Commodity trader warns: World is heading for “food wars”

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The world is heading for “food wars” as geopolitical tensions and climate change push countries into conflict over dwindling supplies, one of the world’s largest agricultural commodity traders said.

“We have fought many wars over oil. We will fight even bigger wars over food and water,” says Sunny Verghese, chief executive of Olam Agri, a Singapore-based agricultural trading house.

Speaking at the Redburn Atlantic and Rothschild consumer conference last week, Verghese warned that trade barriers imposed by governments to shore up domestic food stocks had exacerbated food inflation.

Major agricultural commodity traders, which posted record profits in 2022 after food prices were pushed up by Russia’s large-scale invasion of Ukraine, have been accused of exacerbating flood-price inflation by charging profit-boosting markups.

But Verghese argued that increased food price inflation was partly the result of government intervention. An increase in non-tariff barriers in 2022 in response to the war – 1,266 from 154 countries, by his calculations – had “created an exaggerated imbalance between supply and demand,” he said.

Wealthier countries are accumulating surpluses of strategic commodities, leading to excessive demand and therefore higher prices, Verghese said. “India, China, they all have buffer stocks,” he said. “That only exacerbates the global problem.”

Food prices began to rise in the wake of Covid-19 and surged after Russia’s invasion of Ukraine as the conflict blocked some grain and fertilizer exports. This exacerbated food insecurity in poorer countries and left consumers around the world facing a cost-of-living crisis.

Given this increase and the impact of climate change on agricultural production worldwide, governments are increasingly resorting to protectionist measures.

In 2022, Indonesia banned palm oil exports to protect the local market, and last year India imposed export curbs on certain rice varieties to curb rising domestic prices ahead of general elections after a fickle monsoon disrupted production and raised fears of supply shortages.

“That was exactly the wrong thing to do,” Verghese said. “You’re going to see more and more of this kind of thing.”

Olam Agri, which processes and supplies grains and oilseeds, edible oil, rice and cotton, is part of the larger Olam Group. The food and agribusiness company, which supplies ingredients, feed and fibre to global brands from Nestlé to Unilever, has had a difficult year.

The trader, which has a strong presence in Asia and Africa, was investigated by Nigerian authorities last year after media reports said the company was involved in a multi-billion-dollar fraud. The company’s shares soared in February when it was cleared of all charges.

The Olam Group was also forced to issue a profit warning for the first half of 2023. Even after a better second half, it reported a 56 percent drop in annual profit to 278.7 million Singapore dollars (205 million US dollars), citing high interest rates and “exceptional losses” due to low yields from its almond orchards in Australia.

The decline in profits was partly due to a lower contribution from Olam Agri after the company sold a 35 percent stake in the company to a subsidiary of Saudi Arabia’s Public Investment Fund for $1.24 billion in 2022. Olam Agri is 51 percent owned by Singapore’s state-owned investment company Temasek Holdings.

The Olam Group has long had plans to list Olam Agri on the Saudi Arabian stock exchange, but those plans have been repeatedly postponed since the trading arm was spun off from its food ingredients business in 2020. Headquartered in London, Olam Food Ingredients is one of the world’s largest suppliers of cocoa, coffee, nuts and spices.

Verghese addressed the impact of climate change on global earnings and called on the assembled consumer goods industry executives, including the heads of Coca-Cola and Associated British Foods, to “wake up” and do more to address climate change.

Governments should impose a carbon tax, he argued. “Today carbon is free, so we pollute indiscriminately,” he said.