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Piggy in the middle between the grain speculators and the supermarkets

17 October 2007

3:53 PM

17 October 2007

3:53 PM

The concentrated aroma of — how shall I put it — deep piggy doo-doo that wafts through your car window as you motor up the A1 through North Yorkshire is, in normal times, nothing more nor less than the smell of money. So I was taken aback to hear a farmer from that part of the county declare that if prices carry on the way they’re going, ‘it’ll be time to shoot the pigs’. We will hear shortly from Merryn Somerset Webb, in our Investment column, about how to make money in ‘soft commodities’ — in which dabbling by you and me does no harm if it boosts farmers’ income and the value of their land. But unfortunately it’s not that simple: livestock producers are increasingly caught between two of the most rapacious species on the planet. On one side, supermarket wholesale buyers have forced the price per kilo of ‘finished pigs’ to remain almost static since the beginning of the decade. On the other, hedge funds and other speculators have piled into the grain markets, contributing to a near-tripling of the price of ‘feed wheat’ over the same period. If your basic business model is fattening porkers on wheat, no wonder you feel you’re being fed into your own sausage machine.

Contrary to popular myth, however, hedge funds are not causing this pain just for the hell of it, but in response to globally observed investment signals. This year’s drought-hit Australian harvest could be the worst ever; President Bush wants more US corn to be turned into ethanol; the new-rich Chinese demand more meat, which can only be produced by encouraging livestock to eat more grain. Our local prices have also been pushed up by the effects of the wet summer. Farmers struggle to cope with the resulting volatility, even those sophisticated enough to do a bit of hedging for themselves, by selling forward. A guru of the Yorkshire grain trade, Howard Jackson of I’Anson’s feed mill in Masham, told me of a client who thought he’d hit the jackpot selling wheat at £120 a tonne in late July, only to see the price at £177 in late August. ‘We used to cringe if the price moved £2 in a day. Last Monday it moved £17, with huge numbers of futures contracts traded. That’s City money coming in, and it’s totally distorting our industry.’ Talk of mass slaughter by producers who can’t make the feed-cost sums work is by no means far-fetched, he added. It’s already happening with ‘broiler chicks’ for the poultry industry — gassing is the preferred method — and pigs may be next. The whiff on the A1 could soon be something much more sinister.

Northern Virgin

Financial commentators have been straining this week to find echoes of 20 years ago, when the hurricane was swiftly followed by the Black Monday crash. Despite ominous new peaks in the prices of oil (above $85 a barrel) and gold (almost $760 an ounce), the stock market wilfully declined to dive on cue — or at least had not done so by the time this column went to press. But one parallel does strike me. Sir Richard Branson’s proposal that Virgin Money — with the backing of a crew of hedge funds and investors from the US, Hong Kong and Dubai — should take over Northern Rock, brings to mind the tentative bid in September 1987 by Saatchi & Saatchi, the advertising agency, for the ailing Midland Bank. That frothy idea was soon scotched both by the market fall and a frown from the Bank of England — and it may seem unfair to compare the substantial portfolio of businesses Branson has created over the past 30 years with the image-over-substance of the Saatchi boys’ 1980s fame. Perhaps so, but the bearded wonder certainly seems to spread himself thinner than ever these days, what with his commitment to biofuels and his running commentary on the Madeleine McCann case: it wouldn’t be wholly surprising to find him on the England subs bench for the rugby World Cup final, or throwing his hat in the ring for the Lib Dem leadership. To counter that kind of jibe, his consortium is said to be hunting for a ‘heavyweight’ to take the helm of a Virgin-rebranded ex-Northern Rock: let me propose the eminent Sir David Clementi, former Bank of England deputy governor, now Prudential chairman, who back in 1987 was the young thruster at Kleinwort Benson advising the Saatchis on their Midland bid.

High note

Can you name a British enterprise that has been setting global standards since 1889 and does almost half of its business abroad, where it has clocked up 50 per cent growth in the past decade? The one I have in mind has had particular success in the tiger economies of southeast Asia, while maintaining a huge market share in Britain and a net profit margin of almost 20 per cent of sales — and giving more than £5 million a year to educational causes. Any guesses so far? Here’s another clue: it provides melodious evidence for those who argue that Britain’s economic strength in the world is now much more about intellectual property and creativity than about physical manufacture and trade. OK, here’s the answer: it is the Associated Board of the Royal Schools of Music, the charitable body that provides the world’s most widely recognised examination structure for music education. Its 600 examiners sit through the grade tests of more than 600,000 candidates a year in 90 countries — which must be pretty excruciating work, but which generates a handsome profit to be distributed to the board’s four sponsoring conservatoires, the Royal Academy and Royal College in London, the Royal Scottish in Glasgow and the Royal Northern in Manchester (of which I have just become a governor). I asked the board’s chief executive, Richard Morris, whether the dumbing-down pressures that have caused a near-miraculous 25-years-in-a-row rise in A-level pass rates has affected musical standards. Not at all, he assured me. ‘It’s just as hard to get a Grade 8 Distinction today as it was 15 years ago — or 50.’ I checked this with a local music teacher. ‘Actually, I think they’ve dumbed up,’ he said. ‘The exams have got tougher.’ Bad news for pushy parents and statistic-chasing ministers, but good news for the dwindling idea of British excellence.

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