Those investors either brave or foolhardy enough to flick though the 1,600-odd pages of Glencore’s recent prospectus may have been surprised to discover the extent of the company's involvement in soft commodity markets. Last year, Glencore’s Agricultural Products business segment accounted for approximately 8.7 per cent of the free global market in grains. At $10.4bn (£6.4bn), the segmental contribution from Glencore’s agricultural division only represents seven per cent of group revenue, but it surely speaks volumes that a company like Glencore, whose genesis was in oil arbitrage, would want to aggressively secure a foothold in global food markets.
That they have been able to do so is down to three things: the liberalisation of global food markets, the proliferation of derivatives with which to trade them, and the attractive underlying story of rising populations and changing diet patterns.
Three decades ago, many commodity prices were governed by international agreements. Economic liberalisation has swept much of that away. Organisations like the World Bank, the IMF and the World Trad Organisation have called a halt to state-sponsored monopolies, which depressed prices and removed much of the profit motive within farming. But now, for instance, it is even possible to buy into dairy futures on the Chicago Mercantile Exchange; a situation which would have been unthinkable at one point.
This is not to say that global agricultural markets are completely reformed. Prices are still routinely distorted by government intervention. If you look at the world’s rice crop, for instance, only around seven per cent of annual output makes it to the open market, but the clamour for that residual element has intensified the balance between supply and demand. Rising prices and, above all, the growing volume of food exports are providing compelling incentives for companies like Glencore to increase their exposure to a once moribund sector - it seems hard to imagine now, but major soft commodity prices fell by 28 per cent on average over the period 2000-05.
The Glencores of this world can call upon warehouses and grain carriers as well as futures and options traders, but for smaller investors, the expansion of products like spread bets and exchange-traded commodities has made direct investment in 'softs' much easier.
However, it's not always the best way. With no income on offer, you're reliant on price action to generate profits and so your timing has to be immaculate. Most exchange-traded commodity products are futures-based, so there's counterparty risk and tracking errors can be wide in a rising market because of the need to regularly 'roll' positions. Softs markets are volatile, too, and private investors have no special insight into, say, weather patterns, which could give them an advantage.
Big players
So it may be better to leave softs trading to those with the biggest cojones - and buy their shares instead. Globally, the agricultural commodities trading sector is home to some of the biggest and most powerful companies you've never heard of.
Glencore may have recently reported a 47 per cent increase in first-quarter net profits, but Singapore's Noble Group, which also mixes energy trading with soft-commodity trading, trumped that with a 77 per cent increase in first-quarter net income.
Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus are regularly cited as being amongst the most influential soft-commodities traders. The latter two businesses are privately held, while shares in Archer Daniels and Bunge trade on the NYSE. The financial clout of these companies is vast. Cargill, with annual revenues of around $120bn, would be one of America's ten largest tradable stocks if it was to go public. Anywhere in the developed world, it would be near impossible for a consumer to fill a shopping basket that didn't contain ingredients sourced, processed or marketed by a subsidiary of this quartet.
Some of the largest capital flows in world agricultural markets are now attributable to traders in emerging economies. Noble Group, a Singapore-listed supply chain manager, is not unlike Glencore, in that it is most commonly associated with energy trading, despite the fact that it has built-up significant market positions in a number of soft commodities, including cocoa and oilseeds.
Another Singapore listing, Wilmar International, is Asia's largest agri-business group. It is one of the world's most important processors of edible oils, with a pre-eminent position in the global marketing of palm oil. Wilmar has been competing with both Bunge and China's giant, state-owned agri-business COFCO to buy-up large chunks of Australia's highly fragmented sugar industry, and in doing so, gain ascendancy in South-East Asian markets. With a market value of S$34bn (£16.8bn) it dwarfs all of the UK's palm oil stocks combined.
| FAVOURITES |
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| Wilmar International has been operating under one banner for just 20 years, but it is better placed than industry rivals to exploit the economic and demographic pressures that are transforming Asia's agricultural markets. Wilmar's main areas of operation centre on palm oil cultivation, oilseed crushing, edible oils refining, specialty fats, bio-diesel manufacturing and sugar production. Archer Daniels Midland holds a significant stake in Wilmar, as do the founders - Malaysia's Kuok family. Nevertheless the free-float at 51 per cent affords private investors in the UK the opportunity to gain exposure to Asia’s food markets. Wilmar is currently trading at 14 times forward earnings, on a yield of 1.2 per cent. |
| OUTSIDERS |
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| Though Glencore's agricultural segment is relatively small by comparison to its energy and mining businesses, it has grown to become a major influence on markets for barley, sunflower and rapeseed, as well as cotton. Glencore only originates and ships around a quarter of the oil/oilseeds that it markets, which helps to explain why it has attracted criticism from organisations opposed to speculative investment within food markets; last year, Glencore traders famously bet on a wheat price rise shortly before Russia placed a blanket export ban. It's likely that Glencore, and industry rivals, will try to place pressure on G20 representatives to water down any proposals for agricultural trade reform later this year. |
