financialisation of commodity markets and tncs … 4/serfati_tncs.pdf · financialisation of...

Financialisation of commodity markets and TNCs

Claude Serfati (University of Saint-Quentin-en-Yvelines)

[email protected]

“Strategic Innovation policy and structural change in a context of growth

and crisis”

Plenary 4 New global economic geography: the role of natural resources

and TNCs

mailto:[email protected]

Outline of the presentation

• Central importance of natural resources in contemporary globalization

• How recent rise in price on commodity markets can be accounted for ?

• Financialisation of commodity markets

• Financialisation of non-financial TNCs (NF-TNCs)

• Entry of financial institutions in the Agricultural value chain (AVC)

C. Serfati, Financialisation of commodity markets and Tncs, 13-15/09/2011

2

Central importance of natural resources in contemporary

globalization• 1) Natural resources (Minerals and Agricultural products) account for a significant share of world production and trade : 10% (agric.products) + 19% (mineral) of the 2009 world trade (WTO, 2010)

• They are (remain) essential for exports the development of modern economy


3

• Share of intra-region trade in natural resource exports, 2008 (source : WTO)


4

• They are (remain) essential for exports the development of modern economy

– Refutation of post-industrial and intangible economy rid of natural resource and industrial artefacts.

– It is a reminder that production is a process between human beings and nature (the two main productive forces).

– Cumulative effects of centuries of overuse of natural resource and environmental hazards :

– A bifurcation point? Not so much in terms of exhaustion of natural resources as because of the impossibility, for environmental and ecological reasons to extend at the planetary level the ‘occidental’ capitalist-driven mode of production.


5

• 2) Another major feature: Economic and geopolitical natural resource-related issues are intertwined :

• An old and on-going story : violence and armed conflicts around natural resources (not only but often mainly for oil) :

– imperial conquest updated in ‘Carter doctrine’, Lybian wars ?), and also ‘humanitarian wars’ (see ‘Liberal imperialism’ , R. Cooper, 2002) : Iraq, Libya, (still with strong occidental complicity with dictators, see Saddam, Ghadaffi, etc.)

• Libya : “The starting pistol has been fired on bids by Britain and other

western powers to secure a slice of the oil prize in Libya when France said it was "fair and logical" for its companies to benefit[…] Abdeljalil Mayouf, an executive at Libyan rebel oil firm Agoco : "We don't have a problem with western countries like the Italians, French and UK companies. But we may

have some political issues with Russia, China and Brazil." (The Guardian,

September 1, 2011)

C. Serfati, Financialisation of c’ommoditymarkets and Tncs, 13-15/09/2011

6

http://www.guardian.co.uk/business/oil

http://www.guardian.co.uk/world/libya

• ‘new wars’ (resource wars, including oil and mineral wars) mostly in LDC (in particular in Africa)

• Suspicion (or critic of) non-violent, legal ‘landgrabbing’ by TNCs and financial institutions (private equity or State-owned funds) (50 Million HA since 2006 in Africa, WB 2009) and critic by some of market based conservation policies leading to ‘Malthusian oriented speculation’


7

• 2) Another major feature: Economic and geopolitical natural resource-related issues are intertwined (cont’d) :

• State is back ? (It never really backed down on some strategic issues) : Government concern for ‘energy’, ‘food’ security/sovereignty, ‘strategic resources’ ‘resource nationalism’ (e.g. Klare) protected from foreign control, etc. (cf China condemnation by WTO panel on export restrictions of rare mineral resources, July 5 2011)

• Linked to the political economy of natural resource : The resource curse (Deutsch disease syndrome): how much good is a large availability of natural resource by a country ?C. Serfati, Financialisation of commodity

markets and Tncs, 13-15/09/20118

• 3) Striking characteristics of the 1900-2000s: strong rise and volatility in commodity prices, oil being not an exception. Involves structural and agency drivers, among the latter financial and non-financial institutions (Does not invalidates the Prebisch‐Singer’s declining terms of trade hypothesis)


9

How recent rise in price on commodity markets can be accounted for?

• 1) Some stylised facts: strong rise and volatility in commodity prices:

• Over the 78 months from early-2002 to mid-2008 the IMF’s overall commodity price index rose steadily and nominal prices more than quadrupled. During the same period, UNCTAD’s non-fuel commodity index tripled in nominal terms and increased by about 50 per cent in real terms.


10

• ANNUAL FOOD PRICE INDICES (2002-2004=100)

• Source : Author’s Illustration

from FAO data


11

0,0

50,0

100,0

150,0

200,0

250,0

300,0

350,0

400,0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Food Price Index

Meat Price Index

Dairy Price Index

Cereals Price Index

Oils Price Index

Sugar Price Index

• Volatility is not unusual, but this time it was exceptional

• Source: 2009 Global Economic Prospects, World Bank

• The upward trend is not over : Major Price Indices

Indices of Nominal US$ Prices (2000=100)

Source : World Bank, May 2011

• Historical high in March 2011

in assets under management

By institutional investorsC. Serfati, Financialisation of commodity


• 2) Different explanations

• Climatic conditions leading to shortages of production

• Strong rise in Demand (by emerging countries) and slow supply response due to long lead times in investment and capacity growth: OECD’s Irwin and Sanders analysis (2010) strongly challenged (UNCTAD 2011, Frenk and Staff, 2010)

• Strong increase in biofuel production (subsidies, blending requirements, rise in price of ethanol more or less pegged on oil prices) and corresponding decline of agricultural lands : controversial (maybe for US maize, not for Brazilian sugarcane).


13

• 2) Different explanations (cont’d)

• Fall of Dollar

• Stronger link between energy and non-energy commodities

• Speculation? Pro and Cons

• In any case dramatic consequences for poor population


14

Financialisation of commodity markets

• Need to go beyond this debate and look at structural changes on financial markets, of which commodity ones have become an integral component

• Hypothesis : financialisation of commodity markets

• “Financialization [is] a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” (Krippner, 2004)

• Correct definition provided it is stressed that such financial accumulation is drained from value created in the production process, and that financial accumulation largely orient industrial accumulation


15

• 1) COMMODITY AS A NEW ASSET CLASS

• A) The role of financial institutions : “Goldman Sachs recommends a permanent strategic holding in commodities as a ‘separate asset class’ to hedge macroeconomic risk, decrease expected portfolio risk and increase expected portfolio returns.”(2004)


16

• B) Deregulation initiated by governments

• 1936 : Commodity Exchange Act regulates commodity markets and futures trading, it placed limits on the size of Speculators’ positions, thereby ensuring the dominance of Physical Hedgers

• 2000 and after : deregulation eased by the Commodity Futures Modernization Act (CFMA) (signed by Clinton, a few weeks before the end of his mandate)


17

• C) Financial innovations eased by B) :

• derivatives, broad-based commodity index funds, which use derivatives contracts (e.g. Goldman Sachs Commodity Index, GSCI; DJ-UBSCI). Often run by Hedge funds.

• Majority of investment in recent years concentrated in exchange-traded products (ETPs) . Replicate an underlying benchmark (e.g. S&P 500) and facilite ‘active speculation’

• They set the pace for commodity prices (below)C. Serfati, Financialisation of commodity markets and Tncs, 13-15/09/2011

18

• Two examples :

• 1) Oil : Average daily trading volume of oil futures to world oil demand

• Ratio of volume of oil futures to world oil demand• Source: Morgan Stanley

• 2) Cooper :• Where the increase of Demand for cooper came from ? (2002

through 2007)

• Source: Masters and White (2009)C. Serfati, Financialisation of commodity markets and Tncs, 13-15/09/2011

19

• 2) Who ? New Actors

• Blurring of boundaries between ‘physical’ and ‘financial’ investors : ‘Traditional’ classification (by CFTC, etc…): Hedge = Commercial, speculators = non commercial, is no longer valid – Swap dealers report positions as hedges as they have no

commercial interest in the physical commodities – they ‘hedge’ to offset financial positions

– ‘Commercial’ actors (e.g. most non-financial TNCs) invest in financial products

– hedging (taking a ‘long’ position) and speculative (‘short’ position) transactions are two facets of a same process, not opposite as they used to be considered in classification ([Levin, Coburn, US Senate Committee, 2009]


20

• Financial institutions : hedge funds, pension funds, large banks, often investment banks : Top 5 (Bank of America, Goldman Sachs, Citibank, Deutsche bank, HSBC, Morgan Stanley and J.P. Morgan) accounted for 96% of the volume of Chicago OTC derivatives trade (2009).

• Large agricultural multinational corporations (Glencore, Cargill, Louis Dreyfus)


21

• Rising interest of financial interests for commodities reflected by assets under management by product, 2005–2011

• Source :

• Unctad 2011,

Based on

Barclays Capital A


22

Financialisation of non-financial TNCs (NF-TNCs)

• 1) Financialisation is not restricted to financial companies and financial markets. Indeed, Large NF-TNCs should be seen as financial groups (holdings-run) with industrial activities

• TNcs are not simply bigger and more internationalised than other firms : they constitute a category on their own (Serfati, 2011)


23

• 1) Financialisation of TNCs (cont’d)

• TNCs as Global groups:

• The world has become a playing field for locating and sourcing their activities (the world as an ‘internalised’ area for large TNCs)

• Valorization of capital could encompass a broad spectrum and have a global reach from industrial capacities enabling to rent activities and to ‘pure’ financial investments.


24

• 2) GVC has become the dominant mode of international production and distribution (see numerous seminars and statisticians efforts to measure value added distribution) .

• That means : – a) Reshaping of global production by moving upstream and

largement downstream the GVC (below)

– b) Large TNCs’ ‘market power’ goes well beyond what can be measured by classical measures (Cx), goes through non-market relationships with other companies, public research universities allowing them to capture rents (Milberg, 2007)


25

• TnCs in agrofood value chain : Domination thanks to an increasing concentration at the GVC’s lower end (trading, processing and retailing) (Coffee, cocoa, Soybeans,...) , and also in marketing, IP, and market protection activities [UNCTAD, 2009, World Bank, 2007] :

– ABCD (ADM, Bunge, Cargill and (Louis) Dreyfus,) :75% and 90% of the global grain trade

– C4 coffee international traders : 40 % (Id. Cocoa)

– C4 cocoa grinders 51%, confectionary manufacturers : 50%


26

• Still more compelling in agrochemicals (pesticides, seeds, feeds, and fertilizers, processing of sweeteners and biofuels) :

– C4 : 60 % for agrochemicals, 33 % for seeds

• Development of engineering companies centralising all the farmers-oriented services.

• In short : technology edge and market power are two sources of OECD’s TNCs domination


27

• Traditional / modern value chains in food systems

• Source: E.B. McCullough, P.L. Pingali and K.G. Stramouli, 2008


28

• The TNC’s influence in agriculture producing countries (not-OECD) not measured only by FDIs, it includes : subcontracting,management contracts, turnkey arrangements, franchising, licensing and product-sharing. Such activities are rent (royalties, fees) generating (UNCTAD, 2009)

• Nestlé (Switzerland) : >600,000 contract

farmers in over 80 developing and transition

economiesC. Serfati, Financialisation of commodity


• TNCs in mineral industries : High concentration, still SOEs exist in ‘strategic’ industries (energy-related) :

– Top 50 Oil Companies 2009 (Petroleum Intelligence Weeklysource) :

• 4 of the top five companies are 100% owned NOCs,

• 28 of the top 50 are majority owned NOCs

• Market power based on :

– Finance capabilities (risk management, long-term investments)

– Technical, engineering and project management expertise (still Petrobras, Petronas, CNOOC, Aramco in oil industry)


30

Entry of financial institutions in the Agricultural value chain (AVC)

• Besides price-setting by financial markets, restructuring of the AVC under the influence of financial investors (DB, GS, Morgan Stanley, Gulf SWFs ..) and encouraged by IFC’s World Bank:

• Drivers :

– a) Producers : increasing need by producers to find funding, protect against risks,

– b) investors : High rates of return, buying of carbon

permits“I’m convinced that farmland is going to be one of the best

investments of our time. Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that’s a long ways away yet.”, George Soros, June 2009 (in Grain, 2009)


31

• It is not only land, but also agricultural production targeted with the ‘rush to land’ (Ansseuw and alii, 2011)

• - Development of ‘contract farming’ (promoted in the early 1980s by the WB and USAid) in which farmers bear most of the risk (strong power asymemmetry) , with preference with leasing (appropriation of the ground rent rather than the land,Cochet, Merlet, 2011)

• - Banks and insurance as managers of the risks : use future production (and not only land) as collateral C. Serfati, Financialisation of commodity


Thank you for your attention


33

financialisation of commodity markets and tncs … 4/serfati_tncs.pdf · financialisation of...

Documents