UN urges regulation overhaul for food and commodity traders amid “profiteering” concerns

05 Oct 2023 --- The United Nations Conference on Trade and Development (UNCTAD) has flagged that some of the biggest food traders bypass existing regulations by not being monitored as financial institutions but as manufacturing companies. This adds to the global food crisis, as consumers face the brunt of the high cost of living. It now calls for a “fundamental revision” of this regulatory approach.

The UN further states that an international tax architecture and tools to enhance transparency and accountability need to be an integral element of the International Financial Architecture.

It further calls for greater oversight of commodities traders, claiming that unregulated activity is fueling this problem.

According to UNCTAD’s report, the “stark contrast” between the surging profits of commodity “trading giants” and the widespread food insecurity of millions underscores a “troubling reality” — markets are becoming unstable amid price hikes owing to unregulated activity, intensifying the global food crisis, at a time when consumers are facing cost of living crisis. 

Unregulated activity is destabilizing markets, says report 
The post-COVID-19 world has had to grapple with the cost-of-living crisis. It has manifested as high inflation, particularly for groceries, and growing financial vulnerabilities for developed nations. 

On the other hand, the developing countries have faced import dependencies, extractive financial flows, fluctuating commodity cycles, trade disruptions, the war in Ukraine and climate-vulnerable food systems that led to destabilized finances.

The cost-of-living crisis has manifested as high inflation, particularly for groceries.UNCTAD’s report says: “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.”

However, the recent price volatility crises have brought profits to food traders. In fact, the growth in earnings of some of the largest food traders in 2021–2022 is equivalent to the profitability profiles of leading firms in the energy sector, the report flags.

It also highlights a report that states up to 20% of food inflation in Europe comes from profiteering. Market analysts and scholars also argue that “decades of mergers and acquisitions” have expanded the firms’ influence along the supply chain and raised concerns over the lack of regulatory oversight of commodity trading.

UNCTAD’s analysis reveals that “unregulated financial activity” significantly contributes to the profits of global food traders. 

Moreover, it highlights that corporate profits appear to be strongly linked to periods of “excessive speculation” in commodities markets and to the growth of “shadow banking,” an unregulated financial sector operating outside traditional banking institutions and presenting systemic, regulatory and stability challenges.

However, supermarkets recently rejected claims of profiteering amid UK inflation, when MPs questioned senior representatives from Sainsbury’s, Morrisons, Asda and Tesco about when food prices will likely decline substantially.

Zooming in on the loopholes
Over a decade ago, regulators were skeptical about using over-the-counter derivatives in food markets, showcasing the “incomplete, fragmented and diluted approach to regulating commodity trading,” says UNCTAD.

Over time, these concerns pointed to rising risks in financial stability and opacity in the industry, where regulatory gaps have widened further since 2010.

The report says that food traders have evaded existing regulations and attempts to regulate their financial activities.The report further says that food traders have evaded existing regulations and consistently avoided attempts to regulate the financial dimension of their activities. 

“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.”

Financial and excessive speculation may point to price swings and agriculture prices are highly affected by market conditions, geopolitical tensions, climate risks and trade measures as per the organization.

What can regulators do?
The UNCTAD laments that the commodities sector is “lightly supervised” while most of it is opaque and regulation of crucial actors is almost non-existent.

It emphasizes that one of the root causes of the current regulatory gaps is an “outdated set of systemic regulations” that have not kept pace with financial, technical and legal innovation that corporates have access to.

UNCTAD has identified that data transparency is necessary to overcome the ongoing food crisis. But, more is needed for market participants to discover prices. Therefore, it proposes a three-fold way to reform the financial regulatory framework.

First is the market-level approach to close existing loopholes and facilitate market transparency and competition. Second, it operates at the systemic level and promotes competition to avoid the dominance of a few prominent players. Finally, global governance-level reforms that address the problem of unearned profits, enhance transparency and curb the risks of illicit financial flows.

The organization encourages studying the link between the speculative activity of food traders in the financial markets and price dynamics, which needs further research.

By Insha Naureen