund Glencore, citing "serious concerns" about its corporate governance. Oh, and did we mention that Tony Hayward - BP's former CEO, forced to resign following last year's Deepwater oil spill disaster - is their new environmental and safety expert?

So what does all of this mean for us? It's clear that Glencore's woes are not just of concern to City investors. As a FTSE100 company, it will now feature in pretty much every pension fund in the country - making all of us, at least indirectly, food speculators. Are we all now players in a hunger casino?

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Stop banks betting on food: email the Treasury

Photo credit: Agrilifetoday (Creative Commons)