The United Nations is calling for an overhaul of rules for food and raw materials traders amid concerns about “profiteering”.

Oct. 5, 2023 — The United Nations Conference on Trade and Development (UNCTAD) has indicated that some of the largest food retailers are circumventing existing regulations by being monitored as manufacturing companies rather than financial institutions. This is exacerbating the global food crisis as consumers bear the brunt of the high cost of living. She is now calling for a “fundamental overhaul” of this regulatory approach.

The United Nations also notes that an international tax architecture and tools to improve transparency and accountability must be an integral part of the international financial architecture.

It also calls for greater oversight of commodity traders, claiming that unregulated activities are exacerbating this problem.

According to the UNCTAD report, the “stark contrast” between the rising profits of “commodity trading giants” and the widespread food insecurity of millions of people underscores a “troubling reality” – markets are becoming unstable in the face of price increases due to unregulated activities, exacerbating the global food supply crisis , at a time when consumers are facing a cost of living crisis.

Unregulated activities destabilize markets, the report says
The post-COVID-19 world has had to deal with the cost of living crisis. This manifested itself in high inflation, particularly in food, and increasing financial vulnerability in developed countries.

On the other hand, developing countries faced import dependencies, extractive financial flows, volatile commodity cycles, trade disruptions, the war in Ukraine and climate-vulnerable food systems that led to financial destabilization.

The cost of living crisis has translated into high inflation, particularly in food.The UNCTAD report states: “A vicious circle has emerged between higher energy and food production costs, lower agricultural yields and higher food prices, more inflationary pressures and subsequent financial constraints.”

However, recent price volatility crises have brought profits to grocers. In fact, earnings growth for some of the largest grocers in 2021-2022 is in line with the profitability profiles of leading companies in the energy sector, the report said.

It also highlights a report that suggests up to 20% of food inflation in Europe is due to profiteering. Market analysts and academics also argue that “decades of mergers and acquisitions” have expanded companies’ influence along the supply chain and raised concerns about the lack of regulatory oversight of commodity trading.

UNCTAD’s analysis shows that “unregulated financial activities” contribute significantly to global food retailers’ profits.

It also highlights that corporate profits appear to be strongly linked to periods of “excessive speculation” in commodity markets and to the growth of “shadow banking”, an unregulated financial sector that operates outside traditional banking institutions and poses systemic, regulatory and stability challenges.

However, supermarkets recently dismissed claims of profiteering amid British inflation as MPs questioned senior officials from Sainsbury’s, Morrisons, Asda and Tesco about when food prices are expected to fall significantly.

Enlarge the loopholes
Over a decade ago, regulators were skeptical about the use of over-the-counter derivatives in food markets, demonstrating the “incomplete, fragmented and watered-down approach to regulating commodity trade,” UNCTAD said.

Over time, these concerns pointed to increasing risks to financial stability and opacity in the industry, where regulatory gaps have continued to widen since 2010.

The report said grocers have circumvented existing regulations and attempts to regulate their financial activities.The report goes on to say that grocers have circumvented existing regulations and consistently avoided attempts to regulate the financial dimension of their activities. “Despite efforts to strengthen controls, the grocery market has resisted, arguing that it is indirectly monitored by banks.”

“The ongoing crisis in the global food system highlights the need to rethink the regulation of food and commodity traders at a more coherent and systemic level.”

Financial and excessive speculation can indicate price fluctuations and agricultural prices are heavily influenced by market conditions, geopolitical tensions, climate risks and trade measures, according to the organization.

What can regulators do?
UNCTAD complains that the extractive sector is “lightly monitored”, while most of it is opaque and regulation of key players is almost non-existent.

It highlights that one of the main causes of the current regulatory gaps is an “outdated set of systemic regulations” that has not kept pace with the financial, technical and legal innovations available to business groups.

UNCTAD has noted that data transparency is necessary to overcome the ongoing food crisis. But more is needed for market participants to discover prices. Therefore, it proposes a three-fold path to reform the financial regulatory framework.

Firstly, it is about the market-level approach to close existing loopholes and facilitate market transparency and competition. Second, it operates at a systemic level and promotes competition to avoid the dominance of a few prominent actors. Finally, there are reforms at the global governance level that address the problem of unearned profits, increase transparency and mitigate the risks of illicit financial flows.

The organization recommends studying the relationship between the speculative activity of grocers in financial markets and price dynamics, which requires further research.

By Insha Naureen

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