£50bn merger with Xstrata will be latest City coup for billionaires behind commodities trader
More than £50m of World Food Programme aid to feed the starving has ended up in the hands of a London-listed commodities trader run by billionaires, despite a pledge by the United Nations agency to buy food from “very poor farmers”.
Glencore International, which buys up supplies from farmers and sells them on at a profit, was the biggest single supplier of wheat to the WFP over the last eight months, the Guardian can reveal.
Glencore, which was able to operate with secrecy from its base in Baar, Switzerland, until it floated on the London stock exchange last May, is expected on Tuesday to announce a merger with mining group Xstrata to become one of the 10 biggest FTSE 100 companies with a market value of more than £50bn.
Details of the dealings with Glencore, which controls 8% of the global wheat market, emerged a year after the head of the WFP committed to buying food from local farmers.
“Our new motto is to help people feed themselves,” Josette Sheeran, the executive director of the WFP, told China’s state news agency. “When we can, we purchase our food from the very poor farmers who suffer because they are not connected to local markets.”
Raj Patel, an economist expert in the global food trade and former UN employee, said it was shocking how much food aid money was “funnelling to one of the largest commodity traders”.
The rising price of wheat has squeezed the incomes of millions of the world’s poorest people. Many have been forced to turn to the WFP, which last year fed more than 90 million people in 73 countries.
Over the last eight months Glencore has sold wheat worth $78m (£50m) to the WFP, according to details of contracts published on the agency’s website.
In the biggest single deal, the WFP bought $22.5m of Glencore wheat in July last year to feed Ethiopians in one the worst famines in recent memory. The WFP also bought Glencore wheat, sorghum and yellow split peas for Kenya, Djibouti, Bangladesh, Sudan, North Korea and Palestine. Last month the WFP spent $10.8m on wheat for drought-stricken Djibouti.
In its latest half-year financial results Glencore, which previously attracted controversy for environmental breaches and accusations of dealing with rogue states, including Iraq under Saddam Hussein, reported that revenue from agricultural products doubled to $8.8bn. The company said its performance had been “driven by stronger profits in grains and oil seeds” for which “prices were substantially higher in H1 [the first half of] 2011 compared to H1 2010”.
The company said: “There were increased geographic arbitrage opportunities [buying commodities cheaper in order to sell them on later at a higher price] available in wheat and edible oils.” It said the average wheat price of a bushel [8 gallons] of wheat increased by 60% over the previous year to $778.
A spokeswoman for the WFP said: “As a humanitarian agency that depends entirely on voluntary donations we always aim to get the most competitive price when purchasing food on the open markets. Rising food prices do have an impact on our budget and they can be driven up by any number of factors, including speculation.”
Glencore said it won the WFP tenders because “we were able to offer the commodities needed at the lowest possible price”.
Rob Bailey, a senior research fellow in food security at Chatham House in London, said the WFP often buys from traders such as Glencore, Cargill and Viterra, because food donations are not available and local farmers cannot provide the quantities needed. “It is concerning that the World Food Programme is left at the whim of international markets precisely when prices are high,” he said.
“Such crisis periods of high volatility are also when the big traders make the most money, because they have the best information on likely supply and demand and how markets are going to evolve, allowing them to take positions in the market to turn profits.”
John Hilary, the executive director of the War on Want, said: “Glencore’s self-confessed speculation on grain markets last year forced up prices at a time of world shortage, driving more people into extreme hunger. The WFP needs to rethink its priorities and support local markets rather than corporate giants such as Glencore.”
Patel, the author of Stuffed and Starved: Markets, Power and the Hidden Battle for the World’s Food System, said: “It’s a shocking amount of money to be funnelling to one of the largest commodity traders. That financial entities are now making their presence felt – and Glencore is among the most powerful of these new corporations – points to the increasing financialisation of food in the 21st century.”
Glencore admitted that it bet on a rising wheat price after drought in Russia, according to investment bank UBS. “[Glencore’s] agricultural team received very timely reports from Russia farm assets that growing conditions were deteriorating aggressively in the spring and summer of 2010, as the Russian drought set in … This put it in a position to make proprietary trades going long on wheat and corn,” UBS said in a report to potential investors, disclosed by the Financial Times.
On 3 August 2010 the head of Glencore’s Russian grain business, Yury Ognev, urged Moscow to ban grain exports, according to the UBS report. Two days later Russian authorities banned wheat exports, which forced prices up by 15% in two days.
On Monday Glencore said UBS’s account of its role in the Russian grain crisis was “simply untrue. In any case, the export ban did not help our business”.
A spokesman said: “We share the view that financial speculation in agricultural products markets can be harmful. Our business is physical – we produce, buy, store and blend agricultural commodities.
“We bridge the gap between harvests that last for a couple of weeks and demand which is fairly constant throughout the year.
“Because we are physical holders, we are always net sellers in the agricultural products futures markets which actually has a downward effect on the prices of agricultural products futures.”
Glencore’s chief executive, Ivan Glasenberg, earned the moniker “the $10 billion man” when his stake was valued at £5.76bn at last May’s flotation. Four other partners – Daniel Maté, Telis Mistakidis, Tor Peterson and Alex Beard – were also made paper billionaires. More than $3.6bn was given to the WFP last year, with the US contributing $1.2bn and the UK £144m.
Merger deal anticipated
Glencore is on Tuesday expected to announce plans to merge with mining group Xstrata to become one of the 10 biggest companies listed on the London stock market. It will be the latest move in Glencore’s journey from secretive trading house founded by Marc Rich, a commodities traderwho was charged by US authorities with selling oil to Iran during the 1979-81 hostage crisis, to global powerhouse in the sale of commodities from copper and coal to sugar and wheat.
The largest shareholder in the combined company – dubbed Glenstrata – will be Ivan Glasenberg, Glencore’s multibillionaire chief executive. But Glasenberg, who makes so much money he indirectly funded a generous Christmas tax break for the other residents of the Swiss village where he lives, is understood to be planning to step aside to become deputy to Mick “the miner” Davis, the head of Xstrata.
Davis, already one the highest paid executives in the FTSE 100, is likely to be offered a “golden handcuffs” deal to stay at the company. A change of control clause could also see Davis collect an additional £10.7m in long-term shares.
The deal is likely to see Glencore pay about an 8% premium to buy up the Xstrata shares it does not already own.
Sir John Bond, Xstrata’s chairman and a former chair of HSBC and Vodafone, will lead the Glenstrata board, while Glencore’s chairman Simon Murray, who has been attacked for his “unbelievably primitive” views on women in business, is likely to step aside.
Tony Hayward, the former boss of BP, is likely to be appointed the senior independent director of the combined company, which will have more than 120,000 staff across five continents.