Marc Rich, the infamous commodity trader, amassed a fortune despite facing extradition charges. He spent much of his life in exile in Switzerland. The US authorities charged him with racketeering and tax evasion. Rich started a commodity trader that now forms the basis of Glencore.
But even Marc Rich never faced a calamity as devastating as the crisis brought on by Covid-19. The streets are now littered with bust commodity traders. Last month, Hin Leong, a Singaporean marine fuel trader, declared bankruptcy with US$4bn of debts. This was followed by Zenrock, another trader in Singapore, that went into judicial management. On Friday, Phoenix Commodities Pvt Ltd, a UAE-based commodity trader, went bust with US$450m of trading losses.
Phoenix is a trader that was founded in 2000 by Gaurav Dhawan. It rose (like a phoenix) to amass US$3bn in revenue by 2019. The firm traded grain, coal, metals and other commodities.
The intense volatility from Covid-19 affected the currency hedges. There were also reports of fraudulent use of invoices. Phoenix Commodities was using the same invoice to generate leverage from several financial institutions.
The implications of these reversals are as follows:
(1) Commodity finance will be highly strained
Many banks are restricting trade finance, in the wake of the bankruptcies. This is also increasing the pressure on commodity traders. According to one account of the Phoenix collapse, it was the desperation to raise cash that led to alleged malpractice such as multiple pledges of cargoes.
Banks are also watchful about the use of letters of indemnity instead of bills of lading for trade finance. Bills of lading carry the actual title. The misuse of letters of indemnity were allegedly at the heart of both Hin Leong and Zenrock's fraudulent activities.
(2) Food prices may escalate due to the dislocation and lack of finance
The trade finance crunch could further tighten the food supply situation. The food market is facing export curbs and supply chain dislocation.
Unlike oil prices, which have fallen 33% in 2020, Covid-19 has had the opposite impact on food prices. Other than pork, staples such as wheat and rice have rallied. Rice prices are now at their highest since April 2013. Thailand, the world’s second-largest rice exporter after India, is expecting higher prices as export bans sweep Asia.
Thai exporters anticipate more sales, as their main competitors India and Vietnam battle domestic coronavirus outbreaks. India’s production has halted with the country on lockdown. Vietnam (the third-largest exporter) has imposed an export ban. Thailand quoted its benchmark 5% broken white rice at cUS$560-US$570 per tonne on a free-on-board (FOB) Bangkok basis last week, according to Reuters.
Meat prices in the US could rise. Tyson Foods, one of the principal meat producers, has closed several plants after Covid-19 spread among its workers.
(3) Investors need to focus on stock market proxies for food prices
We have identified companies that act as good proxies for food prices. We prefer primary producers of food, as opposed to processors. In the table below, we list six stocks that are suitable proxies for a food price rally. They are either primary producers or processors that can pass on price increases.