Monday, April 25, 2011

Jackin' Food Prices: Glencore and the Price of Wheat

Similar to General Electric and taxes, where the focus should have been on GE's lobbying for preferential treatment in the tax code rather than the amount of U.S. income taxes they paid, Glencore crosses the line from using their brains and computers to speculate on price moves to actively promoting policies which will benefit their previously laid bets.
From the Financial Times:
Glencore reveals bet on grain price rise
Glencore made a speculative bet on rising wheat and corn prices in the early stages of last summer’s Russian drought, the world’s largest commodity trader has revealed ahead of its initial public offering that will value the company at $60bn.

As it bet on rising prices, senior traders at the Swiss-based company publicly urged Russia to impose a grain export ban. Moscow acted a few days later, triggering a grain rally. Glencore is the largest trader in Russian wheat, followed by US-based rivals Cargill and Bunge....MORE
The FT's flagship blog was on top of the story last August:

"And the winner so far in the wheat crisis is...."
I am always reluctant to copy out an entire piece, good writing deserves a visit.
In the instant case I must make an exception. The writing is so tight that there is no natural break.
From FT Alphaville:

It could have been very bad for the world’s largest commodities trader. But if you thought for a moment that the escalating wheat crisis might hit the middle-men in the hot seats of the global grain trade, think again.
While consumers, producers and food industry processors of wheat are grappling with price increases of as much as 90 per cent in just three months, one big winner so far in the grain crisis is none other than Glencore, the privately-owned Anglo-Swiss trader, and some other multinational commodities traders.

That has become clear in the last 24 hours, since Russia handed them a convenient escape route from some potentially disastrous wheat supply contracts with a surprise decision to ban all grain exports within 10 days.
Already, on Friday, exporters of wheat from Russia have started to void their supply contracts because of the government’s ban, according to Dow Jones.

The newswire cites traders and exporters saying that several companies with contracts that specify the supply of Russian-origin wheat have declared force majeure, which enables them to cancel contracts by citing circumstances beyond their control....MORE
I noted at the time:
We are just as cynical and suspicious as the good folks of Alphaville:

"Wheat's in a sweet spot, but run may not last"

...I commented:
Should prices see $8.50 the opportunities on the short side would almost be a lock.
I say almost because the serious money in commodities can pretty much get prices to where they want them, at least for short periods....

Ambrose Evans-Pritchard: "Agflation fears as Russia halts all grain exports"; Albert Edwards: "This is more Deflationary than it Looks"

There is no shortage of wheat. U.S. stockpiles are at two decade highs. There may be more going on here than meets the eye....

...Two days ago Bloomberg reported:

Russia Should Ban Grain Exports Amid Drought, Glencore Unit Says
Glencore is one of the worlds largest grain traders. They may have profited by the up-move caused by the export ban.