The Dirty Guts of the Commodities Game

Chances are, you've never heard of a company named Vitol. It rarely makes a headline, yet it plays a larger role in the oil market than Exxon, and its annual sales last year were twice as strong as Apple's.

... and it just got a lock on the Libyan oil market.

How do you invest in this company? You can't... it's owned by just 330 share-holding employees. They are very rich.

How about Cargill? Surely you've heard of this agricultural giant. It's over 145 years old, has annual sales worth more than $108 billion and is one of the world's largest companies.

But you can't get in on the action... not unless you marry into the family.

And then there is Trafigura. Despite allegations it killed 16 people and sickened hundreds more through massive illegal dumping, the 18-year-old firm managed to grow into the third-largest independent oil trader and second-largest industrial metals trader in the world.

Even with $79 billion in investment turnover last year, shares of this beast won't be public anytime soon.

In fact, very few commodities traders will succumb to the siren call of Wall Street anytime soon. It's just easier that way. And besides, if the regulators got a peek at Trafigura's books... they'd be forced to acknowledge a very big problem.

If the world's big commodities traders went public, the secretive, coercive industry would no longer be controlled by a few ultrapowerful men. The realm of obscene profits and massive market manipulation would vanish like a cockroach in a bright room.

Take, for example, Koch Industries - the nation's second-largest private company (next to Cargill, of course). Koch has a stake in everything from oil refining to dry bulk transport to commodities trading.

If you eat or drive... you've put cash into the deep pockets of the Koch brothers.

Their most important investment is not in a refinery or a fleet of ships. It's Uncle Sam. Koch Industries has made more than $6 million in political donations since 1989, with more than $2.24 million in the last election cycle.

The payouts help explain why these commodity behemoths remain privately owned cash machines.

Despite the fact the top five commodity trading firms control over half the sector's revenue ($629 billion) and never mind the idea they take dangerously large speculative stakes and hoard commodities to sway the market in their favor... Washington takes a hands-off approach.

Under the new, "tighter" rules for Wall Street, commodity trading firms have gone virtually untouched. And as long as they keep funneling money inside the Beltway and keep their business out of the public eye, it will stay that way.

It's a relationship with great mutual benefits.

The legicritters get the cash they need to stay in office and the men pulling the strings of the commodities markets get richer and richer.

Get this... since 1960, the S&P 500 grew 82-fold, with dividends. During the same half-century, the Koch brothers claim the value of their firm grew more than 2,800-fold.

It helps prove a point we made on Friday. The big money is made long before shares ever go public. Someday, greed will prevail and whether it's the Koch brothers or their heirs that do it, the company will sell shares to the public.

It will be a billion-bonanza for the sellers... a crap shoot for the buyers.

Just ask the poor folks who bought shares of Glencore (GLEN:LSE) after its IPO:


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The offering made the company's boss $10 billion richer in the span of a day... but the fresh shareholders have been losing their shirt ever since.

I know I sound glum, but the idea here is not to dishearten you and make you think all hope is lost -- because it's not. Remember, I'm quite bullish these days.

The goal is to show you what really drives this market.

Despite what you'll hear on CNBC or read on the front page of the Journal, there's a dirty underbelly dragging across the muddy grounds of the commodities industry.

The greed and manipulation you see on Wall Street is what's visible to the naked eye. But cut the beast open and dig through the guts... you'll see what truly drives this market.

And that's OK.

You and I are not going to compete with the Koch brothers or the Cargill regime. We can't send millions of dollars to Washington.

But we can understand what they do and how they do it. And, better yet, we can use what we know to sidestep their traps and take advantage of the opportunities they leave in their wake.

Two and a half minutes ago, you had no idea two of the nation's most politically connected and largest private firms are the companies that put food on your table and fuel in your tank... now you do.

... and now you know why food and gas prices are rising faster than anything else.

Andrew Snyder is editorial director of Inside Investing Daily.

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About the Author
Andrew Snyder

Andrew Snyder is editorial director of Inside Investing Daily. 

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