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FOOD COMMODITIES, CORPORATE PROFITEEERING AND CRISES, REVISITING THE
INTERNATIONAL REGULATORY AGENDA  
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October 4, 2024
Trade and Development Report 2023 Growth, debt, and climate:
Realigning the global financial architecture
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_ The report highlights how market concentration in key sectors, such
as the trading of agriculture commodities, has grown since 2020,
deepening the asymmetry between the profits of top multinational
enterprises and declining labour share globally. _

, United Nations

 

[xxxxxx Moderator: There are few areas of concensus in the aftermath
of the 2024 Presidential elections.  One area which does seem to
exist is that a significant role in the election was played by impact
of inflation, and in particular, with the cost of food in the World
Capitalist System.  However,  the causes, responsiblity or blame for
the rise in food costs remained murky in the election debate. Some
answers may be found in this report. The following is Chapter III of
the United NationsTrade and Development Report 2023 -- Growth, Debt,
and Climate: Realigning the Global Financial Architecture. The full
report is worthy of study. Chapter III addresses Food Commodities,
Corporate Profiteering and Crises: Revisiting the International
Regulatory Agenda. Wether the proposed methods in the report for
controlling the oligopolies responsible for the massive rise in costs
and profiteering laid bare in the report will be adequate, sufficient
or effective will, most likely, be the subject of continuing debate.]

Profiteering in times of crisis

The report highlights how market concentration in key sectors, such as
the trading of agriculture commodities, has grown since 2020,
deepening the asymmetry between the profits of top multinational
enterprises and declining labour share globally.

It finds that unregulated financial activity significantly
contributed to the profits of global food traders in 2022.

Corporate profits from financial operations appear to be strongly
linked to periods of excessive speculation in commodities markets and
to the growth of shadow banking – an unregulated financial sector
that operates outside traditional banking institutions.

During the period of heightened price volatility since 2020, certain
major food trading companies have earned record profits in the
financial markets, even as food prices have soared globally and
millions of people faced a cost-of-living crisis.

Food trading companies take positions and function as key participants
in financial markets, but this shadow banking function is not
regulated in the current financial system.

Patterns of profiteering in the food trading industry reinforce the
need to extend systemic financial oversight and consider corporate
group behaviour within the framework of the global financial
architecture.

FROM EXCESS TO EQUITY

The stark contrast between the surging profits of commodity trading
giants and the widespread food insecurity of millions underscores a
troubling reality: unregulated activity within the commodities sector
contributes to speculative price increases and market instability,
exacerbating the global food crisis. This presents significant
obstacles to effective policy measures. At the same time, an intricate
web of crosssector connections and high volume of intragroup corporate
activity in the industry complicates efforts to establish transparency
and accountability. Profiteering from financial activities now drives
profits in the global food trading sector. Yet commodity traders
circumvent existing regulations: they are not regulated as financial
institutions but are treated as manufacturing companies. This report
calls for a fundamental revision of this regulatory approach. It is
imperative to develop tools to enhance transparency and accountability
in this opaque yet systemically vital global industry. Policymakers
and regulators need to foster a future where equity replaces excess,
and the global paradigm shifts from profiteering to purposeful sharing
for the betterment of all.

SPECIFICALLY

• Profiteering prompts the need to reevaluate corporate group
membership and the behaviour of major players in food trading.

• Regulators should recognize the financial aspects of food
traders’ activities as systemically important and extend relevant
regulations. Measures proposed here at the corporate–finance nexus
can enhance wider efforts to combat financial speculation and
profiteering.

• A set of market-level, system-level and global governance reforms
are needed to align the international financial architecture with
recent developments in the opaque, underregulated yet strategically
vital commodity trading industry

A. INTRODUCTION

The cost-of-living crisis has become the hallmark of the post-COVID-19
recovery and continues to cascade through the global political
economy. In advanced economies, the crisis is manifesting as high
inflation and growing financial fragilities (chapter I). In the
developing world, import dependencies, extractive financial flows,
boom–bust commodity cycles, trade disruptions, the war in Ukraine
and climate-vulnerable food systems are combining to destabilize
finances, bringing countries closer to a debt crisis (chapter II;
IPES, 2023).

In the interplay of crisis transmission mechanisms, a vicious cycle
has emerged between higher energy and food production costs, reduced
farm yields and higher food prices, more inflation pressures and
subsequent financial tightening. Stricter financial conditions are
eroding the buying power of currencies in developing countries and
increasing the import costs of food and energy, reducing financial
capacity and increasing the costs of servicing debt (GCRG, 2022). In a
fragile global economy on the verge of a recession, volatility in
commodity markets endangers access to most basic needs and rights,
such as food and energy security for millions, potentially threatening
social and political stability in many parts of the world.

But crises always present opportunities, at least for some. The last
few years of commodity price volatility have coincided with a period
of record profit growth by global energy and food traders. In the area
of food trading, the four companies that conservatively account for
about 70 per cent of the global food market share registered a
dramatic rise in profits during 2021–2022. As figure III.1 shows,
growth in profits of some of the largest food traders in 2021–2022
is at par with the profitability profiles of leading firms in the
energy sector. Meanwhile, total profits of the nine big fertilizer
companies over the past five years grew from an average of around $14
billion before the pandemic to $28 billion in 2021 and then to an
astounding $49 billion in 2022 (IATP and GRAIN, 2023).

This chapter analyses some key dynamics of corporate profiteering
through crisis, with a focus on the global food trading sector. The
analysis presented below aims to identify and help address some of the
destabilizing impacts of concentrated corporate control in the
strategically vital, highly interconnected yet opaque and poorly
regulated food commodity trading industry

Corporate profiteering in times of crisis is not a new challenge. At
the very first United Nations conference, which took place 80 years
ago in Hot Springs, Virginia, United States, 43 countries gathered to
discuss the food and agricultural challenges faced by the post-war
international order.1 With many agricultural economies still suffering
from the price collapses of the inter-war years and against a backdrop
of famine conditions in parts of Europe and Asia, a central issue at
the time was the problem of volatile prices, for both producers and
consumers. But while there was broad agreement that the food question
could not be left solely to market forces, there was less agreement
about the best way to establish a more secure and stable global food
system.

“In the context of cascading crises, there is a stark contrast
between growing risks to the food security of millions and
profiteering by corporations that control global food systems.”

Today, in the context of systemic crises, the contrast between growing
risks to food security of millions around the world and profiteering
by the few corporations that control global food systems during times
of volatility and shocks, is particularly stark. In the highly
concentrated commodity trading industry, the super profits enjoyed by
“agripolies” trickle down very slowly, if at all, to local farming
communities.

In July 2023, Oxfam estimated that 18 food and beverage corporations
made on average about $14 billion a year in windfall profits in 2021
and 2022, enough to cover the $6.4 billion funding gap needed to
deliver life-saving food assistance in East Africa more than twice
over (Oxfam, 2023). A recent study found that in Europe, up to 20 per
cent of food inflation can be attributed to profiteering (Allianz,
2023). Some reports suggest that the ten leading “momentumdriven”
hedge funds made an estimated $1.9 billion by trading on the food
price spike at the start of the war in Ukraine (Ross and Gibbs, 2023).

However, according to two leading scholars, the issue is more enduring
and rooted in structural factors. Growing cross-sectoral control over
the food system by major agri-corporations raises the risk that
extreme food-price swings will become the norm. Through decades of
mergers and acquisitions, such firms have been able to expand their
influence up and down the supply chain, while amassing huge amounts of
market data. If a handful of companies continue to hold inordinate
power over the world’s food systems, any policy effort to mitigate
the short-term effects of food price spikes will be futile in the long
term (Clapp and Howard, 2023). Similar warnings are increasingly
echoed by market analysts, civil society, regulators and international
organizations concerned with the lack of regulatory oversight of
commodity trading (FSB, 2023; Schmidt, 2022; Tarbert, 2023; Tett,
2023).

The analytical and policy challenges of regulating commodity trading
cannot be overestimated. Opacity, lack of regulatory oversight –
especially at the systemic level – cross-sector interconnections and
intragroup corporate activity all pose major hurdles in efforts to
scope the problem and identify risks and workable solutions. This can
explain why, despite growing public attention on the issue of market
concentration and profiteering, current policy debate on possible
multilateral solutions to the food systems crisis has not addressed
this question in depth.

This chapter is a step forward in this endeavour and its aim is
two-fold. First, to examine the factors that enable corporate
profiteering in food trading in times of crises and thus play a role
in the current dysfunction of global food systems. Second, to put
forward a set of regulatory measures that can help address the
destabilizing impacts of concentrated corporate control in a
strategically vital, highly interconnected yet opaque and poorly
regulated industry.

The analysis reveals that unregulated financial activity significantly
contributes to the profits of global food traders. It also shows that
corporate profits from financial operations appear to be strongly
linked to periods of excessive speculation in commodities markets and
to the growth of shadow banking – an unregulated financial sector
that operates outside traditional banking institutions.

Specifically, during periods of heightened price volatility, certain
major food trading companies gain amplified profits in the financial
markets. Like a non-bank financial institution, food trading companies
take positions and function as key participants in financial markets.
This shadow banking function is not regulated in the current financial
system. As a result, these companies are motivated to increase their
already significant role in profiting from price differences in food
markets. To help combat the problem of profiteering, arbitrage and
unearned profits, a set of regulatory measures have been identified
that can help address market dysfunction and risks of shadow financial
trading.

The analysis does not necessarily establish that financial speculation
is driving food prices up. Rather, it suggests a strong link between
corporate profiteering through the use of financial instruments and
the current period of market volatility. As figure III.2 shows, the
past two years have been marked by high volatility in crop prices and
in the financial markets for food, but correlation does not mean
causation. Much more research needs to be carried out to establish the
relationship between excessive speculation and price dynamics. Food
prices are determined by an interplay of supply and demand conditions,
including in retail sectors, food processing industries and conditions
in labour markets (Scott et al., 2023). Therefore, while financial
speculation, and excessive speculation specifically, may accentuate
price swings, agriculture prices are highly affected by market
conditions, geopolitical tensions, climate risks and trade measures.

In February 2022, threats to global food systems were amplified with
the start of the war in Ukraine. Since 24 February 2022, 62 per cent
of 667 export-related non-tariff measures recorded affected
agricultural products or fertilizers. Of these, 267 are restrictive
measures such as bans on the export of fertilizers and certain food
products.2

Early in 2023, food prices came down from their 2021 peaks, yet the
suspension of the Black Sea Initiative and the subsequent withdrawal
of the Russian Federation from the deal has again sparked market
volatility (figure III.2.B). In early August 2023, wheat remains more
than twice as expensive as it was before the pandemic. In most
developing economies, food price inflation is above 5 per cent, and as
high as 30 per cent in Egypt and Rwanda (Clapp and Howard, 2023). And
while it may seem straightforward that high agriculture prices benefit
food producers, such assumptions ignore the major role played by the
international agrobusiness firms that control many of the links in the
global agrivalue chains and the dynamics of price formation in global
food systems (Akyüz and Gursoy, 2020; Baines, 2017; Clapp and Howard,
2023; Staritz et al., 2018; UNCTAD, 2023).

With these qualifications, the findings presented in this chapter are
indicative, and not definitive. More research is needed, and the
challenge of incomplete data and non-transparency of the commodity
trading industry is a major hurdle in this endeavour.

However, what is clear is that the fragmented and compromised set of
regulatory norms governing the financial dimension of the global food
trading industry has played a key role in enabling financial
speculation, corporate arbitrage and profiteering in the global food
industry since 2010. This problem was accentuated in the global
context of compounding crises post-2020. Financial speculation in
commodity markets, as well as the increasing role of financial assets
under the control of large corporations that dominate the sector,
point to the issue of unearned profits and the need to strategically
regulate important modes of corporate control.

The chapter is structured as follows:

• Section B analyses the role of financial trades and speculation in
food trading, finding a strong parallel between the period of high
profits of major food traders and the wave of financial speculation in
over-the-counter (OTC) markets.

• Section C investigates the conditions for corporate arbitrage in
commodity trading created, in part, by the regulatory distinction
between commercial and financial institutions. Findings show that this
distinction is being eroded by the process of regulatory loopholing,
corporate arbitrage and financialization of food trading.

• Analysing some of the concerns related to this process flagged by
the Financial Stability Board in 2023, an indicator was developed (the
asset dominance ratio, or ADR) to help locate and estimate the risks
to financial stability in commodity trading.

• Section D concludes by charting policy solutions that aim to limit
the systemic and distributional effects of unregulated financial
activities in commodity food trading, at different regulatory levels.

B. FOOD AS AN ASSET: HEDGING, SPECULATION AND PROFITING FROM CRISES

Financial instruments and insurance products, known as commercial
hedging tools, play a crucial role in risk management across all
industries. Particularly vital in sectors such as agriculture,
commodities, trade and investments, these tools contribute to market
liquidity. They become even more significant due to their role in
maintaining stable commodity prices, which in turn, rely on a stable
commodity derivatives market. A notable aspect of this market are
deferred settlements, a concept where transactions are settled at a
later date. Derivatives are based on the principle of deferred
settlements, and on the basis of being “a contract whose value
depends on the price of underlying assets, but which does not require
any investment of principal in those assets. As a contract between two
counterparts to exchange payments based on underlying prices or
yields, any transfer of ownership of the underlying asset and cash
flows becomes unnecessary” (BIS, 1995:6–7).

Commodity futures markets bring together commercial operators who
either produce, store or process commodities, and speculators, i.e.,
non-commercial operators who buy and sell futures contracts but have
no specific interest in the use of the commodity; rather, they aim to
make a profit exclusively from price fluctuations (Kornher et al.,
2022; IPES, 2023).

A degree of speculation, and speculative liquidity, is essential for
the stable operation of any financial market, as it helps price
discovery and hedging. However, excessive speculation makes price
swings larger than would have been the case based on supply and demand
conditions alone. Under certain conditions, excessive speculation can
become an independent driver of those price fluctuations. Excessive
speculation, including in commodity markets, is intimately linked to
the use of financial derivatives. These instruments mushroomed
following the heightened uncertainty and unstable expectations that
followed the end of the Bretton Woods system in 1973.

Speculation on food futures markets dates back to the mid-nineteenth
century, when farm production expanded in the United States. At the
time, small-scale farmers, being directly indebted to the banks which
sold land, had to seek opportunities in markets much further afield.
As international channels for trade in cereals had only just started
to develop, control over the food chain became concentrated in the
hands of a few powerful intermediaries, who are the ancestors of
today’s food multinationals (Vargas and Chantry, 2011). These
markets came under federal oversight in the late 1930s, with stricter
regulation introduced following the farming crisis and the Great
Depression.

Over the past few decades, the structure of food speculation has
become more complex. Two parallel forces have driven this shift: the
maturing of speculation in financial markets on the one hand,
including through the use of derivatives; and the liberalization of
agriculture markets, on the other (Vargas and Chantry, 2011). This
process has seen private equity funds, asset management companies,
institutional investors, banks, and other financial institutions
invest in “alternative assets” such as commodity futures,
agricultural land and the crops it produces, which had hitherto been
avoided by most investors as too high-risk (Murphy et al., 2012).
Partly as a result of this process, the financial activities of
non-commercial hedgers in commodity markets have become associated
with excessive speculation and its impact on price levels, most
dramatically seen during the commodity price crisis of 2008–2010
(Bicchetti and Maystre, 2013).

The current crisis accentuates two major effects of these
developments. First, there is ample evidence that banks, asset
managers, hedge funds and other financial institutions continue to
profit from the most recent bout of commodity market volatility
(Schmidt, 2022; Oliver Wyman, 2023; Ross and Gibbs, 2023). Second, by
actively managing risk, commodity trading firms have assumed many
financing, insurance and investment functions typically associated
with the activity of banks. In this context, very large international
trading firms, or ABCD-type companies3 have come to occupy a
privileged position in terms of setting prices, accessing funding, and
participating directly in the financial markets. This not only enables
speculative trades in organized market platforms, but a growing volume
of transactions between individuals, or over-the-counter trades, over
which most governments in the advanced countries have no authority or
control (Suppan, 2010; Vargas and Chantry, 2011; Murphy et al., 2012).

Continuous lack of systemic regulatory oversight over the emergent
segments of commodities trading reinforces this position. Market-based
speculation, and operations in exchange-traded derivatives represent
only a fraction of derivatives traded globally. Financial derivatives
on agricultural commodities are mostly traded over the counter, which
makes monitoring market trends and regulating risks in this sector a
challenge (Schmidt, 2022).

In this instance, the geographical structure of global commodity
derivatives trade is instructive (figure III.3). Many market-based
instruments are traded in North America and Asia, reflecting major
trading zones for key commodities, while Europe accommodates mainly
OTC trading.

Data from the Bank of International Settlements (BIS, 2023) shows that
outstanding over-the-counter commodity derivatives relating to energy,
food and non-precious metals experienced a sharp increase after 2020,
with their gross market value increasing from less than $200 billion
to $386 billion at the end of 2021 and peaking at $886 billion by
mid-2022. This represents more than a fourfold increase compared to
their 2015–2020 average. During the second half of 2022, this
indicator declined by 45 per cent. Yet it still yielded a year-end
value of $486 billion in 2022.

Notional principal values of these outstanding derivatives remained
above $1.5 trillion at the end of 2022, its second highest since
records began, after reaching an all-time-high of more than $2
trillion in mid-2022 (BIS, 2023). These trends reflect the uncertainty
triggered by the war in Ukraine and other geopolitical tensions
affecting commodities markets.

The central role of OTC operations in commodities trading points to
one of the major challenges of regulating this notoriously inscrutable
industry. The opacity of the global food trading sector has
implications for the availability of data and therefore, definitive
conclusions: only eight out of 15 main food trading companies examined
in this chapter are publicly traded and required to publish
consolidated accounts.4 The lack of transparency within this sector
means that generalizations about profit trends for individual
companies, and a conclusive verdict on the exact impact of corporate
profits on the overall price dynamics, are difficult to draw at this
stage.

What does appear to be clear from analysing sector-wide profit trends
is the relationship between companies’ profits and price volatility.
Figure III.4 presents the relationship between the (net) profits of
the “ABCD” companies and food price volatility during the last
decade

As figure III.5 shows below, global food price volatility during the
crisis of 2020–2022 is close to the levels of the commodity price
crisis period of 2008–2010.

Two major issues are notable here. First, the profits of four major
food traders rise during periods of market volatility and during
crises, and this trend has been particularly pronounced during the
pandemic. Second, in the context of compounding crises, the sources of
the super-profits in the food trading industry warrant closer
attention.

As noted in the seminal study by Oxfam (Murphy et al., 2012), prices
in volatile commodity markets are as much about anticipated supply and
demand as they are about existing conditions and potential risks. The
level of risk and volatility in the trading of standardized and
generic products pushes companies to look for strategies that will
increase their stability and predictability. To achieve this, a range
of financial techniques designated for commercial hedging can be used,
such as futures and options. Commodity exchanges can also serve this
purpose if traders, in addition to using publicly available
information, trade using independent information derived from an
intimate knowledge of specific events and their own plans to supply or
demand commodities. However, in an inadequately regulated system,
instruments officially designed (and regulated) as hedging tools are
being used for speculating in food prices.

Figure III.6 gives an indication of this phenomenon in the food
commodities trading industry. It shows that profit indicators
reflecting the dynamics of the core business of companies in the
sector have followed a common trend since 2006. Yet in 2020, pre-tax
profits, which can serve as an indicator of the profits (and losses)
from purely financial operations (i.e., non-core business operations)
became extreme, greatly exceeding profits/ losses from their core
business operations. These are: operating revenues, gross profits and
earnings before interest, taxes, depreciation and amortization
(EBITDA).

This contrast in profit indicators leads to three key observations.

First, food trading companies have come to rely on the use of
financial instruments and markets not simply to hedge their commercial
positions, but to strategically ride the wave of market volatility (in
other words, to speculate) using techniques of financial engineering.
Second, market and price volatility appear to have a much more
pronounced role in the sector’s financial operations, in contrast to
their core commercial activities. Third, financial instruments and
techniques designed for hedging a range of commercial risks are being
used by the sector for speculative purposes. This is enabled by the
current regulatory architecture of commodity trading as a whole, which
remains diluted and fragmented.

Hedging activity, regardless of whether it is officially a hedge under
the existing rules, or a hedge to bypass onerous regulations, should
have a negligible impact on financial performance because, if done
properly, that is the objective of the hedge. Most derivatives trading
takes place in OTC markets, which are largely unregulated. Major
commodity traders classify the bulk of their derivatives assets as
normal speculative investments that contribute to the profit of the
group as a financial gain (or loss). However, the unique nature of
derivatives trading means it does not consistently deliver predictable
results. Financial gains from derivatives activities are not
equivalent to “financial income”, but instead, are manifested as
“fair value adjustments” based upon the difference of the original
face value of the contract, and whether, over time, value differences
generate gains or losses to be accounted for. Depending on how
companies present their accounts, these “adjustments” can
materialize in different places in the income statement present in
annual reports. For some companies in the sample, the magnitude of
these adjustments is consistent across time, except during periods of
excessive derivatives speculation (discussed below). During such
times, company accounts report unusually large adjustments, which
boost overall profit levels and drive the observations detected in
figure III.6. This attests to the disproportionate role that
non-operating activities (speculation) play in the current era of
super profits. This aligns with the timeframe during which excessive
speculation in the OTC markets surged, as shown below.

Over time, large commodity trading companies have become major
financiers. They act as creditors to governments and private entities,
carry out proprietary trading (i.e., speculating on the future
direction of prices, leveraging their large informational advantage),
issuing financial instruments such as “secured amortizing notes”
to third party investors such as pension funds, etc. (Blas and Farchy,
2021). Driven by the need to hedge their business transactions, and
with the resources and opportunities to speculate, commodity traders
today are key participants in derivatives trading. In 2017, the
European Central Bank (ECB) found that 11 commodity dealers cover more
than 25 per cent of the Euro area market in commodity derivatives,
with more than 95 per cent of derivative contracts being non-centrally
cleared OTC derivatives.5

“There is mounting evidence that speculative activity in food
markets increases dramatically during crises.”

There is mounting evidence that speculative activity in financialized
food markets increases dramatically during crises, including the
current period of 2020– 2022/2023. Kornher et al. (2022) examine the
drivers of excess price volatility of commodity futures markets and
find that, following the period of extreme market volatility between
2007 and 2011, markets stabilized until the onset of the pandemic in
2020. Since the end of 2021, excessive price volatility surrounding
commodity futures trades has grown significantly. The share of
speculators (non-commercial traders) in hard wheat and maize
corresponds to price spikes and has risen sharply since the end of
2020 (Kornher et al., 2022). In 2022, the share of long positions held
by non-commercial traders was estimated at around 50 per cent, a
figure similar to the period of high speculative pressure in
2007–2008 (Kornher et al., 2022).

“A group of 10 leading hedge funds made an estimated $1.9 billion
trading on the food price spike at the start of the war in
Ukraine...their activity contributed to speculative price rises and
exacerbated the food crisis for millions around the world.”

More recently, data compiled by French commercial bank, Société
Générale, suggests that a group of 10 leading “momentum-driven”
hedge funds made an estimated $1.9 billion trading on the food price
spike at the start of the war in Ukraine in wheat, corn and soybean
trades, after a period of years in which they had largely made losses
on these food commodities in the same three-month period (Ross and
Gibbs, 2023). Their activity contributed to speculative price rises
and exacerbated the food crisis for millions around the world.
Researchers have found that in the Paris Milling Wheat market – the
benchmark for Europe – the proportion of buy-side wheat futures
contracts held by financial speculators increased from 35 per cent of
open interest in May 2018 to 67 per cent in April 2022 (Agarwal et
al., 2022).

These findings are confirmed by the analysis of speculation in OTC
derivatives presented in figure III.7. The available current data from
the Bank of International Settlements indicates that financial
speculation in commodities, including food, has risen dramatically
during the two recent crises, 2008–2010 and 2020–2022.

The Bank of International Settlements offers two metrics which provide
two ways of understanding the key dynamics in these markets. The first
measure is “notional value of outstanding” OTC derivatives (blue
line in figure III.7.A). It is a metric of value that aggregates the
total “face value” of an underlying set of contracts. The second
measure is the “gross market value of outstanding derivatives”
(orange line in panel figure III.7.A). This differentiates the pool of
contracts into those that are currently generating a profit, versus
those that are generating a loss. The latter metric is particularly
important for evaluating when speculation pursuits “overtake”
break-even risk management hedge interests. Put simply, the blue curve
in figure III.7.A shows the volume of bets taken in OTC commodities.
Major increases in the orange curve indicate periods when there were
more profit-making bets in the market.

Taken together, the panels in figure III.7 present the evolution in
the structure of speculative trades in OTC markets during the past two
financial cycles. The data suggests that the OTC commodity markets
have evolved through four phases. The first is the lead up to the
global financial crisis, when the rapid growth of OTC markets
coincided with a predominance of loss-making contracts (orange line in
III.7.A), with a notable correction and growth in contracts that were
profit-making immediately after the onset of the crisis in late 2007.
This period of excessive profit making contracts gave way to a long
period of stability with little volatility in the composition of
profit versus loss-making contracts in the OTC markets from, roughly,
2010 until the end of 2020. Between 2021 and December 2022, the
underlying composition of the OTC markets, compared to 2007–2009,
has been marked by a disproportionately large number of profit-making
contracts.

These metrics distinctly show when there are shifts towards excessive
speculation in the OTC markets. They also show how this measure more
effectively correlates with the timing of systemic shifts when profits
are generated from financial activities, as reflected in corporate
accounts. Together, the two measures indicate the timing of excessive
speculation. The determining feature in when this happens appears to
be external to the companies themselves. This reflects differences in
how market investors estimate prices, compared to industry insiders’
more precise knowledge of actual prices.

Moreover, as can be seen from figure III.7.A, while the speculative
bout of 2007–2010 was driven by new entrants into the commodity
markets supplying new liquidity (banks and other financial
institutions), the current peak is mainly associated with the activity
of the incumbent market players (see the much less dramatic rise of
the blue curve in figure III.7.A reflecting the more limited injection
of new liquidity).

It is instructive in this instance that in the documentation presented
by one of the ABCD giants, a listed company under strict obligation to
disclose to the public the exact nature of its activities, it is made
clear that:

The majority of the Company’s derivative instruments have not been
designated as hedging instruments. The Company uses exchange-traded
futures and exchange-traded and OTC options contracts to manage its
net position of merchandisable agricultural product inventories and
forward cash purchase and sales contracts to reduce price risk caused
by market fluctuations in agricultural commodities and foreign
currencies. The Company also uses exchange-traded futures and
exchange-traded and OTC options contracts as components of
merchandising strategies designed to _enhance margins_ (Archer Daniels
Midland, 2022:67, emphasis added)

“The blurred distinction between hedging operations by commercial
traders and financial speculation poses a financial contagion risk and
is a factor in price inflation.”

The transformation of food trading companies into financial
institutions is a problem long noted by analysts (Murphy et al., 2012;
Gibbon, 2013). The blurred distinction between hedging operations by
commercial traders and financial speculation poses not only a
financial contagion risk but is also a factor in price inflation. This
warrants a revision to the existing regulatory architecture of
commodity trading. While the phenomenon of excessive speculation in
commodities is linked to deregulation policies (de Schutter, 2010;
Oxfam, 2011; Winders, 2011), there are growing concerns that financial
activities within today’s food trading industry give rise to
unnoticed financial stability risks and strengthen corporate influence
over strategically significant markets (FSB, 2023). Not only does this
add to the challenges of detecting and curbing excessive market
speculation in commodity and food trading; it also further complicates
regulation of the shadow banking system and imperils financial
stability. It also conceals risks and exposures in the poorly
regulated yet highly interconnected and systemically important
industry. These issues are addressed in the next section.

C. OF LOOPHOLES AND LOOPHOLING

“What might happen under legislation that would allow most OTC
derivatives to remain in dark markets, thus preventing regulators from
having timely access to all trading information, a prerequisite for
effective regulation?”, asked one contributor from the Institute for
Agriculture and Trade Policy, to a 2010 UNCTAD symposium on commodity
market regulatory pathways (Suppan, 2010).

More than a decade after the use of OTC derivatives in food markets
raised concerns among regulators, some clear lessons can be drawn.
They point to the incomplete, fragmented and diluted approach to
regulating commodity trading. Increasingly, these concerns relate to
heightened financial stability and opacity risks in the industry,
where regulatory gaps have widened further since 2010. These gaps are
being exploited by the corporate groups that dominate commodity
trading. Moreover, commodity traders have not only circumvented
existing regulations but also consistently avoided further attempts to
regulate the financial dimension of their activities.

Regulatory competition, unique industry characteristics and
efficiencies, as well as economies of scale, are typical arguments
used by the industry to advocate the merits of the fragmented
regulatory approach which has prevailed until today. Despite efforts
to increase oversight, the food markets sector has resisted, arguing
that it is indirectly supervised by banks.

“Commodity traders have circumvented existing regulations and
consistently avoided attempts to regulate the financial dimension of
their activities.”

To a large extent, current gaps are the outcome of regulatory
loopholing in the post-2010 financial architecture. These include
caveats and exemptions to market-level regulations introduced in the
wake of the global financial crisis; company-level techniques of
financial and regulatory arbitrage; a persistent lack of a harmonized
approach to regulating commodity traders generally, and of food
companies more specifically.

There is also a more fundamental reason for the lack of appropriate
regulatory treatment: the majority of food trading companies are not
regulated as financial institutions but are treated as manufacturing
companies. The ongoing crisis in the global food system underscores
the need to rethink the regulation of food and commodity traders at a
more coherent and systemic level.

“The majority of food trading companies are not regulated as
financial institutions but are treated as manufacturing companies.”

1. DODD-FRANK: AN OPPORTUNITY MISSED

Historically, the most important source of the public regulation and
monitoring of futures exchanges has been the government of the United
States, driven by farmer and consumer interests. Until the financial
crisis of 2007–2009, futures exchanges in other jurisdictions,
except for some developing countries, were typically subject only to
light forms of self-regulation and little or no public monitoring. In
the European Union, regulation of commodity derivative markets centred
on the behaviour of market participants – in terms of capital
requirements, organizational requirements and requirements to follow
conduct-of-business rules, and even here with wide exemptions –
rather than of markets (Gibbon, 2013).

Following the commodity price boom of the 2000s, financial market
regulation concerns began to feature in the regulatory agenda of the
United States and the European Union. Signed in 2010, the Dodd-Frank
Act aimed to roll back the preceding liberalization of OTC and
exchange-based trading. The Act prioritized measures and requirements
for better (re)-capitalization of banks, and more discipline in the
credit operations of commercial banks (Kornher et al., 2022). In the
area of commodity trading, the main provisions in the Act were
usefully summarized by Gibbon (2013):

(i) OTC swaps “taking a standard form”, when traded by financial
entities with portfolios with a notional value of more than $8
billion, will have to be cleared through centralized clearing houses
and subject to reporting and margin requirements. The United States
Securities and Exchange Commission (SEC) has announced a margin
requirement equivalent to 15 per cent of the notional value of the
acquired position. Crucially, “non-financial entities” hedging
risk will be exempted from the central clearing requirement but will
be subject to a requirement for central notification. Additional
margin requirements were considered for non-cleared swaps.

(ii) Banks shall spin off their commodity swap activities to
independent entities excluded from Federal Reserve Insurance
arrangements and not engage in derivatives trading not directly
related to the trading they do for customers (the so-called “Volcker
rule”).

(iii) Federal position limits shall be extended to all exchange-traded
commodity contracts, and the aggregation of individual positions on a
commodity for position limit purposes shall occur across all exchanges
and trading venues, including non-United States exchanges and swap
venues. The eligibility for hedgers’ exemptions from position limits
shall be narrowed to entities with positions exclusively in
cash-settled contracts.

(iv) Spot month position limits shall normally be set at 25 per cent
of the estimated deliverable supply

(v) These rules shall also apply to activities on foreign exchanges
and other trading.

(vi) Venues by “United States persons”, foreign-registered
subsidiaries of firms and foreign firms whose activities are likely to
impact on the economy of the United States, except where foreign
exchanges set rules that are deemed to be identical to domestic ones.

(vii) In early 2012, additional Presidential authority was granted for
the Commodities Futures Trading Commission (CFTC) to increase margin
requirements for oil futures and options contracts (Gibbon, 2013).

Not long after the initial adoption of the Act, its key principles
started to be diluted, under the influence of industry interests,
inter-agency competition, technical difficulties of implementation and
opportunities of international arbitrage.

The coalition of companies using derivatives includes companies such
as Bunge, John Deere and Cargill, which engage in both commercial
hedging and financial speculation. The coalition has argued that OTC
trades between financial institutions and non-financial institutions
(such as the coalition members), should be exempt from requirements to
clear those trades on public exchanges. At least three reasons are
typically given to justify the exemption.

• First, non-financial firms pose no systemic financial risk and
hence they should not be prevented from “customizing” their
interest rate, currency rate, balance sheets and credit risk in
bilateral deals with financial institutions;

• Second, the higher margin requirements of trading on exchanges
will pose huge cash-flow problems for coalition members and imperil
market liquidity;

• Third, if bilateral trades are pushed from the dark OTC market to
exchanges or derivatives clearing platforms, trade risks will be
concentrated in such quantity that these centralized clearing
platforms will be unable to confirm and verify trades operationally
(Suppan, 2010).

Some of the key effects resulting from regulatory loopholing in
financial derivatives that ensued soon after the inception of the
2010–2011 regulatory norms are examined in box III.1. The overall
outcome of diluting the set of financial reforms was the creation of
an important regulatory loophole that is being used by financial
institutions to speculate in commodity derivatives to this day.

BOX III.1 IT’S ALL IN THE FOOTNOTE: DODD-FRANK AND FINANCIAL
REGULATORY ARBITRAGE

With the adoption of Dodd-Frank, OTC trading for financial derivatives
was supposed to be formalized and moved to central clearing platforms
to boost market transparency. The measure was aimed primarily at swaps
and security-based swaps (Kornher et al., 2022). Other important
regulatory reforms included new position limits and restrictions on
the use of swaps. However, although at the time the Commodity Futures
Trading Commission (CFTC) issued comprehensive rules on position
limits, the authorities failed to enforce them fully. Some funds, such
as the commodity index and similar funds, were left unregulated.
Regulation of swaps in particular became the centre of the regulatory
loopholing that would soon ensue.

To understand its origins and the impact on the sector, a critical
distinction needs to be drawn between “branches” and
“affiliates” or “subsidiaries” in the structure of banking and
corporate operations. The distinction is legally important and impacts
the identification of the persons subject to legislation; it also
defines how to potentially avoid (arbitrage) the application of
legislation.

A branch is merely an office of a legal person; transactions concluded
by personnel out of this office are transactions of the legal person
owning the branch. An affiliate, or subsidiary, as opposed to a
branch, is a separate legal person having its own legal personality,
assets, and personnel. This separate legal person is an affiliate or
subsidiary because its equity capital is owned by a parent company,
which is itself also a separate and autonomous legal person. But
legally speaking, as a matter of principle, it is an autonomous legal
person. The activities conducted in the office can be exactly the
same under both legal configurations. In the first case, they are
attributed to the owner of the branch; in the second they are those of
a separate legal person (the subsidiary), although 100 per cent of the
share capital of the subsidiary may be owned by the “parent”
company.

Under the International Swaps and Derivatives Association (ISDA)
documentation applicable at the time, a legally separate subsidiary
would in effect benefit from an unlimited parent guarantee. In the
context of financial trading, for counterparties, this meant that the
situation was almost “as if” they traded with the parent company,
or a branch. The trade could be subject to local rules, but with a
United States bank holding guarantee. This opened the possibility to
enjoy the best of many different worlds: for instance, to trade under
a more relaxed regime while benefiting from the parent’s guarantee
and the backing of the United States federal government in case of a
bailout.

Dodd-Frank purportedly closed this possibility with Section 722(i).
But the CFTC introduced a loophole in its own legislation making it
possible to adapt the form of past practices and keep the substance.
The July 2013 Guidance made “[United States] persons” in swaps
trades subject to all Dodd-Frank’s swap rules, regardless of the
physical location of the swap execution.

However, footnote 563 of the Guidance stated: “The Commission agrees
with commenters who stated that Transaction-Level Requirements should
not apply if a non-[United States] swap dealer or non-[United States]
major swap participant (MSP) relies on a written representation by a
non-[United States] counterparty that its obligations under the swap
are not guaranteed with recourse by a [United States] person.”

Consequently, newly (officially) “de-guaranteed” foreign
subsidiaries were no longer subject to Dodd-Frank. It has been
reported and understood among swaps industry experts that a large
portion of the United States swaps market shifted from the largest
United States bank holding companies and their United States
affiliates, to their newly de-guaranteed “foreign” affiliates,
even though those swaps remained on the consolidated balance sheets of
these United States institutions (Greenberger, 2018). Also, these huge
United States bank holding company swaps dealers were often
“arranging, negotiating, and executing” these purported
“foreign” swaps in the United States, through United States
personnel but then “assigning” those fully executed swaps to their
newly “de-guaranteed” foreign subsidiaries, asserting that these
swaps were not covered by Dodd-Frank even though completed in the
United States.

By arranging, negotiating, and executing swaps in the United States,
with United States personnel and then “assigning” them to their
“foreign” newly “de-guaranteed” subsidiaries, these swaps
dealers once again have the best of both worlds: swaps execution in
the United States under the parent bank holding companies’ direct
control, but the ability to move the swaps abroad out from Dodd-Frank
(Greenberger, 2018:126).

The 2013 Guidance and Policy Statement was superseded on 23 July 2020
by the CFTC which issued its Final Rules regarding the cross-border
application of various requirements under the United States Commodity
Exchange Act. Importantly, however, the definition of a “[United
States] person” has been further narrowed. For example, a collective
investment vehicle owned by [United States] persons was considered a
“[United States] person” in the Guidance (although such a legal
vehicle does not have legal personality). In the Final Rules, it is
not a “[United States] person” anymore (CFTC, 2020).

Although a fully accurate estimate of the extent to which swaps have
moved abroad from the United States is not available, it is estimated
that up to 95 per cent of certain lines of swaps trading had moved
outside the United States under the de-guaranteed loophole and thus
were considered not to be subject to Dodd-Frank swaps regulations. An
international race-to-the-bottom of swaps regulation ensued
(Greenberger, 2018). Partly as a result of this regulatory loopholing,
Greenberger estimated that, in the United States, the ratio of
speculators versus hedgers, historically around 30 per cent
speculators to 70 per cent commercial hedgers, has inversed: 70 per
cent speculators to 30 per cent hedgers (Greenberger, 2013).

In the European Union, the European Commission broadly modelled its
approach to OTC trading on DoddFrank. Yet its key regulatory issues,
such as the regulation of OTC derivatives and the enforcement of
aggregate positions limits for all market participants, have been
controversial and divisive (Suppan, 2010). After the G20 meeting in
Pittsburgh in 2009, position limits became a cornerstone of the
regulatory approach.

Position limits imposed on market actors are supposed to ensure that
derivatives markets work for the commercial producers, and not for
purely financial operators with no intrinsic interest in the
commodities themselves. Importantly, this means that industrial and
financial market participants are to be treated differently. The
classical method used is to set position limits and provide bona fide
exemptions for commercial producers as in the Dodd-Frank Act. In the
European Union, the Markets in Financial Instruments Directive
(MiFID), notably MiFID I and II, apply to commodity derivatives, but
include a number of key exemptions. Under MiFID II, a specific
“ancillary activity exemption” is available where a firm’s
activities relating to commodity derivatives are “ancillary” to
its main business.

2. GLOBAL FOOD TRADERS: COMMERCIAL HEDGERS OR FINANCIAL INSTITUTIONS?

At its core, the problem of regulatory gaps centres on the dichotomy
between the regulatory treatment of commodity traders as manufacturing
corporations on the one hand, and their increasingly more profitable
(yet unregulated) activities in financial markets, on the other. The
concept behind this distinction between commercial and financial
market participants is that an industrial business should only look
for security in prices; not betting for the sake of it. However, large
grain processors with access to a wealth of information regarding food
markets have a clear interest in using their hedging activities as a
profit centre. In the process, they tend to change their business
model and start operating like a financial actor, with the benefit of
exemptions designed for purely commercial hedgers.

“Large grain processors with access to a wealth of information
regarding food markets have a clear interest in using their hedging
activities as a profit centre.”

By using a series of subsidiaries located in appropriate
jurisdictions, food monopolies have found a way to combine several
advantages:

– A superior knowledge of the agricultural commodities markets
(real-time supply and demand and prospective knowledge of their
evolution);

– An ability to store agricultural commodities to harness price
surges when they occur, ABCD have invested heavily in infrastructure
for storage and built significant grain reserves; but with no
obligation to disclose their grain stocks;

– Secrecy of their operations and the benefit from derogations to
the rules applicable to pure financial actors. ABCD have all legally
structured their operations using hundreds of subsidiaries
incorporated to take advantage of the various menus of regulations (or
lack thereof) offered by the different jurisdictions, including
secrecy jurisdictions, around the world (table III.1).

Although some of the challenges of implementing regulatory reforms are
due to the operational complexity and opacity of the global food
trading industry (indicated in table III.1), many key arguments
against closer regulatory attention are constructed by group politics

The core of regulatory arbitrage opportunities lies in the use of the
concept of legal personality and subsidiaries. As the investigation
shows below, in the case of major food giants, using hedging for
purely speculative purposes appears to take place at the level of
subsidiaries, often not being reported at a consolidated (GUO, Global
Ultimate Owner) level.

Increasingly, however, in the context of 2020–2023 crises, there is
growing recognition that such regulatory dichotomy poses a range of
potentially systemic risks to financial stability (FSB, 2023), price
stability and economic security (UNCTAD, 2022) and corporate
governance, including through risks of illicit financial flows (OECD,
2023; Public Eye, 2023).

In 2012–2013, the Financial Stability Board (FSB) considered
classifying large physical commodity trading houses (which are without
exception major participants in derivatives markets) either as shadow
banks or as “systemically important non-bank financial
institutions” or both. This would have made them subject to greater
regulation.6 The industry pushed back, insisting that commodity
trading is a highly complex, globally interconnected manufacturing
sector managing a range of specialized risks on a large scale (Baines,
2017). In the event, the FSB concluded there was insufficient evidence
to consider trading houses as shadow banks but left the door open for
future revision of this stance (Gibbon, 2013).

In the absence of close regulatory oversight, the transformation of
commodity trading houses into shadow financial institutions continued
unabated. Following the implosion of the 2008–2010 commodity bubble,
many of the world’s largest banks have scaled down their commodity
trading operations. Some institutions (e.g., Barclays, Deutsche Bank)
have exited the business. These departures opened the space for less
regulated entities such as commodity trading firms. As a result,
“large trading companies have gained access to increasingly
sophisticated instruments that offer them greater financial
flexibility and enable them to avoid any controls by banks” (Public
Eye, undated).

At the global level, large commercial groups (“ABCD”-type) with
real commercial hedging needs have been developing additional
financial strategies designed to enhance profit margins, further
challenging the regulatory framework of the industry and posing
potential threats to financial stability (FSB, 2023). Some of these
risks came to the fore during the energy crisis in 2020 when commodity
companies faced severe liquidity difficulties (Longley and Chin,
2022). Lévy-Garboua (2022) has called such traders
“semi-financial” players, with one foot in finance (their
liabilities, which make greater use of leverage than a company, albeit
much less than a bank) and one foot in the real world (the raw
materials they hold). Yet this real world is close to the financial
markets, due to the extreme volatility of prices (Lévy-Garboua,
2022). Implications for financial stability arise from the fact that
central banks are helpless when addressing such entities. They require
intermediary institutions to take on the functions typically carried
out by banks when dealing with commodity traders. From the perspective
of central banks, only banks and, to a greater extent, central
clearing platforms, are well-suited to this role.

Academics have long suggested that global food trading corporations
have expanded the scope of control over the industry to become not
simply oligopolies, but cross-sectoral value chain managers (Clapp,
2015). Crucially, this includes control over the financial assets. Yet
methodologies or monitoring tools that would help capture the scale
and impacts of this transformation at a systemic level were, up to
now, lacking. The idea that the commodity trading industry will
self-regulate means there is an absence of established regulatory
guidelines in the industry, making it challenging to differentiate
between commercial and financial institutions.

With this task becoming more urgent in light of recent volatility and
crises, a new method is proposed below to advance this discussion.

3. HOW TO DIFFERENTIATE BETWEEN FINANCIAL AND COMMERCIAL COMPANIES,
USING THE “ASSET DOMINANCE” RATIO

Analysis of the food trading sector’s profitability presented in
section B above established that non-operating activities were the
main source of heightened profit growth in the food trading sector
during 2020–2022. But what is the best way to gauge the level and
impact of the financial activity undertaken by a global non-financial
corporation?

The answer to this question presented below has its origins in
corporate accounting methods.7 In corporate accounting, financial
instruments used in intrafirm financing are typically described on the
balance sheet of entity filings. The method used here is based on
examining the corporate filings of 13 of the major global food
commodity traders and comparing the accounts of the corporate parent
with the accounts of group subsidiaries. The result is measured by an
indicator called the asset dominance ratio (ADR), which aims to
capture financial (as opposed to “real”) economic activity carried
out inside a corporate structure. This is achieved by comparing
information presented in the balance sheet with income statements in
corporate filings. More specifically, ADR points to heightened use of
intragroup transfers within private corporate groups. Intragroup
transfers are financial transactions between legally independent
entities within a corporate group.

As table III.1 shows, large companies such as food traders consist of
a parent company and tens, in some cases, hundreds of subsidiaries. A
great deal of intrafirm transfers take place among the parent and
subsidiaries, and between subsidiaries themselves. There are two main
types of such intragroup transfers: (a) transfer pricing, which
involves trading activities between group members; and (b) intragroup
financing, which involves using financial instruments to create debt
or equity relationships between group members.

In corporate accounting, balance sheet items represent an
approximation of all forms of financial investments by the reporting
entity (e.g., a subsidiary or the corporate parent); while income
statements document the amount of revenue harvested from those
investments during the reporting period. Due to the known problem of
tax avoidance through transfer pricing, corporate intrafirm trading is
subject to considerable regulation. The regulation of intragroup
financing, however, is less developed than transfer pricing, and is a
concern for regulators. The study presented here is predicated on the
assumption that tracking intragroup financing requires comparing
balance sheets and income statements because financial instruments are
accounted for on the balance sheet. This helps simplify the complexity
of financial reporting within multinational corporations.

More precisely, ADR is computed as the mean average of all reported
balance sheet items compared to the mean average of all income
statement items presented by the corporate entities under examination.
Note that:

• An ADR figure at or below 1 describes an industrial corporation in
this sector;

• An ADR of more than 1 indicates that financial investment activity
outweighs the earnings activities from core business and investments.

This metric focuses on the use of financial instruments in intragroup
financing and gives weight to certain reporting patterns. Findings
show that the use of intragroup financing is significant in generating
excess profits.

It is commonly performed by select members of a corporate group whose
primary role is corporate financing and treasury functions. The use of
financial instruments is often reported in multiple places within
accounting categories, and the magnitude of assets and liabilities
involved is much larger than the values reported on the income
statement.

For governance purposes, it is important to compare not only the
subsidiaries within a group but also the consolidated parent
company’s reporting. Consolidated reporting, oriented towards
shareholders, excludes intragroup transfers. Thus, analysing changes
in excess values produced by subsidiaries excluded from consolidated
reporting is crucial from the point of view of: (a) financial
stability, (b) tax avoidance and fiscal revenues; (c) risks of illicit
financial flows (IFF).

Figure III.8 illustrates the change in asset dominance ratio between
the consolidated parent (GUO in most cases) and group subsidiaries for
the 13 companies in the sample. It presents an analysis of the
corporate activity, including at the level of subsidiaries, between
two time periods:

• the period when hedging predominates in the OTC markets
(2014–2018);

• the period of speculation on OTC markets and excessive corporate
profits (2019–2022).

This analysis pinpoints shifts in the reports of these corporate
groups, which indicate these entities are taking advantage of the
profit opportunities that have arisen in recent years. The distinction
between data presented by the consolidated parent group (y axis) and
data presented by the group’s subsidiaries (x axis) is key. The
diagonal in the graph depicts the points where subsidiary reports
match the information presented in the consolidated public reporting.
As positioned in figure III.8, being at or below 1 (e.g., GrainCorp in
the sample) depicts an accounting profile of a typical industrial
corporation. The diagonal differentiating the two halves of the
graphic where there is a difference in the information presented by
the financial reporting: one which is “hidden” (subsidiary level)
and one which is “already public” (consolidated parent).

In figure III.8, the ADR is the ratio of the sum of all available
balance sheet items to the sum of all available income statement
items. The change in the ratio is illustrated by an arrow, where the
starting point is the period of 2014–2018, and the endpoint of the
arrow is the period of 2019–2022. Red arrows indicate corporations
where asset dominance ratio has increased at the subsidiary level,
while black arrows indicate the decrease of asset dominance ratio at
the level of the parent.

“Profiteering reinforces the need to consider corporate group
membership and the behaviour of major players in the food trading
sector.”

Three key conclusions can be drawn from these findings:

• First, the cases showing growth in asset dominance are observed
primarily at the subsidiary level within the group, indicating
increased use of intragroup transfers.

• Second, this suggests that the amount of excess profits being made
could be underestimated when only looking at public profit and loss
reporting.

• Third, profiteering is not limited to a specific sector but is
specific to individual firms. There are concerns that excess profits
may be linked to market concentration, benefiting only a few global
players in the commodity trading community. This reinforces the need
to consider group membership and the evolving behaviour of major
international players in the sector. It is pertinent that these three
issues crystallized in the commodities sector at the peak of the
energy crisis in 2020–2021, when market volatility threatened the
financial stability of clearing houses and required the support of
public liquidity injections. The financial crisis of utility companies
highlighted the risks of liabilities on hidden balance sheets and
underscored banks’ exposure to commodity firms facing sharp market
volatility (Petrou, 2022; Foroohar, 2020).

As monetary tightening continues in advanced economies, there are
growing market fears that similar financial structures may arise and
threaten the stability of individual companies, as well as the
international financial system (FSB, 2023). Therefore, it is necessary
to adopt rules to the effect that commodity derivatives play their
useful social function while preventing excessive speculation in the
financial markets for food and dysfunction of food systems globally
(Thomas, 2023; OECD, 2023).

D. REGULATORY LESSONS

When asked who is monitoring the food system globally, beyond the
prism of antitrust, a former senior economist at the United Nations
Food and Agriculture Organization replied: “Nobody” (Thomas,
2023).

“The commodities sector is lightly supervised, much of it is opaque
and regulation of key actors is close to non-existent.”

The absence of harmonized global rules provides ample opportunities
for regulatory arbitrage, which is exploited differently by different
market participants. As noted above in section C, large United States
banks use “de-guaranteed” subsidiaries to evade Dodd-Frank. Other
actors use exemptions available thanks to their commercial activities
in order to conduct what amounts to financial speculation. The United
Kingdom Financial Services Authority (which oversees the world’s
second largest agricultural commodities market outside the United
States) does not even distinguish between commercial and financial
traders (de Schutter, 2010). As a result, the commodities sector is
lightly supervised, much of it is opaque, and regulation of key actors
is close to non-existent (Jones, 2022).

The current fragmented and outdated approach to regulating the global
food industry has many causes. But with new types of risks and shocks
confronting an already complex, opaque yet strategically important
system, it is time to revisit the menu of available regulatory
pathways. Such a challenge is vast. Below, measures are outlined
relating to what are considered the root causes of the current
regulatory gaps: the flawed distinction between commercial and
financial operators, and an outdated set of systemic regulations that
have not kept pace with financial, technical and legal innovation
available to corporate groups. Possible solutions centre on three
interrelated levels of policy reform that capture the connection
between market practices and financial activities:

1. Market-level reform: close loopholes, facilitate transparency;

2. Systemic-level reform: recognize aspects of food traders’
activities as financial institutions and extend relevant regulations;

3. Global governance-level reform: extend monitoring and regulations
to the level of corporate subsidiaries in the sector to address the
problem of unearned profits, enhance transparency and curb the risks
of illicit financial flows.

Crucially, all three levels of necessary action require much more
cooperation on data quality, disclosure and corporate transparency in
the sector. The ongoing crises highlight that the historical approach,
which distinguishes between commercial and financial operators in
agricultural commodity derivatives, is ill-suited to the current
economic and legal structures of global trade in certain agricultural
products and their associated derivatives. While data transparency is
necessary, it is insufficient for market participants to discover
prices. What is required is a process in which all market participants
contribute daily price information, and which is accessible to all
participants and regulators on a daily basis.

Following the UNCTAD vision to reform the financial regulatory
framework, scaling up could take place in a three-fold manner:

1. MARKET-LEVEL: close existing loopholes, facilitate market
transparency and competition (Dodd-Frank, CFTC, MiFID, European
Commission).

Consider applying several rules to all the exchanges around the world:

• Improve stock (public and private) information. Excessive
speculation is made easier by a lack of transparency on stock levels.
Information about one’s inventory can be made a pre-condition to act
on the derivatives market. The information can also be used to
evaluate whether combined positions correspond to a hedging strategy
or to excessive speculation.

• Build a highly disaggregated dataset with volume/weight of
commodity, import price value, source and destination countries, all
company names obtained via customs declarations linked to each unit of
commodity movements, and time stamps for shipment and receipt. 

Both proposals can build on the experience of the Agricultural Market
Information System (AMIS), an interagency platform to enhance food
market transparency. It was launched in 2011 by the G20 Ministers of
Agriculture following the global food price hikes in 2007, 2008 and
2010. By bringing together the principal agricultural commodity
trading countries, AMIS assesses global food supplies (focusing on
wheat, maize, rice and soybeans) and thus helps alleviate market
uncertainty.8

Clearly distinguish between commercial hedging and financial
speculation, with the understanding that the historical segregation
between commercial/financial does not apply to today’s structure of
the world agricultural commodities exchanges (de Schutter, 2010).

Current practices and unsupported assertions by market participants
seeking minimal oversight of their trading activities cannot be the
sole focus with respect to bona fide hedging recognitions. Legitimate
hedging relating to physical commodities through derivatives markets
must not be jeopardized by those seeking exposures for investment,
speculative, or dealing reasons.

• Access to commodities derivatives markets could be restricted to
traders and specialist brokers.

• The holdings of any single trader should be known to all. Strict
position limits should be placed on individual holdings, such that
they are not manipulative. UNCTAD (2011a) noted that determining
appropriate levels of position limits is difficult, but as a first
step, it might be useful to adopt position points at which traders
would be required to provide additional information.

• The limits currently set in the United States and Europe are too
high. For the same reason that the United States sets federal limits
applying to all markets, this needs to be globally set. Position
limits must address a proliferation of economically equivalent
instruments trading in multiple trading venues. Position limits at the
exchange level cannot suffice (Behnam, 2020).

• Improve market transparency in physical commodity markets,
commodity futures exchanges and OTC markets. Require market
participants to disclose their positions and trading activities
(UNCTAD, 2011a, 2011b). There should be clearing to the maximum extent
possible of OTC derivatives, so that there is real time reporting of
all transactions made without information privileges for OTC traders.
The small minority of OTC derivatives which cannot be cleared should
nevertheless be reported within a short time lag.

• The unfair competitive advantage conferred by the OTC trade data
reporting delay not only impedes price discovery but makes it harder
for exporters and importers to manage price risks and investment, as
UNCTAD has repeatedly noted. If developing countries continue to spend
a high portion of hard currency reserves on food and energy imports,
while the rate of return in commodity investments remains
unpredictable, the “distortion of development” will intensify
(Suppan, 2010; UNCTAD 2011a).

2. SYSTEMIC-LEVEL: Promote competition in commodity markets to curb
the concentration of market power in the hands of a few large players.

Systemic reforms can include laws such as breaking up monopolies,
promoting the entry of new market players, considering measures such
as antitrust laws, adherence to modern international financing
reporting standards (IFRS) in commodity trading, and supporting the
participation of small farmers and producer organizations in commodity
markets.

Regulation should support the development of physical markets to
reduce the destabilizing impacts of unregulated financial instruments
and promote price discovery based on physical supply and demand
fundamentals. This could include measures such as supporting the
development of commodity exchanges in developing countries and
promoting the use of physical delivery contracts in commodity trading.
Also, contingency plans need to be developed to deal with potential
market disruptions.

More fundamentally, regulators should revisit the plans of 2010–2012
and recognize the financial aspects of food traders’ activities as
systemically important and extend relevant regulations. Like the
previous set of measures, these date back to policy discussions in the
wake of the 2007–2009 financial and commodity price crises. At the
time, lack of evidence was cited as a reason not to pursue a closer
regulatory focus.

Notwithstanding the existing rules, there is widespread agreement that
as of late, the dynamics and price signals of supply and demand have
been overwhelmed by financial speculators, making price
discovery, and hedging, challenging, if not impossible (Tarbert,
2023). There are also warning signs from the financial risks in the
underregulated energy market, where amidst the uncertainty of 2022,
utility companies did not have enough working capital to meet big
collateral calls. It became apparent that government regulators and
private sector risk managers had failed to prepare for the crisis
(Tett, 2022).

“Regulators should recognize the financial aspects of food
traders’ activities as systemically important and extend relevant
regulations.”

Measures to help mobilize fiscal resources, curb regulatory arbitrage
and enhance corporate transparency also need to be expanded and
updated. Conservative estimates suggest that today, multinational
enterprises (MNEs) avoid tax payments of at least $240 billion per
year, due to outdated international taxation rules. These rules allow
multinationals to treat each national subsidiary as a separate
“arm’s-length” entity for tax purposes, and to move profits to
low- or no-tax jurisdictions. The study presented above demonstrated
some of the effects of this fragmentation for companies in the global
food trading industry. Chapter VII of the 2022 Trade and Development
Report analysed the problem of corporate arbitrage in the area of
foreign direct investment (FDI).

There are mounting calls from academia and civil society to address
the problem of corporate arbitrage at the regulatory level. For
instance, tax and other forms of regulatory arbitrage can be prevented
by recognizing that multinationals are global unitary businesses, and
by abandoning the arm’s-length principle. Multinationals’ profits
could then be divided among countries according to a formula based on
the location of revenues, employees and so on (Ghosh, 2023).

3. GLOBAL ECONOMIC GOVERNANCE: The evidence presented above
underscores two dimensions of the regulatory impact of the
financialization of food trading. At the level of companies
themselves, their transformation into shadow banks poses systemic,
regulatory and stability challenges. Additionally, there is a link
that needs to be examined between the speculative activity of food
traders in the financial markets, and price instability.

More and more evidence is emerging not only about profiteering in food
and commodity trading, but of the role of unregulated financial
activities and institutions inside commodity trading giants. An
estimate of the scale of the phenomenon was provided above, but more
research is needed. In addition to system-wide measures to strengthen
regulation in food commodities and enhance food security – such as
harmonized and clearer rules, enforceable controls to limit the
destabilizing influence of high-frequency trading and position limits
(Kornher, 2022) – regulators and policymakers should apply some of
the financial stability measures developed for the banking system in
2011–2012 to large food trading giants.

This requires further work on the nature of systemic risk in the
highly financialized industry. This can only effectively be done as
part of the reform to the global financial ecosystem, an idea strongly
endorsed by the first Financing for Development Conference organized
by the United Nations in 2001. Since then, efforts at global reforms
have been slow and often non-inclusive, while the unresolved problems
of financial and resource asymmetries only continued to deepen (Ryding
and Rangaprasad, 2022). In light of recent crises, such efforts should
include regulation of corporate behaviour including at the subsidiary
level, to address the problem of unearned profits, opacity and risks
of illicit financial flows. This direction of work could capitalize on
the plans for a United Nations Tax Convention (see Tax Justice
Network, 2022) and be usefully supported by the work of the
Independent Commission for the Reform of International Corporate
Taxation established in November 2022 (ICRICT, 2023).

Some lessons from the recent attempts to increase transparency and
regulate super profits in the energy sector are relevant here. Several
countries have levied windfall taxes on the oil industry, following
the dramatic rise in profits in the sector amidst the energy and
inflation crisis of 2022. A similar strategy could be imagined with
regards to the profits derived from speculation on the food
commodities derivatives markets. At the same time, levying windfall
taxes does not address the main issue for developmental purposes,
which is to have commodities derivatives markets fulfilling their
role: providing hedging solutions for producers and processors.

There are, moreover, numerous issues with the retroactive taxation of
speculative profits. The first is that the profits have often been
booked in tax havens whose cooperation is unlikely. Second,
retroactive taxation creates constitutional issues in many
jurisdictions. In some countries, it is unconstitutional, and, in many
others, courts accept retroactive taxes only in limited circumstances,
such as closing a blatantly abused loophole. A windfall tax would most
likely be litigated in many forums with substantial chances of
success. A windfall tax does not deliver on the opportunity created by
illuminating that there are serious issues with the rules applying to
the world food commodities derivatives markets. Although States may
need to address their constituents’ desire for the correction of
what they perceive as an unfair outcome, the structural issue needs to
be addressed via other means.

In this respect, a 15 per cent global minimum tax rate agreed to in
2021 by 136 countries, further to a plan by the OECD, is often seen as
a major step towards countering tax avoidance and artificial arbitrage
strategies by multinational groups of companies generally. Yet this is
a compromise measure agreed after fraught international negotiations.
Alternative measures, such as a median global tax rate of 21 per cent,
as proposed by ICRICT, would serve to offset the potential revenue
lost, making a significant difference to developing countries (Ghosh,
2023).

The tax is not and was not designed to address the specific issues
raised by the strategies developed by global food traders. Their
activity, as shown above, underscores the need for multilateral
efforts to identify the true beneficial owners of all assets,
financial and physical. As Ghosh argues, moving towards a global asset
registry should be the ultimate aim, but this step shows that
like-minded countries can cooperate without a global agreement. In
July 2023, Latin American and Caribbean countries hosted the first
regional ministerial meeting for a more inclusive, sustainable and
equitable global tax order (Nicholls, 2023), aimed at addressing the
development aspects currently not met by the architecture of global
taxation. While this is only a start, it is a meaningful move towards
a common approach to taxing multinationals and combating regulatory
and jurisdictional arbitrage (Ghosh, 2023).

The role of monopolies in strategically important markets in times of
crises and the complexity of global corporate and financial structures
that enable speculation and profiteering, not only require close
attention, but also smart policies (Lusiani, 2022). Regulation of
these interconnected problems needs to be targeted to the specific
issues at hand, at a multilateral level. The initiatives outlined in
this chapter provide a systemic framework to the measures on food
price and food security agreed by the G20 members in June 2023.

Crucially, in light of the lessons of past crises and the analysis
presented above, reforms need to be conceived in an integrated way,
targeting key priorities across the system. More specifically:

(a) The problem of excessive financial speculation in commodities
markets needs to be addressed along with the problem of unregulated
activities in this underregulated sector;

(b) The issue of corporate control over key markets cannot be resolved
by anti-trust measures alone but requires a coherent framework of
national competition and industrial policies;

(c) International cooperation and commitment are critical in the
effort to enhance data quality and transparency in commodity trading
and curb the risks of financial instability and illicit finance. More
generally, the case of a commodity price crisis and corporate
profiteering in food trading indicate that an international tax
architecture that works for the benefit of all countries needs to be
an integral element of the International Financial Architecture,
examined in detail in Part II of this Report.

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FOOT NOTES

1 It is also worth noting that development issues were much more
prominent in Hot Springs than they were a year later in Bretton Woods
at the United Nations Monetary and Financial Conference (Daunton,
2023).

2 UNCTAD calculations based on the Global Trade Alert database,
available at [link removed],
accessed on 20 August 2023

3 Large firms of a size and stature akin to the four big commodity
traders, Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus
Company, known as ABCD because of the coincidence of their initials.

4 Given the diversified nature of the trades the largest agriculture
corporations engage in, coupled with a high level of opacity inherent
in current reporting, a pragmatic approach to sample selection was
chosen. It was based initially upon current membership by
“agricultural” firms in a leading trade body for the commodities
sectors, the Commodities Market Council (CMC). As of March 2023,
agricultural firms participating in the CMC are attributable to 9
distinct corporate groups. This membership is dominated by United
States-centric firms. To help balance this bias out, 6 other major
players from groups organized around several other major agriculture
economies were identified. For all 15, the current structure of the
corporate groups was mapped out, to identify which entities, from
which jurisdictions, were producing consolidated and audited accounts
on behalf of the corporate group as a whole. These steps were followed
by assessment of available financial reporting by those entities. The
data is gathered from the Orbis dataset provided by the commercial
data publisher, Bureau Van Dijk. This is both because Orbis is the
only consolidated source of information on the activities of public
and private companies at a global level, but also because Orbis helps
to standardize financial reporting to facilitate better comparisons
for a global set of corporations. This also means that some firms,
most notably Cargill and Noble Group, do not provide information at
the standard required for the analysis undertaken here. While groups
such as these do provide some figures publicly on their website, these
represent unaudited and selective information which is unsuited to
this analysis.

5 IMF (2023: 63) notes that “[m]ajor data gaps exist in the
reporting of derivative exposures across [nonbank financial
institutions] (NBFIs). Important details such as the direction of
positions – long versus short – and information about
counterparties are often missing in disclosures. For exchange-traded
and centrally cleared over-the-counter derivatives, detailed data are
available through central counterparties but are highly confidential
and, therefore, require robust data-sharing arrangements with the
relevant supervisors. Recent over-the-counter derivative-market
reforms in the G20 have helped introduce central clearing requirements
for interest rate and credit derivatives across a broad range of
advanced and major emerging market economies. However, the reforms
have generally not extended to foreign exchange and commodity
derivatives.” Moreover, BIS data still provides no disaggregation
within the catch-all category that includes energy, food and other
non-precious metals.

6 At the time, the initiative followed the disclosure of long-term
lending to independent companies by Glencore worth $3 billion, and the
trend for the largest trading houses to operate hedge funds or index
funds or both, either alone or in partnership with investment banks
(Gibbon, 2013).

7 The method was developed on the basis of a research project on
corporate arbitrage (CORPLINK, EU Grant agreement ID: 694943, DOI:
10.3030/694943).

8 AMIS is composed of G20 members plus Spain and seven additional
major exporting and importing countries of agricultural commodities.
Together, AMIS participants represent a large share of global
production, consumption and trade volumes of the targeted crops,
typically in the range of 80–90 per cent.

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