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1 Amity Insight January 2014
commodities are not abundant, therefore trading may become illiquid and volatile commodities may have synthetic or man-made alternatives (e.g. sugar) consumption and production may be at a variance, causing price shocks.
market where commodities are bought and sold for immediate delivery market where an obligation to buy or sell at a given price in the future is agreed market where an option to buy or sell is purchased or sold.
n Historical
n Futures
n Options
To be traded, commodities generally meet standard criteria of tradability, deliverability and liquidity. Unlike the energy and metals market, agricultural soft commodities can be more price-volatile. This is because:
n Often,
the largest reserves are in politically volatile territories commodities are susceptible to climate, environmental impact and perishability
n Agricultural
Commodities are principally traded in Chicago, New York and London, although Londons dominance is largely restricted to minerals and metals. Five of the top ten global commodity exchanges are located in the USA. However, the majority of commodity traders operate from Switzerland. The principal purpose of the exchange is to regulate the market in that commodity. Commodity exchanges operate in a similar way to the pre-Big Bang stock exchange in London, with most exchanges allowing traders to exchange futures contracts, incorporating sell dates and an agreed price. Commodities are most frequently traded in bulk on the Chicago exchanges (CME and CBOT); however, they may also be sold directly by a commodity trading company to a processor-manufacturer.
Each commodity is grown, processed and sold into the market differently, but each commodity is typically controlled by a small number of global traders, integrating buying, freight, and nancial futures trading. The top ten global commodity trading rms earned $1.1trn in revenues in 2012, with the top 14 ve earning $629bn, rivalling the largest but far better known nancial institutions. To the average person, these companies are largely unknown and invisible and yet by and large they control global food and feed supply. The most signicant soft commodity traders include:
Various products
Various products
14% Energy
14% Energy Commodities 24 5% Metals
11
11 Chemical products
5% Agricultural products
34
34
Soft commodity trading is dominated by the so-called ABCD Group of ADM, Bunge, Cargill and Dreyfus. Archer Daniels 11 Midland (ADM), founded in 1902 and listed on the NYSE, Various bulk materials 11 8 Various bulk materials 8 4 4 is one of the Global 10 soft commodity traders with revenues 9 20 9 of $90bn in 2012.15 ADM has signicant businesses in grain, 14 20 14 Total Commodities 70 Total oilseed, palm and cocoa, supplying and trading 16% of world Containers Commodities 70 11 Containers 11 3 4 1 3 cocoa production.15 ADM is typical in having two divisions: 3 4 1 3 12 12 trading and processing. It therefore buys, processes (or renes) General cargo, ro-ro 3% Metals and minerals 20% Crude oil and then trades the raw product into the market. ADM is a General cargo, ro-ro 3% Metals and minerals 20% Crude oil 1% Bauxite/alumina 11% Oil products 1% Bauxite/alumina 11% Oil products 4% Grain 8% Natural gas (LNG) leading manufacturer of raw vegetable oils, corn sweeteners, 4% Grain 8% Natural gas (LNG) 3% Additional agricultural 9% Coal 3% Additional agricultural commodities 9% Coal 11% Iron ore commodities 11% Iron ore biofuels, our and feedstuffs, illustrating the breadth and reach of a modern global trader. ADM, like many of its peers, is an integrated giant, combining nancial futures, brokerage, Whilst there are commodity trading hubs in the USA, Europe shipping, risk management and captive insurance as well. and Asia, Switzerland dominates the physical handling of soft
WEIGHT Refers to ocean freight (80-90% of world trade)
commodities; for instance, Geneva is the global centre for grain, coffee and sugar trading.
The surge in prots illustrates the necessity of closing the huge transparency gap of the commodities trading industry. The industry right now is a black hole. Oliver Classen, The Berne Declaration
Singapore
The Commodities Giants with Revenues Larger than Some Countries GDPs
Commodity trading rms come in all shapes and sizes, but the top companies are giants. In fact, many earn revenues equal in size to the GDP of entire countries. Below is a comparison between the revenue of ve of the top ten global commodity trading rms and the GDP of ve economies.
GDP (2012)
Founded: 1966 HQ: Geneva, Switzerland Employs: 5,000 Operations: 30 countries
Malaysia: $300.6bn
Finland: $244.3bn
Hungary: $124bn
Founded: 1987 HQ: Hong Kong Employs: 15,000 Operations: 140 countries
Morocco: $94.8bn
Founded: 1902 HQ: Decatur, USA Employs: 31,000 Operations: 140 countries
Slovakia: $90.7bn
J Sainsbury has been involved with the Better Cotton Initiative since 2010 and collaborates with partners on sourcing cotton more sustainably. Sainsbury has set an ambitious target to source all its key raw materials and commodities sustainably to an independent standard by 2020, with its top 35 raw materials subject to sourcing plans in development.
Its school uniform range has now moved entirely to BCI sourced cotton, saving over 1m cubic metres of process water. Its target is for 20% of Sainsburys cotton footprint to be sustainable by autumn 2014, driven by BCI partnerships.
www.j-sainsbury.co.uk/media/1790641/20x20_brochure_2013.pdf
Sustainable Cotton
Cotton has a reputation for being an unsustainable crop with its excessive use of water, chemicals and associations with forced and child labour. Water use can exceed 10,000 litres to produce 1kg of raw cotton;19 in areas of shortage and scarcity, excessive drawdown has had a devastating effect on communities and local livelihoods (e.g. former shing communities in Uzbekistan reduced to desert after water supply diversion for cotton elds). In India, 5% of land is given over to cotton, but it consumes 21 54% of all the sub-continents pesticide use. So cotton, vital to the global economy, is a cash crop with substantial risks attached owing to land, community and water pressures. The Uzbek cotton industry has been convulsed by child labour allegations, initiating a wide-reaching ban on sourcing Uzbek cotton, and giving rise to greater interest in corporate responsibility and sustainability initiatives. The Better Cotton Initiative is a multi-stakeholder group focused on six basic principles for better cotton (limiting pesticide use; water efciency; healthy soil; biodiversity protection; bre quality; and working conditions). Supporting retailers include H&M, M&S, Adidas, Tesco, J Sainsbury and Walmart. In 2012-13, 220,000 farmers took part in better cotton projects on 683,000HA, producing 623,000MT of better cotton or 10% of world consumption.22 In India, better cotton farmers typically use 20% less water and 40% less 22 pesticide. The global organic cotton market now stands at an impressive $7.4bn.23 Whilst conventional cotton remains at the heart of the chain, poor sustainability has forced business and retail leaders to take increasing control of parts of the supply chain to improve the chain of custody. This phenomenon has been repeated across other commodity supply chains, such as cocoa (see Ecclesiasticals Amity Insight The Bitter Sweet Side of Cocoa [2008] and the Cocoa Report [2011]), and palm oil (see IFA Expert Brieng Can You Invest Responsibly in Palm Oil? [2011]). Companies such as Unilever and M&S have committed to source only sustainable palm oil by 2015,24 whilst in cocoa, leading confectionery manufacturers (Mondelez International, Nestl, Mars) have taken control of parts of the supply chain by sourcing direct from farmers and are having a dramatic impact on improved quality, yield and health & safety practices.
2007
2008
2009
2010
2011
2012
M&S has a target under Plan A to source 25% sustainable cotton by 2015, and 50% by 2020. Results have been impressive, with 11% sustainable cotton achieved across its ranges from Fairtrade, organic, recycled or better cotton compared to just 3.8% in 2011.
In Kita, Mali, the cotton producers co-operative from whom M&S sources cotton has used the Fairtrade premium paid (this is in addition to the normal Fairtrade price premium), to build a block of two classrooms, with a further two planned next year. This achievement has persuaded the Malian government to invest in schools in the region. Fairtrade cotton in Mali is also empowering women at every stage of the production and process cycle.
http://plana.marksandspencer.com
The company has now established responsible sourcing guidelines across 12 key commodities, with Tier 1 suppliers audited against their supplier code requirements. Traceability is still a challenge, but programmes are in place where the commodity is not sourced directly from the farm. All direct sourcing (and this is increasing) is monitored via a farmer connect programme, designed to ensure responsibility, sustainability and product improvement. The direction of travel in commodity sourcing is instructive; the traditional model of sourcing from traders on the commodity market is easing in favour of direct relationships with growers and partners. The Nescaf Plan aims to double the amount of sustainably sourced coffee by 2015; direct purchases of coffee (eliminating buyers and traders) will reach 90,000 tonnes by 2020.25 The Nestl Cocoa Plan follows in the wake of allegations of child labour and dangerous practices on cocoa plantations in Cte dIvoire. 11% of Nestl cocoa is now sourced direct.25
In 2012, Nestl sourced 22.47m tonnes of raw commodities.25 Nestl is typical of many of the global food and household goods producers in beginning to take ownership of the supply chain in order to become an agent of change; it has committed to a number of sustainability initiatives across a range of commodities. In particular, Nestl is working directly with over 690,000 farmers, with 273,000 receiving training in plant science and agronomy in 2012.25 Training, which is vital to improve yield efciency, took the form of conservation, water use, general husbandry and environmental science.
Sources:
1 Tesco & Society Using our scale for good 2013/14. www.tescoplc.com/les/pdf/reports/ tesco_and_society_2013-14_halfyear_summary. pdf 2 NRDC www.nrdc.org/food/les/wasted-food-ip. pdf 3 Ecclesiastical Investment Management: Hungry Planet, Food: the search for sustainable yield. www.ecclesiastical.com/Images/Amity%20 Insight%20-%20Hungry%20Planet.pdf 4 CME Group (Chicago Mercantile Exchange) 5 S&D Groupe Sucres et Denres www.sucden. com/statistics/1_world-sugar-production 6 Oxfam Nothing sweet about it: How sugar fuels land grabs 2013 www.oxfam.org/sites/www. oxfam.org/les/nothingsweetaboutitmediabriefembargoed2october2013.pdf 7 www.fairtrade.org.uk/includes/documents/ cm_docs/2012/F/FT_Coffee_Report_May2012.pdf 8 www.realcoffee.co.uk/coffee-encyclopedia/ trivia/growing-facts/ 9 The Latte Revolution? Regulation, Markets and Consumption in the Global Coffee Chain 10 Coffee: The Supply Chain Times/Nestl www. businesscasestudies.co.uk 11 www.tagesanzeiger.ch/wirtschaft/unternehmenund-konjunktur/Die-Schweiz-handelt-denKaffee-fuer-die-Welt/story/21879629 12 www.bloomberg.com/news/2013-11-24/ sustainable-coffee-means-higher-yield-forvietnam-farmers.html 13 http://unctad.org/en/pages/ InformationNoteDetails. aspx?OriginalVersionID=38 14 www.businessinsider.com/presenting-the-worlds16-largest-commodity-traders-2011-10 15 www.adm.com 16 www.businessinsider.com/presenting-the-worlds16-largest-commodity-traders-2011-10#3cargill-minneapolis-minnesota-14 17 www.bloomberg.com/news/2013-03-27/ swiss-reject-tougher-regulation-of-commoditiestrading.html 18 Index mundi www.indexmundi.com/ 19 Better Cotton Initiative http://bettercotton.org/ about-bci/why-a-bci/ 20 Fairtrade Foundation www.fairtrade.org.uk 21 www.globecot.co.in/organic/new/intro_of_ organic_cotton.html 22 http://bettercotton.org/wp-content/ uploads/2013/10/2012-Harvest-Report_nal. pdf 23 Global Market Report on Sustainable Textiles 24 http://plana.marksandspencer.com/ 25 www.nestle.com
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