Export Distribution Centre Program
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This chapter describes the major players in international food trade involved in developing country imports, and the ways in which they provide or export trading house program food import finance. The great majority of the world trade in cereals and oilseeds is carried out nowadays by private operators.
International trade houses dominate, but brokers are also of some importance. Brokers are intermediaries remunerated on a commission basis by putting together a buyer and a seller. Although their role has markedly declined with the reduction of the number of intermediaries in the commercial chain, they still play a role, particularly in facilitating the operations of traders. As well as purchasing cereals or oils in one place and selling them in another, international trade houses ensure their regrouping, storage, processing and export trading house program in particular maritime transport Their operations are profitable less because of their logistical functions, but rather because of their overall management of trading positions e.
As part of their operations, they provide a wide array of financing solutions to their commercial counterparties. Their financing practices are not identical across commodities. For example, in export trading house program rice market, it is common for traders to carry the financing charges of the rice while it is being shipped to its final destination which is in many cases not known at the moment that the rice is loaded.
In contrast, traders tend to sell wheat, maize, soybean oil and palm oil before they are being loaded for export, with the effect that the buyer, not the trader, in effect carries the financing charges of the goods in transit. Most of the large food trading enterprises are privately-held, and information on their operations can therefore be difficult to obtain. The same international trade houses are involved in trade in all of the major grains. In maize and soybeans, where they compete with major export trading house program trading entities, they have a very large market share; for example, three companies Cargill, ADM and ZenNoh account for 80 percent of US maize exports - more than half of world market trade - as well as in trade from other countries.
In international wheat and palm oil trade, their export trading house program is much smaller than that of the major two state trading entities, the Australian and Canadian Wheat Boards, and the Malaysian Government-led palm oil export schemes.
Rice trade is much less concentrated: As a consequence, the turnover in rice trading companies is high; companies that export trading house program in one period are likely to have lost their dominant position, or have even disappeared, a decade later. Annex 4 gives a description of the major international trade houses involved in cereals and vegetable oilseeds and oils trade.
The following are the main STEs involved in grain exports:. The Trading Corporation of Pakistan sometimes also exports wheat. STEs account for a major part of world rice exports. STEs are not important in vegetable export trading house program exports. Annex 5 contains a description of the various major grain-exporting State Trading Entities.
Export trading house program the case of rice, exports by STEs are largely under government-to-government contracts, with payments often arranged under some form of counter trade.
The sales by these STEs to traders are normally through tenders, with the winning bidder having to open a letter of credit before loading, with payment for the rice to be made against presentation of the shipping documents. The situation for wheat sales by STEs is different: Both the Canadian and Australian Wheat Boards have a number of credit programmes. Export trading house program terms are from 6 to 36 months, and the interest rate is set a few percent above the rates the CWB pays on the notes it issues.
The federal Government fully guarantees the credit receivables of the CWB at no cost to the board. Credit limits for the Export trading house program are set by the Government, after taking into account the export trading house program provided by the Department of Finance and others. In the event of non-payment by a sovereign customer, the usual course is for the debts to be worked out at the Paris Club, an informal group of official creditors that addresses the debt problems of developing countries.
Unpaid loans are usually rescheduled, over long periods and at a low interest export trading house program, so shortfalls in payment of principal and interest are simply added on to the credit line. To accommodate this, the relevant credit limits are then increased.
Where this export trading house program to a partial debt write-off, the Government pays CWB the sum concerned. It covers the credit risks of sales to private importers who cannot provide a guarantee from their government. These amounts are significant in the context of the revolving fund proposal see Chapter VIand are symptomatic of the unpredictability in food import financing.
The Canadian government guarantees, free of charge, 98 percent of the credit risks of these transactions. There are no individual country ceilings for these transactions, each transaction being considered on a case by case basis. The level of coverage provided by the Government or the EDC ranges from percent to 92 percent depending on the type of customer and the repayment term of the credit.
The CWB is also able to arrange credit sales outside these programmes. This was basically a export trading house program discounting: CWB assigns its foreign receivables to a Canadian bank which pays the cash value; this bank is then responsible for collecting the payments, with credit insurance provided by the EDC.
Another example is sales by the CWB through local warehouses: Even though credit sales account for the minority of export sales by the Australian and Canadian governments, these governments clearly recognize the importance of providing credit facilities - or in other words, they recognize the fact that access to credit can be a bottleneck for developing country importers, particularly in difficult export trading house program. In Australia, the Cabinet may decide to make credit available for grain exports through a special "national interest window"; it did so inproviding additional export credit insurance cover for exports of around four million tonnes of Australian wheat to Indonesia and the Republic of Korea.
The worldwide trend toward privatization of the grain importing industry, as exemplified by countries such as Cape Verde, Egypt, Mauritania, Morocco, Senegal and Sri Lanka, has led to changes in buying habits.
STEs bought foodstuffs in large bulk quantities and usually handled and controlled all imports, storage, distribution and sales in a particular country, with the government often guaranteeing payment and foreign currency risk. Traders and processing mills in these countries are less able to afford large purchases than their government-owned predecessors, and are consequently buying in smaller lots, often on a more orderly schedule.
Credit risks for foreign suppliers have increased significantly. With a small number of exceptions discussed in the following sectionby and large, private traders are now responsible for importing food. They tend to get export trading house program assistance from their own government in obtaining the funds for this. Most countries have now freed exchange controls, so hard currency is no longer centrally located, and importers have to procure it by themselves.
In most cases, private traders are locally owned. The local, private traders may be fairly large in local terms, but tend to have limited experience until a few years previously, the government arranged food importsand financial strength.
They are generally diversified, importing the whole range of bulk food commodities, and often other products as well. A few large international traders e. Singapore-based Olam have set up what amounts to barter operations in developing countries, bringing rice and other foodstuffs into the country and using the proceeds to buy commodities for export. Even when imports are in private hands, export trading house program government still plays a large role. One example of this is Yemen, where imports are made through government tenders, which are open only to Yemeni private traders.
The private traders do all the arranging for the imports, which are in turn sold to government-licensed distributors. Sales proceeds are turned over to the Ministry of Finance, which pays the importer a pre-negotiated fee for arranging the importation and sale of the commodities to the distributors. Over the past decade, most government-owned food import agencies have been disbanded; some have been exposed to competition and now export trading house program alongside private-sector traders e.
In some countries, particularly in North Africa, trade has been privatized, but the government retains an umbrella export trading house program over the imports of the key commodities cereals, sugar, vegetable oilsproviding a certain amount of financing, imposing prices and giving subsidies. Annex 6 provides a description export trading house program the major state-owned food import agencies.
Most of the state entities buy through public tendering, even if this is known to be an inefficient mechanism for food trade. For buying commodities which requires relatively quick decisions, public tendering is an inadequate purchasing method. If new suppliers participate in the bidding there is usually little time to check on the reliability and financial status of the firms and the risk exists that unreliable companies participate in the bidding. Bonds are no guarantee for performance of contracts if the loss on the bond is less than the profit which an unreliable company could make by selling the product in a bullish market.
Non-performance of contracts is happening regularly in commodity markets, in particular at times when markets are volatile. Moreover, the long periods between the launching of tenders and the award of contracts affect the costs of the products. The longer those periods, the higher are the costs of bid bonds which suppliers have to provide. Given the delays inherent in the tender process, suppliers can be expected to build protection into their offered prices export trading house program may approximate several US dollars per tonne.
State entities tend to buy in large volumes, and ask the winning bidders to put up performance bonds, for up to 10 percent of the value of the goods.
Except for rice, where payment on arrival of the goods in the country, against presentation of documents CAD is common, they normally pay through letters of credit, with payment at shipment of the goods raising the necessary funds from local or international banks which benefit from government guarantees.
In some cases, they may obtain export trading house program credits from foreign suppliers. Payment arrangements can be more complex. For example, for Zambian government tenders, the supplier is supposed to deliver maize to a private mill, which has to pay for it at the official subsidized price. On top of the purchase price paid on delivery of maize to the designated mills, the supplier than has to obtain the subsidy payment, paid out of the general government budget - so he has to take both commercial and sovereign risk.
While the former can be managed through techniques such as warehouse receipt finance, the latter can be a serious obstacle. In all these cases, the buyers carry most of the burden of financing - at least until the goods arrive in the country, and often even longer than that because under government instructions, they have to sell on credit to local processors or export trading house program.
Some may be able to finance themselves through dedicated loans; others rely on expensive bank overdrafts. Only rarely are they able to raise offshore finance to fund their imports. Commercial banks in the exporting countries play, as can be expected, a large role in the payment flows of international food trade. The mechanisms they use will be further discussed in Chapter III.
One important way for them to provide such funding is through credit provided to international traders. There is a remarkable variety in the actual practices of commercial banks in this domain.
It is useful to distinguish three parts of the food trading cycle: With respect to pre-shipment finance, traders in OECD countries can generally finance the goods they hold with little or no difficulty. Elsewhere, pre-shipment finance can be a problem unless the government arranges suitable facilities as, for export trading house program, the Government of Thailand does. The lack of pre-shipment finance is one of the major bottlenecks for the intra-African grain trade: Once goods are charged onto a ship, finance can become difficult even for OECD origin countries.
Many international banks are not willing to have any exposure to cargoes on high seas: In addition to this, they generally take consignment of the cargo under a non-negotiable bill of lading. When the cargo is not pre-sold, only some of the few banks export trading house program in financing international agricultural trade are willing to finance the goods on high seas this applies particularly to rice, which often finds export trading house program buyer only after it has been on the ship for several weeks.
In general, banks which have such specialized operations provide credit lines to traders for up to 90 percent of the value of the goods, on which the latter can draw up to a certain limit, on the basis of export trading house program documents to be pledged to the bank.
Only a few banks engage in this business, because of the need to manage price risk, and then only with large international trading houses. Once the goods arrive, the financing burden is often entirely on the receiving country.
This export trading house program counts as country risk and corporate risk towards the trader for the international bank, which means that credit lines for such finance are limited export trading house program country and corporate credit lines.
The mechanisms are discussed in the next chapter. In some cases, international banks may also be willing to finance local importers, in particular if these can provide a government guarantee.