Trading in World's Commodities

This book gives a good insight into how commodity traders and companies work behind the scenes and supply raw materials, essential to modern life - like energy, metals and food. Often they work around any sanctions and make things happen carving out their cut amidst all that.

In the past, this group has intervened in Iraq by supplying Saddam to sell oil, helped Cuba with a sugar-for-oil scheme and supplied U.S wheat to Russia. They have also advanced big loans to cash-strapped countries in exchange for guarantees for future supplies of natural resources there (Kurds, Congo).

In the complicated financial world, they are now so intertwined that retirement funds of teachers in U.S states of South Carolina and Pennsylvania ended up in the Middle-East before. LINK

The big ABCD firms in agricultural commodity trading are Archer Daniels Midland, Bunge, Cargil and Louis Dreyfus.

The business model is very simple: 

• Buy natural resources in one place and time, and sell them at another making a profit.

• Possible because supply and demand aren’t in sync.

• Natural resources (mines, farms, oilfields) are far away from the places they are needed.

• Not every producer can afford to build a network to sell their produce.

In the past commodity traders were so successful because -

• There was less access to information. (If the coffee crop suffered in Brazil that info flowed very slowly and to limited places. Not anymore).

• Size and scale of the bets.

• Their investments in networks of pipelines, ports, tankers, farms and mines. (If the oil pipeline which they owned had a snag, they would be the first to know and anticipate price movements and bet accordingly).

• Finance the producers.

Although now most of these advantages have vanished in the 21st century.

The book also contains an explanation of how the U.S dollar is being weaponized via sanctions.

Also, in the book learned bunch of new terms related to shipping/logistics -

TOLLING
Supply raw product and take as payment the finished product. Self-explanatory.

Demurrage
Containers that are left at the port or rail yard longer than their allotted free time.
Hire a Very Large Crude Carrier (VLCC) with crude oil in it but do not deliver it and wait by the port side until oil prices jump.

Commodity SuperCycle

There’s a correlation between a country’s wealth and its consumption of natural resources. As the country’s per capita income passes $4000 people start spending money on things other than essentials (food, shelter, medicine). 

China crossed this threshold around 2001 thus requiring more raw materials than before and more than what it produced domestically. This sparked a commodity supercycle - an extended period where the price of raw materials is well above its long run trend lasting for decades. Towards the end of 2000s, other BRICS countries joined this phenomenon.

However, the authors take a nuanced view when it comes to the question whether commodity traders are responsible for spikes in commodity prices. They say NO. In their view, commodity traders are buyers and sellers of last resort. Even though it is always tempting to blame them for food crises.