Earlier this week, I posted a link on LinkedIn to a study requested by the European Parliament's Committee on Agriculture and Rural Development that examines the role of commodity traders in shaping agricultural markets.
The study is 100 pages long and quite challenging to read. I asked Google LMNotebook to produce an easy-to-listen-to podcast highlighting its main points. The podcast does not necessarily represent my views but fairly reflects the study’s conclusions.
In particular, the study raises several key regulatory concerns about commodity traders' role in shaping agricultural markets:
Market Concentration
The study expresses concern about the level of oligopoly in the global agricultural commodity market, where a small number of large multinational corporations like the ABCDs (Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus Company) wield significant market power.
This concentration raises concerns about potential negative impacts, including reduced competition, unfair pricing practices that disadvantage smaller farmers, and compromised labour conditions.
Existing regulatory and institutional frameworks struggle to control market concentration due to factors like the absence of a global competition policy and the influence exerted by large agricultural traders.
This highlights the need for regulatory interventions, such as antitrust measures, promotion of market transparency, and empowerment of smaller stakeholders.
Financialization and Speculation
The increasing involvement of financial players in agricultural commodity derivatives markets raises concerns about excessive speculation and its impact on price volatility.
While derivatives markets facilitate price discovery and hedging, excessive speculation can distort prices, leading to price spikes that do not reflect actual supply and demand.
This has mainly come into focus since the COVID-19 pandemic and the war in Ukraine, with questions arising about the fitness of existing regulatory frameworks in the EU and US to address excessive speculation.
Transparency
The study emphasizes the lack of transparency as a major concern in the agri-commodity market, both in terms of physical trading and stockholding and traders' activities in financial markets.
This lack of transparency makes it difficult to monitor food availability, assess the impacts of speculation, and hold traders accountable for their actions.
The study suggests the need for improved data collection and reporting mechanisms for physical commodity stocks and commodity traders' financial activities.
Accountability
The study argues that the extensive influence of large commodity traders on global food markets requires increased accountability.
This includes better disclosure requirements regarding financial risks associated with derivatives trading and stricter regulation to prevent potential market abuses.
It is vital to ensure that commodity traders operate responsibly and sustainably and do not exploit their market power to the detriment of smaller stakeholders or food security.
The study suggests that effectively addressing these regulatory concerns requires a multi-faceted approach involving:
Strengthening existing regulations: This includes reviewing regulations like MiFID II/MiFIR and EMIR in the EU and the Dodd-Frank Act in the US to assess their effectiveness in curbing excessive speculation and improving transparency.
Implementing new measures: The study suggests implementing standardized reporting requirements for physical commodity stocks, stricter disclosure requirements for financial risks, and potentially a windfall tax on excessive profits.
Fostering international cooperation: Given the global nature of the agri-commodity market, tackling market concentration and financialization requires coordinated action among international actors.
Empowering smaller stakeholders: Supporting policies and incentives are needed to strengthen the position of smaller farmers and ensure they are not unfairly disadvantaged by the market power of large commodity traders.
The study argues that implementing these recommendations will contribute to a more transparent, accountable, and sustainable agri-commodity market that benefits all stakeholders, including consumers, producers, and the environment.
C4 Concentration Ratio in the Global Trade of Cereals, Oilseeds, and Protein Crops
The C4 concentration ratio, which measures the combined market share of the four most prominent companies in an industry, reveals a high concentration level in the global trade of cereals, oilseeds, and protein crops (COPs). The study estimates that the four largest agri-commodity traders (the ABCDs: ADM, Bunge, Cargill, and LDC) handled 540 million tonnes of COPs in 2022, representing an estimated 50-60% of the world trade in these essential crops. This concentration level already constitutes an oligopoly, where a few companies have significant market power.
Adding the volumes traded by COFCO International (CIL) and Viterra, two other significant players, increases the concentration ratio even further:
ABCCDs (including CIL): Estimated to control 60-70% of the COPs trade.
ABCCDV (including CIL and Viterra): Projected to control 70-80% of the COPs trade if the planned merger of Bunge and Viterra is approved.
This high level of concentration raises several concerns:
Limited Competition: With a few companies controlling such a significant market share, there is less competition, potentially leading to higher prices for consumers and lower prices paid to producers.
Potential for Market Manipulation: The large traders' control over significant volumes of essential crops gives them considerable leverage in the market, potentially creating opportunities for market manipulation.
Reduced Choice: The dominance of a few companies may limit the choices available for buyers and sellers of agricultural commodities.
The study highlights that this concentration is not merely a theoretical concern; it plays out in specific geographies and crop markets:
Soybean Crushing in the EU: As of 2021, the ABCDs controlled about 80% of the EU's soy-crushing capacity.
Soybean Exports from Brazil: In 2020, the ABCDs handled around 46% of annual soy exports from Brazil, the world's largest soy producer.
Grain Handling in Canada: If the Bunge-Viterra merger is approved, the combined entity and their JV with SALIC will control 37% of Canadian grain handling capacity. Combined with the other ABCDs, this would give them control of 58% of the market.
These examples demonstrate the real-world impact of the high C4 concentration ratio in the global trade of COPs, highlighting the need for regulatory scrutiny and potential interventions to promote competition and a more equitable distribution of market power.
Finally, the study gives the following revenues for the major agricultural commodity trading companies in 2023:
2023 Annual revenue US $ billion
Cargill: $117
ADM: $ 93
Wilmar: $ 67.16
Bunge: $ 61
LDC: $ 59.9
Viterra: $ 54.67
COFCO: $ 50.1
Olam: $ 48.3
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