Financialization and Global Commodity Chains: Distributional Implications for Cotton in Sub‐Saharan Africa

Abstract

Restructuring of global and local markets has led to an increased influence of commodity derivatives markets on commodity price setting. This has critical implications for price risks experienced by actors along commodity chains. Commodity derivatives markets have undergone significant changes that have been referred to as the ‘financialization of commodities’, which we define as an increase in trading activity by financial investors and the reorientation of business strategies by commodity trading houses towards risk management and financial activities. This article assesses how these global financialization processes affect commodity producers in low‐income countries via the operational dynamics of global commodity chains and national market structures. It investigates how prices are set and transmitted and how risks are distributed and managed in the cotton sectors in Burkina Faso, Mozambique and Tanzania. It concludes that uneven exposure to price instability and access to price risk management have important distributional implications. Whilst international traders have the capacity to deal with price risks through hedging, in addition to expanding their profit possibilities through financial activities on derivatives markets, local actors in producing countries face the challenge of increased short‐termism — albeit to different extents depending on national market structures — with limited access to risk management.

Commodity traders in a storm: financialization, corporate power and ecological crisis

“…index ratio the price discovery lead tends to widen as the commodity traders take advantage of the disorientation of other entities. Growing informational asymmetries afford commodity traders the opportunity of navigating profit opportunities through arbitrage, speculation or the increased provision of risk-management services to less informed entities (Baines, 2017;Murphy et al, 2012;Staritz et al, 2018).…”

Unprecedented but not Unpredictable: Effects of the COVID-19 Crisis on Commodity-Dependent Countries

“…Thus, the dynamics of world commodity prices, including excess volatility and short-term price variation, has been influenced by activities financial actors (Cheng and Xiong 2014 ; Adams et al 2020 ). As these futures prices are used as the benchmark for all other prices set along physical commodity chains, the behaviour of financial investors in the current crisis plays a crucial role in the current challenges faced by commodity-dependent countries (Staritz et al 2018 ).…”

“…Thus, price determination in this context has been influenced actively by public actors in producer and consumer countries. At the national level, many commodity-producing countries ran national price stabilization mechanisms, in particular for cash crops, supported by compensatory financing schemes by the IMF and the EU (STABEX for agricultural products and SYSMIN for mining products) to ameliorate the adverse effects of fluctuating export earnings (Staritz et al 2018 ).…”

“…Thus, the level and the volatility of world commodity prices are increasingly influenced by financial market dynamics (Adams et al 2020 ). Further, the organization of global commodity chains, in which commodities are trade and prices are transmitted from the global to the local level, has changed towards the governance by transnational buyers and traders (Staritz et al 2018 ).…”

Large investments, small farmers: A financialisation perspective on value chains in a development corridor

“…Work on financialised commodities shows that particularly value chains for globally traded cash crops are increasingly financialised through the price mechanisms of derivative markets. Far beyond their financial sphere, global derivative markets have transformed how and to the favour of whom value chains are organised (Newman, 2009;Bargawi & Newman, 2017;Staritz et al, 2018). Here, value chains resemble translation devices for financialisation processes from global markets in their most financial form towards local trading and production in its most physical form (Purcell, 2018).…”