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Editorial: Ultimate inside information

One day in my previous life as director of information for the Canadian Wheat Board, a Chinese delegation was in Winnipeg to negotiate a wheat purchase. By that time, Chinese negotiations were down to a few days rather than the few weeks they had taken in the 1960s and 1970s, but there was still a lot of back-and-forth negotiation. Board staff would put forward every reason why prices were on the way up, so the offering price was a good deal. The Chinese negotiators would do the opposite.

A price was finally agreed for several hundred thousand tonnes of 3 CWRS, and at a premium to the benchmark of Hard Winter Ordinary out of the U.S. Gulf. The Chinese assured the board that it was getting a good deal, because tomorrow the market would be down. They also asked that the sale be announced, but to wait until next morning.

If there were a true supply-demand market for wheat, that would increase the world price. A few hundred thousand tonnes had been committed, meaning lower supply for remaining demand.

In theory yes, in practice no. While it’s changing somewhat with the emergence of new futures markets for European and Black Sea wheat, U.S. futures markets remain the dominant influence on world prices, but they are heavily influenced by U.S. conditions. Traders see every tonne sold somewhere else as one more tonne adding to U.S. supply, so the price goes down, especially when supplies are plentiful, as they were then (and now).

Sure enough, I fired off the press release the next morning, and the Chicago market went down.

You had to suspect that the Chinese had a short position, providing a nice profit to help finance the Canadian purchase. At that time, you could simply admire the smart strategy by Ceroilfood, the name of the buying agency then.

Today the situation is more worrying. Ceroilfood is now COFCO Group, and it’s no longer just China’s largest food-buying agency. As reported by Reuters last week, it has set its sights on being the world’s largest grain trader by 2020. After spending an estimated $3 billion to buy Rotterdam-based grain trader Nidera and Singapore-listed Noble Group, COFCO is already close to joining the dominant ABCD (Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus) group of traders. It also has interests including hotels, real estate and some of China’s leading food and drink brands. In addition to owning ports and terminals in South America, it’s formed supply relationships with Growmark in the U.S. and has a trading office in Vancouver for Canadian canola, of which it’s the largest buyer.

While COFCO has some outside investors including an arm of the World Bank, it’s majority owned by the Chinese government. So by 2020, COFCO wants to be not only the world’s biggest buyer, but the world’s largest seller. In other words, it aims to be the biggest player on both sides of the market. Talk about “inside information.”

In the stock market, regulators play hardball on stuff like this. Woe betide any company executive who trades shares based on non-public information. We journalists get a daily package of science news releases embargoed to the next day, and we’re warned that if we use it to trade stocks, we’re in violation of the U.S. Securities and Exchange Act. But in the futures market, it seems anything goes.

It’s hard to say which is more incredible, the situation itself or that no one ever seems to say anything about it. It’s also hard to say what can be done about this. Perhaps it’s only that we drop any notion that grain futures markets are a free-market mechanism bringing buyers and sellers together to set prices based on supply and demand. State selling agencies such as the wheat board have been dismissed as relics of the past. But consider the origins of the futures market, which was set up to provide price protection when there were literally hundreds of elevators, merchants, exporters and processors. That’s another relic — today a few single integrated companies control all those functions. And there’s one more. Some have purchased massive tracts of land in places such as the Former Soviet Union and Africa, so they are now farmers too. COFCO is just the latest step in this progression.

Whether these massive conglomerates are good or bad is not the issue. It’s that as owners of the whole processing chain, including one responsible for importing grain for the world’s largest population, where do their interests lie — in high prices, or low?

Low, of course. Futures markets don’t reflect supply and demand, and there’s an inherent downward bias to the current pricing system. Short of governments countering it by controlling production or holding stocks, it’s going to stay that way.

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