Aurelia Butler

“Perhaps it was the ancient nightmare of the middleman-merchant that made them all so aloof and secretive”, wrote Dan Morgan in his 1979 book Merchants of Grain. “The old fear that in moments of scarcity or famine, the people would blame them for all misfortunes, march upon their granaries . . . and confiscate their stocks.” This time it is not hunger that thrusts the companies that control the world’s grain flows into the spotlight but dealmaking. The combination of US-listed Bunge with Glencore-backed competitor Viterra, in an $8.2bn deal, brings together two of the biggest traders of grains, oilseeds and other agricultural commodities, further tightening the grip of a handful of low-profile companies on the global market. It is the biggest reshaping of the top tier of agricultural commodities since Cargill, long the biggest of the pack, bought the grain assets of Continental in 1999. The deal will catapult Bunge into second place among the four global traders, who go by the shorthand ABCD, to include Archer-Daniels-Midland and Louis Dreyfus. And while the alphabetic label is outdated and the market has changed dramatically since the 1970s, concerns around a concentrated system of global food production remain.Despite some emergence in public markets and social media, it remains hard to get good figures on companies that, whether you’re farming or eating, are impossible to avoid. One oft-used stat is that the quartet control 70 to 90 per cent of global trade in cereal grains — a figure that is probably too high.After the food shortages and price spikes of 2008 to 2012, China pushed hard into agri-trading through state-owned Cofco, which has muscled into the Big Four. Jonathan Kingsman, whose 2019 book updated Morgan’s classic, reckoned the five plus Viterra and Singapore’s Wilmar, handle half the international trade in grain and oilseeds. Such dominance is worrying. The classic “hourglass” model of market power in food involves a vast number of producers supplying a similarly huge number of consumers, via a tight group of processors and traders. The dealmakers stress their complimentary strengths but regulators, rightly, will take a close look. Argentina and Canada have already pledged to review overlaps. Brazil, Australia, the US and China are likely to follow suit, with some asset sales almost inevitable.Traders is something of a misnomer: this group doesn’t make money simply shifting goods from A to B. In recent years, they have expanded upstream into agricultural origination, storage, freight and port infrastructure, and downstream into processing, ingredients and final products, while moving into a wider range of foodstuffs.“The big issue here is that when you have this vertical integration it creates huge intermediary power from farmers to consumers,” says Jennifer Clapp, professor in food security. An asset-heavier business means higher barriers to entry, and can help transfer dominance from one part of the chain to another. Bunge’s strengths in processing and downstream plus Viterra’s in merchandising and handling creates a more integrated global company.Still, the dealmakers aren’t wrong that this combination looks a good fit. The unease may reflect that regulators and governments should be asking who is monitoring the food system globally, beyond the narrow prism of antitrust. “Nobody” is the blunt assessment of Abdolreza Abbassian, former senior economist at the UN’s Food and Agriculture Organization. Disruption, thanks to a changing climate, is becoming the rule rather than an exception. Traders keep food moving during crises and periods of price volatility, such as the pandemic and Russia’s invasion of Ukraine. But such events are also good for business, with surging sales and record profits last year. The market is already in flux. Cofco’s emergence means a top tier of ABCC, replacing a commercially-motivated trader with a geopolitically-focused one. Nations preoccupied with food security are snapping up stakes: Abu Dhabi’s sovereign wealth fund bought into Louis Dreyfus in 2020; Saudi’s commodities investment company took a third stake in Olam Agri last year. Meanwhile, post-2008 efforts to establish better oversight, led by France at the G20, largely failed. “It wasn’t sufficient,” says Abbassian, of the market information unit established at that time. “And today’s needs are much, much greater. You need transparency at every level, from all commodities to final products and a more influential set-up to look at the market.”Bunge’s big deal will prompt competition watchdogs to scrutinise the world of agricultural trading again. Everybody else should too. [email protected] More

European pasta producers are facing growing pressure to lower prices as simmering tensions surrounding the rising cost of fusilli, spaghetti and other household staples threaten to boil over.Italian consumer groups have asked competition authorities to look into the possibility of price collusion and called for shoppers to shun products in a “pasta strike”, while the French government has threatened food producers with financial sanctions if they do not lower prices.The rise in pasta prices is far outpacing broader inflation in parts of the region and has continued despite a sharp drop in the cost of the wheat used to make it.Manufacturers, which include Barilla, De Cecco and La Molisana in Italy and Panzani in France, insist that their pasta is priced fairly, with recent rises reflecting the impact of higher manufacturing and other input costs following Russia’s invasion of Ukraine. But they have been accused of profiteering and “greedflation” as shoppers wonder why they are still paying so much. “Reality is far different from [the manufacturers’] narrative,” said Italian consumer group Codacons. “Year-on-year price hikes measured on a monthly basis are two times the current rate of inflation.”

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Although broader inflation has eased in the past few months, the price of a kilogramme of pasta in Italy was still up 14 per cent year on year in May, against 15.7 per cent in April and 17.5 per cent in March, official statistics show. Italians are the world’s biggest pasta eaters, consuming roughly 23kg a year, according to the International Pasta Organisation industry body. “For Italian families it’s a fairly existential crisis,” said Clive Black, an analyst at Shore Capital. The picture is similar elsewhere in Europe. Pasta price inflation in April hit 27.6 per cent in the UK, 21.8 per cent in Germany and 21.4 per cent in France, according to UK and EU data.Pasta consumed in Europe is made primarily from Canadian durum wheat imported largely to Italy, the world’s biggest producer. Extreme heat and drought in Canada in 2021 led to a sharp drop in production and sent the price soaring. It has been decreasing steadily since December that year but rose slightly this month after the collapse of Ukraine’s Kakhovka dam hit global wheat markets, according to commodities research group Mintec. Although down more than 40 per cent from its peak, the price of Canadian durum remains 18.8 per cent higher than in June 2021, before the price spike.Facing accusations of using inflation as a cover to raise prices, pasta makers point out that wheat is only one of many volatile costs throughout their products’ journey from field to plate.

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Luigi Cristiano Laurenza, general secretary of trade body Unione Italian Food Pasta, said the industry was still contending with higher energy, logistics and packaging costs following Russia’s invasion of Ukraine and that it would take some time before falling wheat prices fed through to shoppers.“The effects of production costs on products are never immediate,” he said. “If the current trend of cost contraction continues for a protracted period, we could even see a reduction of consumer prices.” One factor for the lag is the length of time it takes for wheat purchased at higher prices to be used up, with current prices reflecting those contracts. “Prices are still high because companies are still using up the stocks of wheat they bought at peak price,” said Giuseppe Ferro, chief executive of La Molisana, Italy’s fourth-largest pasta maker. “Once that is finished in three or four months, prices will drop.”David Ortega, a food economist and associate professor at Michigan State university, said food prices tended to be sticky given the range of costs beyond those of their basic ingredients.“They rise very fast when there is a shock and then they take longer to come down,” he said. “We see the price of commodities like wheat come down quite substantially. But wages are still up, and some of the raw materials for packaging and others are still high.”

The unexpected jump in pasta prices has triggered calls from consumers for a price cap © Eric Gaillard/Reuters

The discrepancy between the cost of wheat and the eventual sticker price goes to the heart of a tussle playing out among food groups, retailers and politicians.With food prices having overtaken energy as the primary driver of inflation across Europe, producers are under particular pressure to lower them after groups such as Nestlé, Unilever and PepsiCo reported healthy quarterly earnings, having passed on higher costs to consumers.Italy’s industry minister Adolfo Urso convened a crisis meeting of pasta producers, distributors and associations last month after the unexpected jump in prices triggered calls from consumers for a price cap. But officials decided not to intervene and assured the public that the market would soon correct itself as energy and raw material costs continued to decline. Codacons has since reported pasta makers to Italy’s competition authority, urging it to investigate whether companies might have colluded to manipulate prices. Meanwhile, Assoutenti, another consumer group, has called for a week-long “pasta strike” starting next week, urging shoppers not to buy the product but to make it at home themselves.France’s finance minister Bruno Le Maire last month threatened to use tax measures to claw back profits if the sector refused to reopen price negotiations with retailers.Speaking to a French radio station at the time, the president of French supermarket operator Leclerc, Michel-Edouard Leclerc, said pasta price increases were inexplicable, accusing food manufacturers of a lack of transparency and “hiding behind the war in Ukraine”.Le Maire said this month that 75 food producers had pledged to lower prices by July, in line with falling wholesale costs.

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In the UK, government plans to encourage supermarkets to voluntarily cap the price of food staples provoked a backlash from retailers and even Conservative MPs. The government has rejected calls for an investigation into “profiteering” by supermarkets, but the UK’s competition watchdog has said it will scrutinise supermarket fuel pricing and the groceries market more closely.The country’s Food and Drink Federation said its members were cutting costs wherever possible and turning to price rises “only as a last resort”.De Cecco, Barilla and Panzani, which manufactures its pasta from wheat grown in France and has pledged to lower its prices on July 1, declined to comment.Beyond the recent agreement in France, there are early indications of moderation in some parts of the market, such as big supermarkets’ cheaper lines of own-brand pasta.Yet, overall, manufacturers are giving little sign that they will lower prices. Ortega said the pressure from grocers on food producers was likely to continue. “But I don’t think they’re going to particularly lead to a lot of action,” he said. “The increase in prices are because of an increase in costs all along the supply chain.”Additional reporting by Adrienne Klasa More

Investment in clean energy in developing economies needs to rise seven-fold by the end of the decade, the International Energy Agency has warned, calling for “urgent action” to mobilise cash. Less than a fifth of the roughly $1.7tn of investment expected to go into clean energy this year is set to be spent in emerging and developing economies excluding China, according to estimates by the group. The sum will need to rise from about $260bn this year to $1.4tn-$1.9tn per year by the early 2030s in order to hit climate goals and meet energy demand, the IEA said, but there is rising competition from richer nations. “Today’s energy world is moving fast, but there is a major risk of many countries around the world being left behind,” warned Fatih Birol, executive director of the IEA. His comments came as the IEA published a report on Wednesday arguing that about 60 per cent of the required investment will need to come from the private sector — but that investors are being put off by the higher cost of capital reflecting “real and perceived risks”. “For the moment, the cost of capital for a typical utility-scale solar project can be two or three times higher in key emerging economies than in advanced economies or China,” the report said. Policies designed to attract investment to Europe and the US are helping boost innovation but also “making it more challenging” for emerging markets to compete for private capital, the IEA added. 

Birol told the Financial Times he hoped the Biden administration’s Inflation Reduction Act, which includes $369bn in subsidies to boost clean energy in the US, would prove a positive global stimulus overall.“I very much hope that this will not be a burden for other countries around the world and there will be some flexible mechanisms, providing incentives for others.” He noted clean energy investment in developing countries was “almost flat” since the Paris Agreement in 2015, which committed countries to limit global warming to 1.5C above pre-industrial levels. “It is not enough. For me, this is the faultline of reaching our energy and climate goals.”New green bonds, voluntary carbon credits and better data reflecting the real risks and returns of investing in emerging markets can all help push money in their direction, the IEA report said. It also called for reforms on planning and regulation to help “steer investment decisions towards cleaner and more efficient technologies”. Larger projects need to be developed given that many investors “don’t want to invest $10mn here or $20mn here — they want billions to be able to go to their board”, said Makhtar Diop, managing director of the International Finance Corporation. The IEA said that action aimed at boosting investment could prove to be a “huge opportunity” for growth and employment, which would be “pivotal . . . to the world’s energy and climate future”. More

Central banking is as much an art as it is a science. It involves not only making economic judgments but also communicating them effectively — a job that the big central banks have struggled to get right in recent years. In an admission of its own imperfect record, the Bank of England last week announced a review into its performance.The OECD forecasts UK inflation to be the highest in the G7 this year. A recent run of higher-than-expected wage and inflation data has raised concerns that price growth will remain sticky, while a BoE survey showed public satisfaction in the institution at an all-time low in May. Like all central banks, the BoE needs to grapple with how it can improve its forecasting processes. Economic models are based on historical relationships, and their predictive capacity weakens when unexpected events like the coronavirus pandemic and war in Ukraine strike. Indeed, many central banks were too slow to raise rates before inflation hit 40-year highs last year. Ultimately, any model would struggle in times of high uncertainty. This means improvements in how central banks convey their forecasts are essential. Here the BoE’s review can make strides. Transparency is vital. How a central bank communicates its forecast and interest rate decisions influences future rate and inflation expectations — which has a real impact on household, business and investor decisions. So, if markets trust and understand the central bank’s forecasts, the effectiveness of monetary policy improves.Guiding the markets has, however, been challenging for the BoE, particularly over this rate-raising cycle. “Consistently . . . it has suggested that interest rates wouldn’t need to rise as far as the markets expect,” said Paul Dales, chief UK economist at Capital Economics. “But it has then raised rates further than the markets expected.”Improving its inflation forecast would clearly help. The review should look at why the BoE has consistently underestimated the persistence of inflation and tightness in labour markets, which has raised price pressures. But the circuitous way the BoE presents its projections makes things worse. Its inflation forecasts are based on the markets’ own expectations for bank rate. Gertjan Vlieghe, a BoE external Monetary Policy Committee member between 2015 and 2021, reflected the flaws of this approach in a 2019 speech: “We communicate about what we think we may do, by showing you a forecast of what will happen if we do something else.” That is rather confusing.One option for the BoE is to highlight its inflation forecasts based on interest rates staying at their current level. That helps give markets a sense of the inflation challenge the BoE thinks it is facing. This is useful since the MPC’s fan charts — which display a range of projected outcomes — also have a tendency to show inflation will eventually return close to its 2 per cent target over its forecast horizon. This confuses the market about where rates then need to go.Another option, as Vlieghe advocated, is to show forecasts using the MPC’s preferred path for interest rates at yearly horizons — which would be published too. The US Federal Reserve, Reserve Bank of New Zealand and Norges Bank are among those that do something like this. Being more explicit about its likely rate path would help everyone better assess the BoE’s potential actions.There is also a procedural benefit to this approach. The high potential for disagreement on a preferred rate path among MPC members could drive a more robust debate on the economic outlook. That is particularly useful in a time of uncertainty, when channelling diverse views, over herd thinking, takes on greater significance.The BoE could also adopt something similar to the Fed’s “dot plot”. The policy-setting Federal Open Market Committee anonymously publishes members’ aggregated economic forecasts and their yearly preferred rate path. The requirement to produce individual projections could drive a tougher committee debate, as members take greater ownership of their forecasts. Yet, the additional information can, and has at times, stoked more confusion. Berenberg, a bank, suggests a switch to central forecasts based on no rate change alongside Fed-style “dot plots” could be the best combination for the BoE. Whatever the approach, at the very least, the BoE’s forecasts should tell us how it expects the economy to evolve and the rate path needed to achieve its target. Right now, it does both in a roundabout fashion. Changing that will not solve all its problems, but if it can help the public better understand what it thinks it needs to do to meet its objective, that will make its job at least a bit [email protected] More

Singapore’s sovereign wealth fund GIC has accelerated dealmaking in the US, investing in venture capital funds and technology companies as it searches for growth beyond China.GIC, whose assets are estimated by analysts to exceed $700bn, has told private equity and venture capital executives this year that it wants to increase exposure to US-focused funds, said three people familiar with the investor’s thinking.“We cannot suggest opportunities fast enough,” said a partner at one global venture fund with a San Francisco office. “They are eager for what we have from San Francisco to Orlando.”The focus on the US by one of Asia’s biggest sovereign wealth funds reflects optimism in the resilience of the country’s top technology companies despite last year’s heavy sell-off. The US is also prime hunting ground for artificial intelligence companies as the industry rapidly expands.It also comes despite a collapse in funding for venture capital groups in the US and falling valuations for private companies. That slowdown could impact GIC’s investment levels over 2023, though interest in the US has remained high this year, the partner said.But the US remains one of the biggest destinations for capital, especially in tech, as global investors rethink their strategy in China over concerns including geopolitical tensions with the US, an economic slowdown and a crackdown on business.GIC struck 63 deals involving US-based private companies including in technology, healthcare and property in 2022 and 2021, compared with 39 in 2019 and 2018, according to data by Refinitiv.By comparison, ITjuzi, a data provider that monitors inflows to China, recorded two direct investments in Chinese companies by GIC last year, down from 16 in 2021.GIC declined to comment but has previously said it maintains significant exposure to large markets including China.A venture capitalist with offices in Silicon Valley said the company had held talks with GIC about raising its commitments to US funds, including in the secondary market. The latter is where private stakes in start-ups and VC funds change hands.GIC “indicated they were looking to ramp up hiring of investment specialists”, the person added. GIC is advertising 18 jobs in the US, according to LinkedIn. One post is for a specialist in the private equity secondary market as well as other senior roles in equities, fixed-income and portfolio management.Global investors who have relied on growth in China face a challenge finding alternatives. India and other emerging markets including Indonesia have not been able to match the mainland market in size and sophistication, even though their economic growth is higher than in developed markets including the US.“But there are only so many bets you can make in places like India and Indonesia. The US has much to offer across biotech, utilities, consumer companies and real estate,” said one Asia-based asset manager and adviser who spoke to GIC about its strategy. “However, there has been some question over tech valuations more recently which could affect the strategy.”The US is GIC’s biggest market, making up 37 per cent of its portfolio according to its 2022 report, compared with 34 per cent in 2021. It does not break down its Asian portfolio, which represented 25 per cent of its holdings in 2022, excluding Japan. Its private market exposure has grown to 17 per cent from 12 per cent between 2022 and 2019.GIC, which has offices in San Francisco and New York, in April increased its stake in Nasdaq-listed US-Israeli fintech Pagaya, which uses AI to manage assets for financial institutions.GIC and Singapore’s other state investor Temasek became investors in Stripe, the San Francisco- and Dublin-based payments processing group, in March. Other recent deals include buying out software company Zendesk, an investment in blockchain data platform Chainalysis and joining a consortium to take cyber security platform McAfee private.Additional reporting by George Hammond in San Francisco More

Britain’s beleaguered mortgage borrowers are likely to escape the scale of home repossessions suffered in previous economic crises because of higher levels of housing equity and regulatory pressure on lenders, say market experts. With 1.4mn households set to roll off their fixed rate mortgages over the course of 2023 — most taken out two or five years ago at much lower rates than today’s — the pressure of meeting soaring repayments has combined with a cost of living crisis and a gloomier outlook on inflation. But while borrowers face higher costs, the mortgage crunch has not yet translated into mass repossessions. Just 1,250 mortgaged properties were taken into possession in the first three months of this year, according to industry group UK Finance. This was 50 per cent up on the previous quarter, but compared with the numbers that lost their homes during the recession that began in 1990 — the historic peak of repossessions — it barely registers. Between 1991 and 1993 some 188,600 homes were repossessed by lenders, according to UK Finance. The reasons for this apparent difference lie in mortgage market trends, the history of house prices and hard-hitting regulatory reforms, market experts say. But they cautioned that there was plenty of room for uncertainty given the unpredictable economic outlook, particularly over jobs. “I don’t think we should expect repossessions to rise to the extent we’ve seen during previous downturns,” said Neal Hudson, founder of housing market analysts BuiltPlace. “For lenders and regulators they should be the absolute last thing that they do. But that’s not to say we won’t see them go up. We will.”A surge in repossessions would pile further pressure on Rishi Sunak, the prime minister, who has rejected calls for direct state support for mortgage holders, arguing that the fight against inflation was “the best and most important way that we can keep costs and interest rates down for people”. The Bank of England’s official interest rate — currently at 4.5 per cent — was in double figures between 1988 and 1991. As a result, most borrowers at that time chose a variable-rate mortgage rather than fix at a high level. This meant, however, that base rate changes hit their monthly repayments more quickly. Fixed rates are the norm today. While these will only protect from interest rate changes for as long as the fix lasts, they crucially provides borrowers with time to plan. In the early 1990s, when house prices dropped and sent borrowers into “negative equity” — when the property is worth less than the outstanding balance on the mortgage — banks and building societies faced few regulatory responsibilities obliging them to offer temporary help or alternative mortgage options. 

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“There was no mortgage regulation [in the 1990s],” said Ray Boulger, analyst at mortgage broker John Charcol. “Lenders are now under the cosh from the Financial Conduct Authority to exercise forbearance, and to go through all possible processes with clients to come to some sort of tailored arrangement. I think that’s going to be crucial for a lot of people.” In March, the FCA set out the measures it expected lenders to take to support struggling borrowers. Banks and building societies must offer existing customers a mortgage deal, even when they fail other lenders’ affordability tests; they must consider helping customers in difficulties cut their monthly payments through, for example, switching them from a repayment mortgage to an interest-only loan; or they should extend the term of their mortgage, another way of reducing repayments.Some, but by no means all, lenders may offer a mortgage payment holiday. The government first unveiled a mortgage payment scheme for those affected by Covid-19 in March 2020, although such schemes have traditionally been used to help borrowers cope with short-term or unexpected changes in circumstances. But brokers warn most of these measures increase the total amount of interest payable over the life of the loan.One banker said they were yet to see a material shift in the number of customers being unable to make mortgage repayments, but that they were well prepared. “It’s in no one’s interest that a house is foreclosed upon,” they added.As well as regulation, another key difference between then and now is the cushioning effect of housing equity built up over years of house price growth. Research by estate agent Savills found the total value of all homes across the UK reached a record £8,679bn at the end of 2022, with outstanding mortgage debt standing at £1,660bn.In the four years since 2019, the value of UK housing rose by almost a quarter, while outstanding mortgage debt went up by 11 per cent. “So, while outstanding borrowing increased by £168bn, the growth in the total equity pot was well over nine times that figure at £1.46tn,” said Lucian Cook, Savills residential research director. For those with more equity in their property — with a loan-to-value ratio of 60 or 70 per cent — but who are unable to make their repayments, this means they will have more options — and more time — when agreeing a plan with banks. Borrowers in this position are far from exceptional; last month, Lloyds Banking Group said its mortgage book carried an average loan-to-value of 42 per cent.Another safety valve not present in previous crises is the “stress test”, where lenders assess whether a borrower can still afford a mortgage if the interest rate were to rise higher in future. However, with each bank applying different criteria and little follow-up on their initial assessment, it was unclear how much comfort policymakers could take from these tests, said Hudson. He gave the example of a couple who take out a mortgage when they have two full-time incomes. If they later decide to have children, one partner may earn only part-time, while paying extra costs of childcare. “There will be some people in that situation thinking, ‘how the hell do we make it work now?’”

As stress rates have risen — typically to about 8 per cent, according to Adrian Anderson, director at broker Anderson Harris — lenders are also taking into account borrowers’ other financial commitments, such as car loans or school fees, which have risen with inflation. “That has brought out a few surprises over the past three months,” Anderson said, noting that under previous ultra-low interest rates these extra payments would make little impact on a person’s capacity to borrow. “We’re now spending a lot more time checking affordability with different lenders.”Hudson expected repossessions to rise — and said that further dangers lurked: “If the Bank of England has gone too far with raising interest rates and we start to see a real impact on the wider economy, with job losses, that might be a situation where we start to see more repossessions.”Since the process is lengthy — a lender must exhaust alternative avenues with a borrower before beginning a potentially drawn-out court process — the current low levels may disguise what lies ahead. Any big rise in repossessions is unlikely to appear in the data before next year. The final alternative to repossession is simply to sell up. While homeowners may resist this, waiting to be forced out of their home by legal process comes with big costs, damaging their credit rating and their ability to take out another mortgage. For Hudson, the turbulence of the mortgage market and investors’ single-minded focus on the next data release could have its upside. If the inflation news is better than expected, “All of a sudden we could start to see rates come down. I just think we’re in a very volatile period.” More