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EIM criticises trading giants

04 April 2014

SHUTTERSTOCK

THE global-trading giants that control the world's food markets, but operate in the shadows, unlisted and unregulated, have been put under the spotlight by Ecclesiastical Investment Management (EIM).

Its report, The Hard Truth About Soft Commodities, notes that many of the firms that trade in raw materials such as wheat, cocoa, and cotton, earn revenues that are equal in size to the GDP of entire countries, and yet the sector is "almost wholly unregulated".

"We see investment in soft commodity trading as problematic owing to the fundamental model that disconnects the raw material from the wider beneficiaries - growers and customers," a senior analyst at EIM, Neville White, writes.

Commodities are traded mainly in Chicago, New York, and London, but the main tax domicile is Switzerland, where the typical tax rate is five to 15 per cent. The sector is dominated by a few large firms, which act as middlemen in a complex supply chain. For example, the coffee trade involves growers, processors, packers, shippers, dealers, roasters, and supermarkets.

The report argues that criticism of these companies is "not just about their size or lack of transparency. Most have been dogged by charges of poor environmental management, pollution, deforestation, and complicity in human-rights violations."

The report argues that only manufacturers can address ethical problems in the supply chain, such as poor labour practices. It cites examples of companies that have taken control of their sourcing, cutting out the middlemen. For example, 11 per cent of Nestlé cocoa is now sourced directly, in the wake of allegations of child labour and dangerous practices on plantations.

EIM has not, to date, invested in any soft-commodity trading company. "There is no blanket ban on investing in soft-commodity traders, but we are trying to highlight some of the ethical dilemmas we would face," Mr White said last week. "We particularly like the increasing-share-value model, where retailers are taking more control of how they source raw materials, bypassing the trading bloc in the middle by buying directly from farmers."

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