Why you should care
Because these companies run your life, your dinner table and your drive to work.
This editor’s pick made its first futures trade on February 22, 2014.
Glencore, Vitol, Archer Daniels: sound familiar? Probably not. So here’s a hint: The big firms you should know about aren’t Google or Amazon, and they’re not McKinsey, Goldman Sachs or Citibank. Heck, they’re not even WhatsApp, Nest or Uber.
They’re booming, mega-money-making, hugely influential and, yeah, a little shady.
No more guesses? They’re commodities firms. (Pause for those playing financial-lingo catch-up: We’re talking about under-the-radar firms that bet, often with high risk, on the future prospects of industries that drive key elements of our economy — from energy to pork bellies.) And they’re booming, mega-money-making, hugely influential and, yeah, a little shady.
”There are many of these firms … they’re gigantic, making these bets, running markets — everything from energy to food around the world. And it is rather shadowy because outside of the stocks that trade on them, a lot of what they do is not very liquid — it’s done off balance sheets,” says Jon Najarian, co-founder of OptionMONSTER, a former trader and financial commenter on CNBC.
That lack of liquidity earned commodities trading some negative attention at the time of the financial crisis — in the vein of increasing public skepticism surrounding trading (e.g. LIBOR).
“The whole idea behind commodities trading is merely price discovery,” says Curt Goulding, senior VP of global sales at commodities trading company FCStone, speaking from Kansas City, Mo.
According to Goulding, the art of inevitably unpredictable futures trading depends only on weather — because agriculture matters — and government regulation. (Both of which are notoriously difficult to forecast.)
The people who power these firms spend their days researching what prices should be, and then they determine them for the rest of the economy.
But mystery and public skepticism aside, these firms aren’t new financial upstarts; in fact the concept of commodities trading has literally been around for ages (since Marco Polo, the original commodities trader, history buffs). Plenty of bankers and financial minds point to the more recent past — the ’70s and ’80s — as the heyday for commodities and insist that the industry has already peaked. And Najarian and others would agree that the idea of a commodities boom taking place now is nothing if not counterintuitive. (Exhibit A: the spectacular collapse of Refco, one of the largest firms of this kind, in 2005.)
But what’s not in dispute is that these companies are major players in our everyday lives. They impact what we pay for our groceries and what we shell out at the pump — they’re the firms that guess at pricings. The people who power these firms spend their days researching what prices should be, and then they determine them for the rest of the economy. And even as many would doubt their renewed importance today, focusing (not incorrectly) on some short-term indicators, here’s what we’d say: You need to know who these companies are.
To start there’s Glencore, Vitol, Archer Daniels, Mercuria, Noble and Wilmar. Not exactly brand names, but you probably have heard of the Koch brothers. Each of these listed companies (of relatively small size) rakes in hundreds of billions a year — collectively adding up to a trillion-dollar industry.
Glencore, for one, has annual revenues of $214 billion — nearly 60 times Facebook’s (and about five times what Google pulls in). More, even, than GM.
Source: Spencer Platt/Getty
And in terms of profitability, other than arms dealers, drug companies and monopolistic tech firms, they are the economy’s lottery winners.
But these financial cowboys might be on the threshhold of something even bigger as signs appear, both small and large, that these firms are booming. Over the last 10 years, Glencore and others have been (quietly) growing exponentially. There was Glencore’s expansion (“the biggest company you’ve never heard of ”) and its $11 billion IPO, which might not have shown up on your Twitter feed. There’s the rise of Singapore, a hot spot of innovation and money — and the place where commodities are taking off. There was a real boom before the entire system crashed in 2008.
What’s to stand in the way? Regulation, of course, which already chased a couple of big guns out of the market (Deutsche Bank and JPMorgan shut down their commodities divisions in the past three months).
U.S. and European governments have been thinking about regulating the commodity firms more closely, fearful that price fixing could spark food shortages and riots in some parts of the world — or even destabilize the entire economy.
But in the end, regardless of regulation and even acts of God, these firms have been consistently powering our economy for decades and making boatloads of money, and they should be on everyone’s radar. Even if you don’t know their names or invest yourself, they touch your life in pervasive ways.
Between Koch and Singapore, these companies are worth watching.
And, as Najarian says, being a hot firm means more than just drawing in big money on the regular. It also means attracting top talent — a challenge, surprisingly enough, for companies of their size and oomph. So if you’ve got a mind for markets and good eyes for money, maybe you should consider sending your applications over to the mining world of Australia or burgeoning Singapore. No need to head for Wall Street or the Valley.Go deep