MECHANISMS FOR FINANCING IMPORTS OF BASIC FOODSTUFFS BY NET FOOD-IMPORTING DEVELOPING COUNTRIES AND POSSIBILITIES FOR IMPROVEMENT

Background paper

FAO Round Table

2 May 2003

Room XI

Palais des Nations

Geneva, Switzerland

The designations employed and the presentation of the material in this document do not imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD or FAO concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the definition of it frontiers or boundaries.

CONTENTS

Executive Summary

Introduction

I. Food imports of net food importing developing countries

A. The importance of food imports for net food importing countries

B. Major food trade flows

II. The major players in international food trade and their role in food trade finance

A. International trade houses

B. State trading entities

C. Private importers

D. State-owned food import agencies

E. Commercial banks

F. Export credit and credit insurance agencies

III. An overview of food import financing techniques

A. Overview of Food import Finance

B. Seller’s credit

C. Usance and deferred Letters of Credit

D. Bank loans to importers

E. Commercial paper

F. Factoring and forfeiting

G. Counter trade and Bilateral Payment Agreements

H. Warehouse receipt finance

I. Islamic finance

IV. Current food financing practices of net food importing countries

A. Open account sales

B. Documentary collection

C. Sales under Letter of Credit conditions

D. Transactions under Bilateral Payment Arrangements (BPAs)

E. Warehouse receipt finance

F. Intra-firm trade

G. Cash-paid imports by major corporate and government-owned entities

V. Weaknesses in international food trade financing systems

VI. Implications for the structure and operational modalities of an international
“revolving fund” for the financing of imports of basic food imports

Annex 1 Decision on measures concerning the possible negative effects of the reform

programme on least-developed and net food-importing developing countries

Annex 2 Production, exports and imports of cereals and vegetable oilseeds

Annex 3 Trade flows for wheat, maize, rice, palm oil and soybean oil

Annex 4 Major international grain and vegetable oils trading companies

Annex 5 Major state trading companies – food exports

Annex 6 Major state trading companies – food imports

Annex 7 Major export credit agencies and programmes relevant for world food trade

Executive summary

Food imports account for a large part of the total imports of many developing countries. This report looks at the current practices for financing the major food imports (of wheat, maize, rice, palm oil and soybean oil) of Least Developed Countries (LDCs) and Net Food Importing Developing Countries (NFIDCs). It examines the main entities involved in food trade and in food finance, the various national schemes set up to facilitate food finance, and the factors that determine whether certain transactions can be financed and under what conditions. It examines in more detail the major finance mechanisms as used for food import flows, and the constraints inherent in these mechanisms, with a particular focus of the vulnerability of financing mechanisms to price shocks. This issue figured prominently in the discussions on the Uruguay Agreement (which, among other things, led to the creation of the World Trade Organization), and gave rise to the Decision on measures concerning the possible negative effects of the reform programme on least-developed and net food-importing developing countries, also known as the Marrakesh Decision (see Annex 1). In the Marrakesh Decision, Ministers recognized “that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties.” This paper examines how food financing operates, how short-term difficulties which can impact on food security may occur, and what can be done about it.

While state entities still play a very important role in the export of rice and wheat, on the side of LDCs and NFIDCs, food imports have been mostly privatised. Contrary to the situation ten years ago, private traders and processors now dominate imports of cereals and vegetable oils. There are important exceptions, of course – in the Comoros, Cuba, Mauritius and Tunisia government agencies still have a monopoly on the import of many key foodstuffs, and in a number of other countries (Cape Verde, Egypt, Kenya, Malawi, Mauritania, Morocco, Sri Lanka and Zambia), government entities operate alongside private ones (in the case of Egypt, one such government agency, the General Authority for Supply Commodities, GASC, is perhaps the world’s largest grain buyer).

Government import agencies have a somewhat better position than private entrepreneurs in financing the imports of grains and vegetable oils. They are often able to pay cash on shipment (using their credit lines with local banks); or they may obtain credit from their supplier (e.g., because the supplier can obtain credit risk insurance against the risk of payment default); or they qualify for export credit schemes set up by exporting countries. This does not imply that their financing conditions are good – if their country’s financing position is poor, this has an impact on their access to finance (rates, tenor). They may thus be vulnerable to deteriorations in their environment (e.g., falling export revenue for the country as a whole) and in their situation (e.g., the need to buy more in value terms, due to either the need to buy a larger volume, or increased world market prices).

Private traders and processors generally do not have easy access to import finance, unless if they are part of an international group and the financing is an intra-firm transaction. Processors are slightly better off than private traders: their large fixed assets tend to give them access to some form of credit, either by the seller (again, this may be possible because the seller can obtain credit insurance), or by a local or international bank. For private traders, the situation can be difficult. They often have little track record, and few “hard” assets. If they have lines of credit with their local banks, these often have to be collateralised, and costs are high; similarly, if they wish to open a letter of credit, they may have to provide 50-100% collateral. In some cases, they can benefit of government-to-government “umbrella” arrangements (such as the Palm Oil Credit and Payment Arrangements set up between Malaysia and a number of importing countries, under which importers can obtain a credit for the import of palm oil just by making arrangements with a local bank). In other cases, they have to resort to warehouse receipt finance, a credit form which is highly suitable to risky environments but can be costly.

Financing conditions differ from country to country, from commodity to commodity and from importer to importer. These differences are linked to the physical differences in trade transactions (for example, wheat can most economically be transported in large vessels, while rice is often shipped in containers), to the size of market players (e.g., rice is often traded as a finished product ready for sale to customers, which means that small traders can buy it; while wheat has to be milled, which requires a rather expensive processing plant), and to the particular state of a country’s banking system and riskiness (e.g., in some countries, there are simply no local banks that have uncollateralized lines of credit with foreign banks).

For example, in rice trade, payment on a cash-against-documents basis is common, and letters of credit are rare; for the other major foods covered in this report, the opposite is the case. Much palm oil is traded under the government-to-government “umbrella” arrangement already mentioned above, as is a large volume of rice; but this is rare for other commodities. In some countries, credit may be relatively abundant, or governments allocate credit priority to food importing companies; in others, credit is scarce, and importers may be faced with a real interest rate in the double-digit range. And even within a country, some importers (e.g., processors, state-owned entities, subsidiaries of international firms) may have easy access to credit, while others have poor access.

Credit relations have two components: who provides the finance; and who takes the risks. Thus, credit relations can be constrained in two regards: finance capacity, and risk-taking capacity. With respect to finance capacity, there is a North-South divide: capital is abundant and cheap in developed countries, while in most developing countries, it is scarce and expensive (with prime rates in real terms in many cases in the double digit range). There may also be a divide within the country, if the government operates a credit rationing system under which certain priority companies or sectors have preferential access to credits. Risk-taking capacity is a major constraint both between developed country financiers and developing country counterparties, and between developing country banks and their local clients. The burden of food finance can be shifted from the importing country to the exporting one, but this requires the financier in the exporter’s country to take on more risk.

Thus, access of food import finance will be primarily constrained by risk carrying capacity, rather than by an absolute lack of finance. If one wishes to tackle food import finance problems, one could provide direct credits to the importer; or one could create the conditions under which international financiers are able to provide such credits, directly or more likely, through one or more intermediaries such as local banks. The latter is probably more cost-effective and sustainable in the long run; the first is easier in the short run, but its sustainability is doubtful. Providing general balance of payment support may in some cases have very little effect, and even in the best of circumstances would be a very crude and inefficient instrument to tackle food import finance constraints; rather, one needs targeted measures. In other words, one of the possibilities mentioned in the Marrakesh Decision, drawing “on the resources of international financial institutions under existing facilities” in order to deal with short-term problems in financing normal levels of commercial imports”, would seem to be impractical.

It is useful, then, to consider the main constraints for more efficient food import finance. These constraints are at the national level (the cost and scarcity of finance, and the credit relations between the local banks and food importers), and at the international level (the relations between the importers and local banks on the one hand, and international traders and banks on the other).

If finance is indeed costly and scarce locally, then importers should try to benefit from extended payment terms for their imports, or otherwise “extend” international credit to their own local operations. This is often difficult because of the perceived risk of such finance, and the difficulty of managing such risks. Even local banks often feel uncomfortable with taking the credit risk of food importers. In many cases, they will insist on full cash collateral before opening any international payment instruments. The underlying constraint here is the lack of ability of the local bank to manage the credit risk of food importing clients, which is made worse by an inappropriate legal and regulatory environment for warehouse receipt finance. Often, local banks require real estate or cash collateral from their clients, which of course means that their credit availability is constrained and cannot easily be adjusted to the increasing financing needs.

Developing country clients, whether they are importers or banks, are generally considered as risky counterparts by developed country traders and banks. Generally, the credit exposure that they have has to be provisioned against (under the rules of their Central Bank), which makes such credit costly. Also, both international traders and banks have credit ceilings for their exposure to developing country clients – expressed in nominal amounts, which makes them difficult to adjust to increased financing needs. In principle, they can lay off credit risk on the secondary market, but this market is generally not very deep, which means that, if more than a certain amount of paper from a given bank or country is placed on the market, the costs of using the secondary market can quickly rise.

These various constraints reinforce one another. If one wishes to make the food import financing system for LDCs and NFIDCs more efficient, one can consider an integrated programme of interventions. Support should start with local capacity-building, enabling local banks to become better counterparties for international banks (which will lead to higher credit ceilings), and making them familiar with warehouse receipt finance (the financing form that is the most resilient to food price increases, and provides the largest scope for upcountry finance for importers). These banks should also be given more access to advice on matters related to commodity finance – international organizations, with support from the donor community, could consider enhancing their advisory functions. Capacity-building should also encompass government officials (so that they know which rules and regulations hinder food import finance, and how these can be improved) and potential service providers such as collateral managers. Capacity-building is essential: without it, even if one enhances the capacity of local banks to obtain offshore credit lines, local importers may still not be able to meet the bank’s collateral requirements for, say, opening a letter of credit.

Furthermore, one can provide extra country risk capacity. One way of doing this is to provide extra insurance capacity, e.g., low-cost sovereign risk insurance for goods in stock. One can also provide extra liquidity on the secondary market, providing for example forfeiting facilities, or buying food-trade-related paper from certain countries once the implicit margin on these purchases becomes sufficiently high. Another possibility is to provide currency convertibility risk coverage. On a bilateral basis, Bilateral Payment Agreements can shift country risks from an exporter to his government.

One can also provide extra bank credit risk capacity. E.g., an international agency can add a guarantee to the avals provided by local banks, or provide insurance for local bank credit risk. The range of collaterals accepted by international banks for giving credit lines to local banks could perhaps be increased by new insurance facilities.

In all these cases, one works with the system – smoothing the path for certain forms of finance, opening the way for others. In many cases, one can use leverage to good effect (relatively low-cost actions can make a lot of extra finance available, or lead to considerable reductions in financing costs). One does not have to create completely new mechanisms nor introduce market-distorting practices – rather, one extends the benefits of an efficient financial market to food importers in developing countries and, by implication, to the hundreds of millions of food consumers in these countries.

Pursuant to the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Countries, 17 net food-importing countries made a proposal for the establishment of a “revolving fund” to ensure that adequate financing is available to LDCs and NFIDCs during times of high world market prices. The concluding chapter briefly elaborates upon how such a fund could be structured so that it requires no large new bureaucracy, is cost-effective, is efficient in enabling needy countries to obtain timely finance for food imports, and helps to improve the international trade in foods.

It is argued that if a “revolving fund” is to enable sufficient imports during times of high world market prices (or if a reduction in food imports at concessional terms (e.g. food aid) makes larger imports at commercial terms necessary) it needs to reach the private sector. However, as argued above, the private sector is already constrained in their access to finance. They normally need to buy on “deferred payment” terms, meaning that their foreign suppliers need to accept the credit risks of developing countries’ traders. There are several ways (described in detail in the paper) in which the suppliers can manage this credit risk exposure, but ultimately, they are constrained through the total credit risk that the market can absorb. Therefore, the currently available private sector facilities for financing developing country importers meet absolute constraints, and cannot be adapted, except at great pain (large increases in country risk premiums and thus, import costs), to sudden increases in financing needs.

Given these constraints imposed by market mechanisms, a special facility to deal with food trade financing needs in times of crisis can be useful. However, such a facility should aim to relieve import needs when they arise, rather than reimbursing governments many months after the problems arise. To make finance available in time, the “revolving fund” can rely on objective trigger mechanisms, based on world market food prices and known reductions in concessional exports to countries. These factors are not influenced by the policies of the LDCs and NFIDCs which would benefit from the fund’s support, and thus, no review of the food policies of prospective borrowers would be required.

Furthermore, the fund should rely on disbursement modalities that ensure that, firstly, the companies that actually import the food benefit from the financing and secondly, funds are actually used for food imports and not diverted to other operations. Building on the existing modalities of food trade and its financing makes this possible. Current contractual practices and the involvement of banks at several stages of the food trade financing chain give a good basis for a “revolving fund” to provide targeted finance. On this basis, one can construct fund disbursement mechanisms that make it virtually certain that funds will be used for food imports by experienced local companies with a good track record. How this can be done is discussed in some detail in the paper.

It is also essential to ensure that funds are reimbursed. International food trade is not without its problems – contract defaults or even frauds occur – and at a national level, it has often been difficult for food trade financiers to recuperate their funds. By shifting part of the financing risks to banks, the capacity of banks to identify potential problems and prevent them can be optimally used. With sovereign guarantees further backing national reimbursement obligations, serious payment defaults can be made unlikely.

As the proposed mechanism builds on existing information and the market’s current contractual habits and financing mechanisms, and it requires no policy review process, a “revolving fund” of this nature is easy to administrate. It would thus require only a small secretariat. The “revolving fund” itself would not have to be paid-up; rather, donor countries can give “conditional guarantees” against which the fund could obtain financing when required. The overall cost of ensuring that eventual increases in food import bills resulting from the implementation of the WTO agreement will not endanger the food security of LDCs and NFIDCs is thus low. Moreover, it is a temporary cost and there are important positive multiplier effects: the secretariat of the “revolving fund”, by working with national counterparts to improve food financing mechanisms, would create a better functioning of the food sector, and over time, will make itself and the facility superfluous.

Introduction

International food trade is important for developing countries – while a relatively large share of exports of many of these countries consists of agricultural commodities, they are in fact principally net importers of basic food products, and spend a major part of their export revenue on such imports.

So many developing countries are concerned about the risk of increasing world food prices, and about the risk that they would have to import more food on commercial terms because food aid is reduced. Both may well happen as a result of the Uruguay Round, which, at some time in the future, may lead to considerable declines in agricultural subsidies in developed countries; this, in turn, would normally lead to lower production (leading to higher prices and potentially, less food aid) as well as to lower stocks (which would lead to more volatile food prices). This issue figured prominently in the discussions on the Uruguay Agreement (which, among other things, led to the creation of the World Trade Organization), and gave rise to the Decision on measures concerning the possible negative effects of the reform programme on least-developed and net food-importing developing countries, also known as the Marrakesh Decision (see Annex 1). In the Marrakesh Decision, Ministers recognized “that during the reform programme leading to greater liberalization of trade in agriculture least-developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.” They also recognized “that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties.”

Financing is indeed a major issue in food trade. The way that importing countries finance their food imports is important in two respects. Firstly, if they have difficulties financing, they may be unable to procure the needed foodstuffs. Secondly, and more frequently, if they obtain financing at terms that are relatively costly, this will lead to higher costs for consumers, and a higher import bill for countries.

Over the past decade, most government-owned food import agencies have been dissolved. Some have been exposed to competition and now function alongside private sector traders. Only in very a few net food-importing countries have state enterprises remained in a monopoly position in food imports. Thus, the structure of food imports in developing countries is now dramatically different from that which prevailed in the early 1990s. By and large, private traders are now responsible for importing food.

Where food imports take place within a private sector framework, governments tend to take a hands-off approach, leaving it to private traders and processors to procure foods on the international market, and finance its purchase. Moreover, in the absence of any government intervention, import demand for food may lead to a change in the demand for finance. First, large tenders covering several months’ needs will no longer be needed; second, the absence of government-backed financing will be an incentive to shift from purchasing large cargoes to smaller ones for immediate delivery. The local, private traders and processors may be large in local terms, but tend to have little track record, and a limited financial strength. They may have difficulty in obtaining bank financing, and have to depend heavily on their own small working capital and on credits provided by their suppliers. In any case, finance will be a bottleneck for their operations, and can increase to an important extent the costs of trade.

Food importers have an interest in better understanding the various financing modalities that are in principle available to them, either to access new, alternative financing markets, or to negotiate better with their suppliers.

This paper addresses the following issues:

1. Current systems for the financing of the major international flows of wheat, maize, rice, soybean oil and palm oil to importing developing countries (this implies that it will not only cover the financing of North-South trade flows, but also of South-South flows). The paper will describe specific country systems and experiences, with a focus on the current systems for financing the major commercial food imports of net food-importing developing countries, in terms of:

a. Main actors (traders, developed country and developing country banks, export credit agencies, state-owned and private importers, local government entities involved in food financing, etc.)

b. Main mechanisms (clear lines of credit, bill discounting, export credit guarantees and insurance, and more structured techniques such as Islamic finance, counter trade and warehouse receipt finance)

c. Factors influencing financing conditions, and best practices.

2. Identify weaknesses and problems in these current systems, including legal and regulatory constraints.

3. Identify, on this basis, measures that could be taken by the private sector, national governments and the international community to improve food import financing. In this context it also examines proposals for the establishment of a “revolving fund” to ensure that adequate financing at concessional terms is available to LDCs and NFIDCs during times of high world market prices.

It should be noted that food trade finance is just a part of worldwide trade finance, and while there are factors that specifically influence food trade financing (e.g., price developments); such finance is also affected by other developments in trade finance. For example, the new Basel Capital Accord (Basel II), due to come into force in 2006, will have a major effect on the costs of financing for developing countries (particularly for the “straightforward” forms of finance like bank lines of credit), and is thus likely to make food import finance both more expensive, and more difficult to obtain. These developments, however, are not discussed on this report.

Chapter I

FOOD IMPORTS OF NET FOOD IMPORTING DEVELOPING COUNTRIES

A. The importance of food imports for least developed and net food importing countries

There are 49 Least Developed Countries (LDCs), and 23 other so-called Net Food Importing Developing Countries (NFIDCs). This group has been singled out as worthy of special attention in the process of world food trade liberalization, as the markets for the food crops that are typically imported by these countries are likely to be affected much more strongly than the markets for the commodities that they export.

These concerns were recognized at a political level, and thus, the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed and Net-Food Importing Developing Countries states that:

“Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least-developed countries and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.” (See annex 1)

As Table 1 shows, food imports are indeed important for many of these countries. Of the 58 countries in this group for which the data are available:

• 36 spent, in 1994-1998, more than 10% of their “available” hard currency (revenue from the exports of goods and services, minus debt service) on food imports;

• of these, 23 countries (of which 20 in Africa) spent more than 20%;

• And out of this group, eight spent more than 40%: Cape Verde, Comoros, Guinea-Bissau, Haiti, Mauritania, Mozambique, Rwanda and Sierra Leone.

Most of the food imports of these countries consist of bulk foods: wheat, maize, rice, vegetable oils (with palm oil and soybean oil accounting for the major share), and sugar. Imports of dairy products, fruits and vegetables and meat are also important. Tables 2 and 3 show the import values for LDCs and NFIDCs, for 1997 to 2001 (import values by country are given in annex 2). Cereal imports account for more than half of the total food imports of LDCs, and for a bit less than half of the food imports of NFIDCs. Vegetable oils account for one sixth of food imports of LDCs, and around one tenth of food imports in NFIDCs (if one includes soybeans, which are imported and then processed locally into oil and meal).

Food imports into developing countries consists, in general, of a mix of food aid grants, food trade on concessionary terms (e.g., sales under the US government’s PL480 title I programme, which have repayment terms up to 30 years), and commercial imports. This report is mostly concerned with commercial imports and the conditions for their finance, but it is worth noting that, assuming a fixed volume of food imports required by the country, increased food trade financing needs can be the result of a reduction in food aid grants and concessionary sales, and of increased world food prices. Indeed, the two often go together: both the USA and the EU have budget allocations for their major food aid programmes, so if prices increase, less food can be donated.

Table 1

The importance of food imports in the Least Developed and Net-Food Importing Developing Countries

	Africa	Asia & Pacific	Latin America & Caribbean
Food imports / (exports of goods & services minus debt service) < 10 % (total: 22 countries)	Angola Botswana Chad Côte d’Ivoire Equatorial Guinea Madagascar Mauritius Togo Tunisia	Cambodia Lao PDR Maldives Nepal Solomon Islands Sri Lanka Vanuatu	Barbados Dominican Republic Honduras Jamaica Trinidad & Tobago Venezuela
Food imports / (exports of goods & services minus debt service) between 10 % and 20% (total: 13 countries)	Benin Burundi Central African Republic Kenya Mali Morocco Tanzania Uganda	Bangladesh Myanmar Pakistan	Peru St. Lucia
Food imports / (exports of goods & services minus debt service) > 20 % (total: 23 countries)	Burkina Faso Cape Verde Comoros Djibouti Egypt Ethiopia Gambia Guinea Guinea-Bissau Lesotho Malawi Mauritania Mozambique Niger Rwanda Senegal Sierra Leone Sudan Zambia	Afghanistan Samoa Yemen	Haiti
Lack of data (total: 14 countries)	DR Congo Eritrea Liberia Sao Tome and Principe Somalia Togo	Bhutan Jordan Kiribati Tuvalu	Cuba Dominica Saint Kitts & Nevis Saint Vincent and the Grenadines
Total	42	17	13
Source: based on FAO, “Towards improving the operational effectiveness of the Marrakesh Decision on the possible negative effects of the reform programme on Least Developed and Net-Food Importing Developing Countries” (mimeo), 21 March 2001. Data refer to the average for 1995-1998 or the latest four years available.

Table 2:

The major food imports of Least Developed Countries (US$ 000)

Table 3:

The major food imports of Net Food Importing Developing Countries (US$ 000)

	1997	1998	1999	2000	2001
Total merchandise imports	107,352,272	110,589,549	107,511,852	119,948,429	115,177,544
Total food & animals	12,509,888	12,617,854	11,789,238	12,472,760	12,584,932
Wheat & wheat flour	3,151,620	2,953,986	2,489,116	2,619,804	2,640,565
Maize	1,349,701	1,125,088	1,007,476	1,292,979	1,283,357
Rice	688,200	688,143	706,453	604,193	788,502
Palm oil	973,543	1,195,628	1,192,056	607,652	519,099
Soybeans	213,509	156,942	128,840	183,006	242,164
Soybean oil	585,622	820,705	828,499	554,479	522,122
Sugar	1,152,563	1,186,339	954,023	1,043,146	1,018,876
Dairy products & eggs	1,180,319	1,269,404	1,129,223	1,110,667	1,140,524
Fruits & vegetables	1,172,338	1,249,969	1,388,529	1,428,411	1,430,659
Meat & meat preparations	620,289	656,953	665,312	662,114	511,165
Source: figures drawn from the FAOSTAT Agriculture & Food Trade database.

B. Major food trade flows

World cereals trade fluctuates between 200 and 270 million tons a year, out of a total production of about 2 billion tons.¹ This represents, depending on price levels, US$ 25 to 40 billion. The main cereals are wheat, maize and rice. World cereals production is geographically very much concentrated, with Asia representing about half of world production (with China and India representing about 65% of Asia total production). This is followed by the United States with a world production share of 16%, the EU with 10% and Latin America with 7%.

Production volumes of wheat, maize and rice are similar, between 550 and 600 million tons for each. But the situation is different when it comes to comes to international cereals trade, where wheat dominates (with a share of 42-43 % in volume terms) and maize (30-31 %). Over the period 1995-2001, on average 18.5% of wheat production was internationally traded, 13% of maize, and only 5% of rice.²

The United States is the principal exporter of cereals, accounting for one third of world exports. Asia constitutes the second exporting zone, followed by the EU, Latin America and Oceania, all with relatively similar market shares. Seven countries account for 80 to 83 % of world exports: United States, EU, Australia, Argentina, Canada, China and Thailand. Imports are also concentrated: Asia is the principal zone of cereals imports, followed by Latin America and Africa.³

With respect to oilseeds and vegetable oils, international trade is growing rapidly, at an annual rate 3 - 4 % over the past decade. It has reached a volume of 60 million tons, with soybeans and soybean oils accounting for almost three quarters. The major suppliers are the United States, Brazil and Argentina, which account for roughly 80 % of worldwide exports.

Annex 2 provides statistics on production and trade of cereals and vegetable oils, including imports of wheat, maize, rice, palm oil and vegetable oils by LDCs and NFIDCs. Annex 3 describes the major food trade flows towards LDCs and NFIDCs.

Chapter II

THE MAJOR PLAYERS IN INTERNATIONAL FOOD TRADE AND THEIR ROLE IN FOOD TRADE FINANCE

This chapter describes the major players in international food trade involved in developing country imports, and the ways in which they provide or facilitate food import finance.

A. International trade houses

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 strongly diminished with the reduction of the number of intermediaries in the commercial chain, they still play a role, particularly in facilitating the operations of traders.

International trade houses ensure the regrouping of cereals, their storage, their processing and their transport (in particular maritime transport) – their job involves much more than the simple purchase of cereals or oils in one place and their sale in another, and their operations are profitable not because of such logistical functions, but because of their overall management of their trading positions (e.g., their arbitrage between physical and futures markets). As part of their operations, they provide a wide array of financing solutions to their commercial counterparties. Their common financing practices are the identical across commodities. For example, in the rice market, it is common that traders 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, in the case of wheat, maize, soybean oil and palm oil, traders tend to sell the grains before it is being loaded for exports, with the effect that the buyer, not the trader, in effect carries the financing charges of the goods in transit to the buyer.

Most of the large food trading enterprises are privately-held, and information on their operations can therefore be difficult to find. The same international trade houses are involved in trade in all of the major grains. In maize and soybeans, where they compete with major state 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 (and these three companies are also involved in trade from countries other than the US). In international wheat and palm oil trade, their role 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, and there is a high turnover in the trading community - prices are highly volatile, and trade is therefore relatively risky. As a consequence, the turnover in rice trading companies is quite high – companies that dominate 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.

B. Grain-exporting state trading entities

The Uruguay Round Agreement defines State Trading Entities (STEs) as “governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive rights or privileges, including statutory or constitutional powers, in the exercise of which they influence, through their purchases or sales, the level or direction of imports or exports.” In other words, STEs do not need to be state-owned. Grains and dairy products are the chief exports of the agricultural STE’s reported to the WTO - 16 STEs export wheat and 10 export dairy products. The following are the main STEs involved in grain exports:

• In wheat trade: the Canadian Wheat Board and Australian Wheat Board together account for some 30-40 % of world wheat exports. The Trading Corporation of Pakistan sometimes also export wheat.

• In maize trade: the Jilin Grain Group Import & Export Co. is a major maize exporter. The China National Cereals Oils and Foodstuffs Import and Export Corporation (COFCO) also exports maize.

• In rice trade: STEs account for a major part of world rice exports. Vietnam’s Northern and Southern Food Corporations (Vinafood I and II) dominate the country’s rice exports, alongside a number of other government entities and private enterprises. In China, COFCO is the largest rice exporter, accounting for one tenth of world trade. The Grain Division of the Department of Foreign Trade of Thailand has seen its share in the country’s exports steadily declining, to less than 10% of the total. Other STEs involved in rice exports include SunRice, previously known as the Ricegrowers’ Cooperative Ltd., which has the monopoly on Australia’s rice exports as agent for the Rice marketing Board for the State of New South Wales; China’s Jilin Grain Group Import & Export Co.; Myanmar Agricultural Produce Trading; India’s Project and Equipment Corporation; and the Trading Corporation of Pakistan.

State Trading Entities are not important in vegetable oil exports. Annex 5 contains a description of the various major grain-exporting State Trading Entities.

In the case of rice, much of the exports by STEs are 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. This procedure is also used for China’s maize exports.

The situation for wheat sales by STEs is a bit different: while most of the sales are still against letters of credit (with payment to be made on presentation of the shipping documents), cash against documents sales are more common, and both the Canadian and Australian Wheat Boards have a number of credit programmes.

Canada’s credit programmes are the most elaborated – even though 85-95 of its annual sales are still under cash against documents or letter of credit arrangements. The CWB has two main programmes:

q The Credit Grain Sales Program, for sales to government agencies or other customers who can provide a sovereign guarantee of repayment to the CWB from their Central Bank or Ministry of Finance. In 2000/2001, this accounted for C$ 223 million of credit sales, compared to C$ 372 million the previous year. Repayment 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. Some of the CWB's credit customers in the past have included state companies in Algeria, Brazil, China, Egypt, Ethiopia, Haiti, Indonesia, Iran, Iraq, Jamaica, Pakistan, Peru, Poland, Russia and Zambia. The federal government fully guarantees the credit receivables of the CWB, and the CWB does not pay a fee for this guarantee. Credit limits for the CWB are set by the government, after taking into account the advice 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.⁴ In the case this leads to a partial debt write-off, the Government (Ministry of Finance) pays CWB the sum concerned.

q The Agri-food Credit Facility, a programme started by the EDC in 1995 to cover the credit risks of sales to private importers which cannot provide a guarantee from their government; CWB accounts for the bulk of the use of the facility. In 2000/2001, this accounted for C$ 159 million of its credit sales (either directly or through accredited exporters), compared to C$ 146 million the previous year. It was set up as a facility “to compete with foreign export credit programs, or to combat those programs”.⁵ 98% of the credit risks of these transactions are covered by a guarantee from the Canadian government (again, CWB does not pay for this guarantee). There are no individual country ceilings for these transactions, but rather, each transaction is considered on a case by case basis. This facility falls under the Export Development Corporation’s credit insurance programme, which has allocated 70% of its C$ 1 billion ceiling to the CWB.

The level of coverage provided by the Government or the Export Development Corporation ranges from 100 per cent to 92 per cent depending on the type of customer and the repayment term of the credit. The CWB is also able to arrange credit sales outside of these programmes. For example, in the late 1990s, it made sales to Indonesia and South Korea⁶ in which the credit risk was not covered under one of the above programmes, but was assumed by a commercial bank, without recourse to the CWB. This was basically a receivables 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 Export Development Corporation (EDC). Another example is its sale through local warehouses: CWB can move wheat to warehouses in the importing country, and then deliver the wheat to a local buyer against receipt of an acceptable credit instrument, or cash payment.

Even though credit sales account for the smaller part of export sales by the Australian and Canadian governments, these countries’ 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 times”. For example, in Australia, the Cabinet may decide to make credit for grain exports available though a special "national interest window"; it did so in 1998, providing additional export credit insurance cover for exports of around 4 million tons of Australian wheat to Indonesia and the Republic of Korea. According to Australia’s Minister of Trade: "This decision clearly demonstrates the Government's commitment to the Australian wheat industry and will ensure that AWB Limited has the marketing tools at its disposal to build on the successes of 1997-98." ⁷

C. Private importers

The world-wide 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 changing 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 strongly.

With a small number of exceptions (discussed in section D. below), by and large, private traders are now responsible for importing food. They tend to get little 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 the large majority of cases, the private traders are locally owned; but there have been a few large international traders (e.g., Singapore-based Olam) which 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. The local, private traders may be fairly large in local terms, but tend to have little track record (until a few years ago, the government arranged food imports), and limited financial strength. They are generally diversified, importing the whole range of bulk food commodities, and often other products as well.

In some cases imports are in private hands, but the Government still keeps 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.

D. State-owned food import agencies

Over the past decade, most government-owned food import agencies have been disbanded; some have been exposed to competition and now function alongside private sector traders (e.g., Mauritius); and very few (discussed below) have remained in a monopoly position. In some countries (particularly, in North Africa), trade has been privatized, but the government retains an “umbrella” function over the imports of the key commodities (cereals, sugar, vegetable oils), providing (to some extent) financing, imposing prices, and giving subsidies. Annex 6 provides a description of 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.⁸ They tend to buy in large volumes, and ask the winning bidders to put up performance bonds (for up to 10% of the value of the goods). Except for rice (where payment on arrival of the goods in the country, against presentation of documents -“Cash Against Documents-, is common), they normally pay through letters of credit, with payment at shipment of the goods.⁹ If so, they normally raise the necessary funds from local or international banks, benefiting from government guarantees.¹⁰ In some cases, they may obtain direct credits from foreign suppliers. In all these cases, the buyers clearly 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 distributors. In some cases, these entities may be able to finance themselves through dedicated loans; in others, they rely on expensive bank overdrafts. Only rarely are they able to raise offshore finance to fund their imports.

E. Commercial banks

Commercial banks in the exporting countries play, as can be expected, a large role in the payment flows of international food trade. They also provide a large part of the credit that enables the bulk food imports by NFIDCs and LDCs. The mechanisms they use will be further discussed in chapter III.

One important way for them to provide such funding is through their credits to international traders. International traders tend to leverage their own capital to a strong extent – their annual turnover may be 20 times or more as high as their capital. It is then more appealing for banks to finance against the goods that the traders are handling rather than just against the traders’ balance sheet. But there is a remarkable variety in the actual practices of commercial banks in this domain. It is useful to distinguish here three parts of the food trading cycle: pre-shipment; on the ship; and post-shipment.

• With respect to pre-shipment finance, as long as they are in OECD countries, traders can generally finance the goods they hold with little or no difficulty. In other countries, pre-shipment finance can be a problem unless when the government arranges proper facilities (as, for example, the Government of Thailand does). The lack of pre-shipment finance is one of the major bottlenecks for intra-African grain trade: it is difficult for local traders to obtain the credit needed to collect the grains (or oilseeds) destined for exports.

• 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: they will provide pre-finance only if the goods are already sold, and a L/C has been opened by acceptable foreign banks (which, in effect, means that their finance is against their available country and bank credit lines). In addition to this, they generally take consignment of the cargo under a non-negotiable bill of lading.

But when the cargo is not pre-sold, only some of the few banks specialized in financing international agricultural trade are willing to finance the goods on high seas (this applies particularly to rice, which often finds a 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% of the value of the goods), on which these traders can draw, up to a certain limit, on the basis of shipping documents (to be pledged to the bank). If commodity prices increase strongly or traders experience a slow-down in their turnover (as has been the case, for example, in West Africa since September 2002, when problems in Côte d’Ivoire led traders to re-route their rice cargoes to other ports which quickly became congested), the credit limits for traders can become a constraining factor for international trade. In some cases, the bank may resort to a “repo financing”, a mechanism in which the bank becomes the owner of the goods, with an option of the trader to buy them back once they arrive in the port of destination (in this case, the credit exposure does not count towards the trader’s credit limit) – only very 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. The main exception is warehouse receipt finance, in which international traders extend their access to international finance into the country (banks generally increase their “margin”, the share of the value of the goods that the trader has to cover himself, e.g., to 15-20%). But this still counts as country risk and corporate risk (towards the trader) for the international bank, which means that credit lines for such finance are limited by 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

Commercial banks in importing countries are very involved in the payment flows of food financing. The two main payment mechanisms in international food trade are documentary collection, and Letters of Credit (L/Cs). In the case of documentary collection – which can be an acceptable payment procedure in the case of large buyers - they will simply follow the payment instructions of the buyer. If a reputable local bank adds its aval on the terms draft of the documentary collection, the international trader, it his bank, can sell the draft relatively easily on the secondary market (but within limits in the value of the drafts that they can place – the secondary market’s ability to take on country or bank limits is often constrained). In the more prevalent case of L/Cs, they will open a letter of credit on behalf of the importer and in the favor of the seller. Such L/Cs ensure that if the exporter ships the products and delivers the bank a number of documents demonstrating shipment according to the contract (this list of documents is specified in the L/C), the bank will make the payment.

However, while developing country banks play a major role in ensuring the payment flows, they are much less active in providing credits, for a number of reasons:

q The counterparty risks of their own domestic importers may be, somewhat ironically, more difficult to manage for them than for foreign banks, because they do not have access to local credit insurance agencies. For example, US exporters can sell to a foreign buyer against a simple promissory note, indicating that some time in the future the buyer will pay. The exporter will be able to insure 65% of the implied payment risk under a programme of the US Department of Agriculture; in the importing country, however, it is likely that there is no way for a local credit provider to obtain such insurance.

q Interest rates in most developing countries are rather high, and local banks can simply not provide finance at attractive rates, in local or in foreign currency.

q In a number of countries, governments have decided that local banks need to be “protected” against their own imprudence, and do not allow them to open L/Cs for imports unless when they receive a 100% cash collateral from the party that applies for the L/C (usually, the importer); and in some countries, the importer may be obliged to provide hard currency collateral, not just the local currency equivalent. This may seem a remarkable intervention for a government to make (in effect, it forces the local importer, whose cost of capital may be very high, to start financing the goods that he is importing many weeks before he actually receives them, and indeed, perhaps even before these goods are shipped), but it has its roots in the arguably poor lending practices of local banks in the recent past.

Nevertheless, domestic banks may provide import finance to some of the larger food importers, in particular if these importers are processing plants (and thus, have a lot of physical collateral), or if they are state entities (in which case the banks may have little choice in the matter). Contrary to the practices of international banks in providing finance to food importers, such finance, where it exists, appears mostly to be balance sheet finance – in other words, the banks take a pure credit risk on the borrower – rather than finance secured by the underlying flows of food products.

F. Export credit and insurance agencies, and export-import banks

All the large western countries support their agricultural exports through a mix of subsidies, export credits and export credit insurance. The ECAs (Export Credit Agencies) and ExIm (Export-Import) banks are export-promoting agencies from the exporter’s country run mainly by the government (but they can also be semi-governmental or private agency).

Export credits and export credit insurance have often been a way to provide hidden subsidies to exporters (although naturally, some governments claim they are merely commercial programmes designed to overcome credit bottlenecks in export trade). Negotiations in the framework of the General Agreement on Tariffs and Trade (GATT) and then, the World Trade Organization (WTO) have curtailed the possibilities of governments to give direct subsidies, which has made these indirect methods more important. As noted by one observer, “With export subsidy programs limited by WTO commitments and food aid constrained by budget resources and other factors, export credits are in effect, the only significant policy tool to increase US exports.”¹¹

The Uruguay Round did not establish effective disciplines on export credit programs, but made a commitment to future work in this area (paragraph 2 of Article 10, Agreement on Agriculture):

Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or insurance programmes only in conformity therewith.

Such work started immediately after the closure of the Uruguay Round, in 1994, in the framework of the Organization of Economic Cooperation and Development (OECD). Through discussions in the OECD, to reduce the likelihood of excessive competition between OECD countries by means of export credits and credit insurance, the OECD export credit agencies had already adopted a “Consensus Agreement” (the Arrangement on Guidelines for Officially Supported Export Credits) which, however, does not apply to the agricultural sector.¹² The discussions now focused on how to adapt the principles to agricultural export credits and credit insurance, but so far, there has been no agreement among the OECD governments.

For the time being, the WTO agreement does not constrain export credit practices for agricultural products. Export credits for industrial products are regulated by the WTO Agreement on Subsidies and Countervailing Measures (SCM), which prohibits export subsidies, including "the provision by governments ... of export credit guarantee or insurance programmes ... at premium rates, which are inadequate to cover the long-term operating costs and losses of the programmes" (SCM Annex I paragraph j) as well as subsidized interest rates (SCM Annex I paragraph k).

However, an export credit practice will not be considered an export subsidy if the export credit arrangement is in compliance with the OECD agreement. Agricultural export credit and credit insurance are likely to be included during the Doha round of negotiations¹³, unless if the discussions in the framework of OECD prove more successful; and at any rate, this is likely to lead to stricter rules on such credits and insurance.¹⁴•

The USA is the major provider of official export credits and credit insurance for agricultural exports, but it is also commonly used in other OECD countries and is increasingly important in developing markets. In countries where it exists, ECAs often support around 10-20% of the country’s exports. Out of the US$ 300-350 billion worth of short-term trade insured each year, 80% covers consumer products, foodstuffs, raw material and commodities.

ECAs and ExIm banks generally cover political risk, such as war or political disturbances in the importer's country, blockage or delay in the transfer of funds and imposition of import restrictions or cancellation of the import license. In many cases, they also cover commercial risk: coverage is provided in the event the importer becomes insolvent, fails to pay, or refuses to take delivery of goods for no justifiable reason.¹⁵

They use various credit and credit insurance systems. The simplest is that used by the United States in its PL480 programme, where it gives a direct long-term credit at preferential rates to allow a foreign government to buy grains and other foodstuff in the US. But the most prevalent system is that of export credit insurance, where an export credit agency (government-owned, or private) covers the credit risk that a seller takes towards a buyer. In most cases, the credit insurance will cover both commercial and political risk; as a corollary to this, it is mostly available for sales to large, well-reputed buyers. Such credit insurance is provided by ECAs and ExIm banks in Australia, Brazil, Canada, France, Germany, Thailand and the United States. Where the ECA is a private entity, the government may re-insure it for certain large risks, if it feels the national commercial or political interest is at stake (there are such special re-insurance windows in Australia, France and Germany).



Another common system focuses on the seller’s bank. As in the previous scheme, the seller provides a credit, e.g., through a promissory note, to an overseas buyer. He does this under a credit line provided by his bank; his bank, in turn, can refinance itself cheaply with a government bank (the case in Brazil, Pakistan and Thailand), or can obtain a credit risk coverage from a government agency (e.g., the case of Malaysia’s ECR scheme or the United States’ SCGP programme). In these schemes, the seller retains a large credit risk vis-à-vis the buyer: he has to reimburse his bank all or part of his credit (e.g., 35% in the case of the US SCGP programme) even if the buyer defaults.

In a third model, the credit scheme works through the buyer’s bank. In this case, one or more banks in the importer’s country are approved as credit counterparties under a scheme from the exporting country’s government. These banks can obtain a credit line either from a commercial bank in the exporter’s country (the case of the United States’ GSM scheme, and reflected in figure 3); or directly, from a the exporter’s ExIm bank (the case of Brazil’s BNDES programme and of Malaysia’s MECIB scheme). In these schemes, the seller is paid on delivery by a bank in his own country. This bank will be reimbursed over a period that can reach three years by an overseas bank. The overseas bank, in turn, will be reimbursed by the buyer, over a period and at conditions that may, or may not, coincide with the conditions provided by the seller’s bank. As the buyer’s bank takes a credit risk vis-à-vis the buyer, he will normally ask for collateral from the buyer (at times, even a 100% collateral, which in practice can make this model unattractive, or out of reach for most importers).

In practice, the schemes in the third category above, notably those provided by the US Department of Agriculture (USDA) under its GSM-102 programme, require the importer to open an irrevocable hard currency letter of credit. USDA has, for the main importing countries, a publicly available list of “approved local banks” whose letter of credits will be accepted for purpose of the GSM-102 insurance (within preset country limits). This means, in effect, that the US government is taking the credit risk on these banks.

Without this insurance programme, exporters would have had to find one of their own country’s banks which is willing to take a risk on the foreign bank, and to confirm that bank’s letter of credit. Apart from the relatively high confirmation fees and at times, the sheer difficulty of finding a bank which still has capacity towards that particular foreign bank, this has two important disadvantages: firstly, the credit risk limit that is available may be quite low, and even if a particular food export transaction still fits within the limit, the bank may not want to freeze up the rest of its operations with that bank; and secondly, such bilateral bank relations are notably fickle, with credit limits vulnerable to factors that may have nothing to do with the particular bank in the developing country, or even with its country (if a transaction goes wrong in a neighboring country, a credit committee can decide that the region as a whole is too risky).

A detailed description of the various ECA and ExIm programmes operated by grain and vegetable oils exporting countries is given in annex 7.

Chapter III

AN OVERVIEW OF FOOD IMPORT FINANCING TECHNIQUES

A. Overview of food import finance

Commodity finance is a complex business, and the focus of this paper does not permit to go into great technical detail. Nevertheless, a basic understanding of the actual techniques used in food financing is necessary for the purposes of policy formulation – lack of such understanding may (in effect, regularly do) lead policy makers to make decisions that make finance for their country more expensive, or to formulate proposals for new international financing facilities that either hardly benefit or distort food trade.

First, payment and financing mechanisms are two different things. Even if no finance is provided, international trade transactions carry significant risks for the commercial parties, and as a consequence, a range of payment mechanisms have been developed to help buyers and sellers deal with these risks. These are briefly described in box 4.



It may be useful to reiterate that whatever one does, food trade absorbs financing capacity – the major issue is whose capacity, and at what costs.

Simplifying somewhat, one could say that the international trading chain for bulk foods goes through the following stages:


For actually producing the food crops, farmers may require pre-financing. In effect, in developing countries a lack of pre-financing for food crops (as compared to the more traditional non-food export crops) is often a major bottleneck for an increase in production. Traders who see a potential for export of food crops may see a need for providing pre-financing to producers; e.g., part of Viet Nam’s expansion of rice exports has been made possible in this manner, with traders providing seed, pesticides etc. and taking paddy in return.

Once the crop is produced, traders need to collect it, process it to a smaller or larger extent (in particular for the processing of oilseeds into vegetable oils, this can be an expensive process), and then collect enough (traditionally, by transporting the commodities to a port warehouse or tank facility) for a worthwhile export transaction. Once a sufficiently large quantity is gathered and a buyer has been found, the goods can be loaded on a ship, and transported to the importing country (or the nearest port). The international shipping can last 2 to 8 weeks, and depending on the shipping modalities chosen (e.g., does one need to wait for a regular liner vessel in order to ship a few containers of rice), there can also be a considerable waiting time in the export port.

Once the goods arrive, they are unloaded (with the inefficiencies that still prevail in many developing countries’ ports, this may require the ship to wait a few days before offloading space is available), and the goods are stored in a customs-bonded warehouse. From there, they may be transported to another customs-bonded warehouse (e.g., in a landlocked country), or immediately cleared through customs (which generally requires duties to be paid). The goods may require further processing (e.g., from wheat or maize into flour), and can then be transported to the warehouse(s) from which they are distributed. On sale, the importer may be paid cash, but it is not unlikely that at least part of the sales will be made on credit, forcing the importer to continue carrying the financing of the commodity.

For international trade in bulk foods, three months would be rather fast for this whole process from the product’s harvest to its sale to, and receipt of payments from, the final customer; six months would be more normal, and for crops that require large seasonal stocks, it can be even larger. International trade in the major bulk foods is worth over US$ 30 billion a year, and this can thus be estimated to create a financing need of US$ 10-20 billion. It can also be easily understood that lack of financing, or overly expensive financing, can have a major impact on food trade flows as well as on the prices finally paid by consumers.

These financing needs can in principle be met by the producer, the exporter, the importer, the final consumer, or outside financiers. It may happen that producers sell on extended payment terms – that is to say, the trader (exporter) receives the product, but pays only much later. It also may happen that the final consumer pays in advance for food ordered (e.g., a baby food company may open a letter of credit against which an importer can obtain finance to purchase the grains that the company needs). But such practices are relatively rare; it is more common that the producer asks to be paid before the actual delivery of his product, and the consumer asks to be allowed to pay only some time after delivery. So by far the main providers of the finance necessary for international food trade are the sellers/exporters (often international trade houses), the buyers/importers and outside financiers.


This section gives a simple description of financing mechanisms, to serve as an introduction to the description of actual financing mechanisms used in grain and oilseeds trade in the following sections of this chapter. To start with, here are three simple financing models. In the first one, the seller provides the finance, and sells on “open account” to the buyer (figure 5).

The technicalities of this financing mode are discussed in greater detail below, but to simplify: the trader arranges for the delivery of the food products, and accepts deferred payment for them, allowing the buyer/importer to sell the products and get paid for the sales. In this model, the importer is entirely financed by the trader. This may seem risky, but this model is used more often than one might think, largely because, as will be discussed below, there are various ways for the trader to lay off his risks in this form of finance, and even, to refinance himself cheaply.


In the second financing model, the buyer provides most of the financing for the food trade transaction.

This is the standard financing model for much of the world’s food trade. The buyer is asked to open a Letter of Credit under which payment for the goods is made by the importer’s bank on behalf of the importer at the moment that the seller provides sufficient documentary proof that the shipment of the contracted commodities has indeed been made – normally, this would be at the moment that the goods enter into the ship that will be used for their sea transport, but it could also be at the moment that the goods are, say, loaded onto a train to bring them to a port. Or alternatively, the trader and importer can enter into a contract under which the importer commits to pay at the moment that he receives such documents.


In the third model, the bank provides finance against the collateral of the actual commodities that are being traded, leaving the trader and the importer to finance only the parts of the trading chain where the bank cannot control the goods (thus, leaving it up to the trader and the importer to finance up-country operations, and the collection of payments due from the final buyers).

Different banks are likely to finance the various parts of the chain. The trader may have a warehouse receipt finance arrangement with his own bank under which his bank immediately refinances any entry of goods into his port warehouse, allowing the trader to build up a sufficiently large volume to do an efficient export transaction (there are several financing techniques for this, from packing credits to red clause letters of credit and some forms of Islamic finance – these will not be discussed in any detail in this report, but the reader may refer to earlier UNCTAD papers¹⁶).

Once the goods are in international transport, they can be financed by another bank. This can either be an international bank which, in many cases, will become the actual owners of the commodities (normally, they sell them back to the trader on arrival at destination), or by the importer’s bank, which holds the documents that will enable the importer to take delivery until the goods have actually arrived, and against this security, allow the importer to pay only on this arrival.

Inside the importing country, a third bank (which may well be a local bank) can use warehouse receipt finance to keep control over the goods until they are actually delivered to the final buyer. This technique will be discussed in more detail in section G below.

The description above is just the first “layer” of financing techniques. In practice, the “primary” providers of finance will re-finance part of their activities, often in such a way that they lay off not only the financing burden, but also, all credit risk. For example, in open account sales, the seller will normally refinance the international part of his sale.

There are a number of ways for the trader to refinance himself; in figure 8, he obtains a confirmation from the buyer that he will pay, within a certain period, on the draft (similar to an invoice) that the seller sent. With this confirmation, he can go to his own bank or to a specialized financing company, and get immediate payment – perhaps with the financing company willing to “discount” the draft without recourse to the trader (that is to say, the trader gets a cash payment and it is the financing company’s problem to obtain the payment from the importer). But this technique can be adapted in order to deal with less creditworthy importers (e.g., by getting a bank guarantee on the importer’s confirmation), and there are other techniques, discussed below. It is also worth mentioning that some government agencies (e.g., in Pakistan or Thailand) give low-cost “packing” credits to food exporters so that they can ready the crops for the actual export.


Similarly, a buyer can obtain external finance to permit him to pay at the moment of shipment of the goods, and/or to enable him to sell to the final buyers on credit.

Figure 9 describes some of the possibilities. His bank may be willing to open a letter of credit without full cash collateral – which is to say that the bank will take a credit risk on the importer for the remainder. The bank will normally retains the shipping documents without which the importer cannot take delivery, but it still has a credit risk because, if the importer fails to take delivery, the bank may have to sell the goods itself. Then, once the goods have been delivered to the importer’s warehouse, they can be kept under control of a collateral management company. This shifts the bank’s credit risk from the importer to the collateral manager, and on this basis, the bank may be willing to finance, say, 80 to 85% of the value of the goods (the bank still runs a number of risks: the value of the goods may fall below the size of the credit; or the importer may default forcing the bank to sell the goods itself, potentially at a loss; or the government may decide to seize the stocks; or civil strife or theft may lead to the goods’ disappearance or destruction). Then, once the importer finds a buyer for the goods, he can sell on credit to the buyer but commit the resulting sales receivables (or discount these receivables) in order to externalize most of the financial burden of providing such extended payment terms.

It is hoped that this simplified and general description of financing possibilities will help in the understanding of the actual techniques, which are described in greater detail below.

B. Seller’s credit

Given their limited financial capacity and high local financing costs, food importers tend to have a strong preference for buying on deferred payment terms – e.g., the seller provides the goods, and agrees to be paid 60, 90 or 180 days later (the seller will normally refinance these payment flows – more on this below). This allows them to import the foodstuffs, sell them on the local market, and use the proceeds to reimburse the seller. The longer the payment terms, the better, particularly because this allows the buyer to make larger-volume purchases which can result in considerable savings in transport costs. The financing costs of these deferred payment sales are effectively hidden in the price of the product – the seller will charge a price equal to the “spot price” of the commodities (the price the importer would have to pay if he were able to pay cash), plus the interest charges that he is faced with, plus a risk premium, plus a profit margin. Banks that have looked into this have found that the implicit interest rates can easily be in the 20% range, except when the seller can benefit of credit insurance from his government.

The deferred payment can be arranged, in principle, in the following ways:

- The seller sells on open account terms, simply allowing the buyer to pay a certain number of days after shipment. The buyer will normally acknowledge his payment obligation with a promissory note – one form of “trade paper”. This is the easiest for the importer, and sellers who can arrange for these payment terms have a competitive advantage. Open account sales are normally a corollary of long-term commercial relations between relatively large companies. For example, Peru’s largest rice importer has a long-term relationship with a major Uruguayan rice exporter who grants him good credit terms.

- The seller sells on a “documentary collection” basis, which means that in the contract, it was agreed that the seller ships the commodities and sends the shipping documents directly to buyer’s bank; which will release them only when either the importer makes the required payment (“on sight”), or when the importer confirms (“accepts”) that he will make this payment after x days – so in the latter case, the importer is providing a credit to the importer, and in return, has a confirmation of the importer that he will pay a certain amount at a certain moment (this is called a “time draft” – see Box 5 for a further explanation). Local banks can add their aval on the time draft which in turn can be sold by international traders on the secondary market. Documentary collection provides an excellent solution for trading partners with a well-established relationship who want to lower costs and expedite processing, yet maintain control over the transfer of goods and funds.

- The seller sells on a usance or deferred L/C basis, in which he agrees that the payment under the L/C will only be made a certain number of days after shipment – this will be discussed in section B.


The supplier normally lays off the burden of the sellers’ finance, and indeed, in many cases also lay off the credit risk of the buyer (in many cases, the seller’s willingness to provide extended payment terms is in effect determined by the availability of these refinancing and risk-shifting tools, and the costs thereof are from the start priced into the transaction). They have five principal techniques at their disposal:

1. Arrange for an international bank to provide a “limited recourse loan”. This means that an international bank loan is put up alongside the food transaction, with the finance provided to the international trader, who, however, only has to reimburse the full loan if he is indeed paid by the importer (otherwise, he only carries, say, 20% of the loss, and the bank will carry the remainder). With the liberalization of food imports in most developing countries, this financing technique appears to have virtually disappeared.

2. They can borrow themselves to enable sale on deferred payment terms. Although for large trading companies, this may be a cheap source of finance, they will nevertheless want to avoid tying up their bank credit limits as it may limit their possibilities for other transactions. In any case, their on-lending to buyers will be restricted by their own credit policy. Trading companies operate very much like banks (and have little choice in this, because they depend so strongly on external finance), with credit ceilings for each country. Revising credit ceilings is slightly easier than in banks, but credit committees are still very vigilant. A few (three or four) of the world’s largest trading companies are, however, able to raise funds directly on the capital market, from institutional investors, and they are therefore much less restricted in using their own finance for providing credit to their clients.

3. They can obtain a credit or credit insurance from an official agency, which provides cover for 90-95% of the risks of the credit. Official credits and credit insurance (which allows banks to exempt loans from country ceiling restrictions) are very important in international food trade. Both the USA and EC have a wide range of programmes, and a small number of food-exporting developing countries (such as Malaysia) also have programmes. Typically, these programmes shift the credit risk from the exporter to the export credit (insurance) agency, with only 5-10% of the risk still remaining with the exporter. It is often against such credits or credit insurance that exporters agree to sell on deferred payment terms. But possibilities are not limitless. Firstly, the procedures of these agencies (e.g., in the case of USDA’s GSM programme, described in the previous chapter) may require a reputable bank in the importer’s country to open a L/C – and that bank may require the importer to put up cash collateral against the L/C. Secondly, these agencies have specific budgets for their operations, often mandated by specific parliamentary budget approvals; most have been complaining in recent years that their budgets had been cut to such a degree that they have had to reduce their services.

4. They can refinance or discount the buyer’s payment obligations, using for that purpose the “trade paper” (in particular, promissory notes or time drafts) provided by the buyer. There is a range of methods available for this, and all may seem somewhat complex. The main instruments and some of the terminology are described in Box 3, necessarily in a somewhat simplified manner.¹⁷ Some of these refinancing methods are “with recourse” (which means that if the bank or other financing institution does not obtain reimbursement from the buyer, they can claim payment from the seller), others are “without recourse” (which means that if the financier does not obtain payment from the buyer, he cannot claim reimbursement from the seller, except under specific conditions linked to a seller’s lack of performance on the underlying trade contract). If the seller can discount buyers’ payment obligations without recourse, he effectively takes the buyers’ credit and country risks off his books, which (given the fact that, as mentioned above, trading companies all have country credit lines) opens up the possibility to do new business.

5. They can use structured finance, in particular warehouse receipt finance, to enable them to transfer financing needs and risks to a bank – this will be discussed in section H.

C. Usance and deferred Letters of Credit

Letters of Credit can require payment by the importer “on sight” Under “sight” letters of credit, the buyer is supposed to pay at the moment that he receives the documents as specified in the letter of credit. With a usance or a deferred letter of credit, he is to pay at a future date, e.g., 30 or 120 days after shipment date.¹⁸

If the letter of credit is on sight, the importer is, in reality, already financing the import trade even before the goods have been shipped. Before opening a letter of credit, local banks generally require the importer to put up 20 to 110% of the value of the import transaction, often in the form of real estate (and in some countries, the government imposes minimum 100% collateral). In the case of a simple “sight” letter of credit transaction, the importer will request the bank to open a letter of credit, tying up part of his capital in the process. The bank’s letter of credit may be acceptable to the foreign seller, or his export credit agency, or the seller may ask his own bank to confirm the letter of credit. Once a satisfactory letter of credit is in place, the seller arranges for shipment. By making the shipment, the seller will generate the documents required to be paid. He will present these documents to, say, the foreign bank, which makes the required payment, and claims this sum from the importer, for immediate payment; on payment, he will provide the documents to the importer, who can use them to take delivery of the goods when they arrive.

In this phase, the goods are still on the sea – the documents are likely to arrive two-six weeks before the goods. After arrival, they have to be offloaded, cleared through customs, perhaps processed, and then sold on the domestic market – in all, it may take another 4-12 weeks for the importer to be paid for the goods. During all this time, he will be financing the goods, perhaps from his own working capital.

The importer would much prefer to pay for the letters of credit after he has already sold at least part of the imported goods – and this is possible with a so-called usance or deferred letters of credit. At a minimum, this would cover the period until arrival of the goods in the country (with very little risk for the bank, as it can keep the documents until full repayment of the loan by the importer), but ideally, it should provide the importer with enough time to (process and) sell the food.

For an exporter, accepting a usance or deferred letter of credit is no problem. Such letters of credit, as long as they have been issued by acceptable banks, can be very easily discounted by the exporter with his own bank, with the bank paying him the net present value of the letter of credit. Unfortunately, in practice most banks in the importing countries will insist on 100-110% collateral for such letters of credit (after all, once they have handed over the shipping documents to the importer, they have no recourse to the commodities any more). As food trade tends to be a low-margin business, few local traders have sufficient wealth to meet banks’ collateral requirements.

D. Bank loans to importers

A bank can provide credit to a client in a number of forms:

• Bank overdrafts: the bank allows withdrawals to exceed deposits by a certain amount. This is normally a rather costly form of finance, and the bank may demand repayment at any time.

• Term loans: direct credit facilities, usually for less than 180 days, payable according to a specified schedule.

• Credit lines: an agreement with the borrower allowing the latter to access credit up to an agreed amount. The credit line agreement generally has a specific timeframe (e.g., one year), but if there is no material change in circumstances, it would then normally be renewed. The credit line may be specific, only to be used to finance one or more contracts to be subsequently entered into by an importer and accepted by the bank as eligible. In such a case, the local banks which would in turn obtain financing from an international bank, which would normally be a correspondent bank or part of the same banking group.

• Bank's aval for import Collections' Drafts or L/Cs. This is a payment commitment from a bank through a "per aval" signature on the draft previously accepted by the importer. It constitutes an unconditional obligation by the Bank to pay the importer's supplier at a later date. The supplier can then discount the avalized draft for immediate cash, e.g., through the forfeiting market.

• Structured loans, taking control over the food commodities imported by the client and his sales receipts and receivables. This is discussed below.


A large client may also obtain a syndicated loan, that is to say a term loan from a group of banks, which may be for a longer period.

In the past, when state companies had a monopoly on the import of food, they were often able to tap into the international syndicated loan market, and even issue trade paper –commercial paper- for sale in the international market. Loans for importers form part of a bank’s country exposure. Banks have credit lines for each country with a specific ceiling; and often, separate ceilings for each industry within the country. Once the credit line is exhausted, it is normally very difficult for a loan officer to get permission from the credit committee to provide new credit. Credit ceilings are normally set for fairly long periods, and only revised when there are specific conditions meriting its revision. Each loan has a risk weighting (country risk forms a large part of this), and banks generally target a “risk-adjusted rate of return” – the higher the risk, the larger the return should be. Although some of the few remaining state import agencies are still considered as a sufficiently low risk to be an attractive client to an international bank, with some exceptions (such as large, monopoly-type flour mills) private importers are generally not considered sufficiently creditworthy to obtain international bank loans.

Thus, importers will have to rely mostly on local banks, and private importers can consider themselves lucky if they then have good access to credit. Food trade is risky, and most domestic banks are not keen to expose themselves to the risk of the trade. When the creditworthiness of the borrower is fair or poor, local banks would only lend on a secured basis, with the traditional security being real estate. Thus, “clean” (non-collateralized) lines of credit are difficult to obtain for commodity importers located in developing countries. Clean financing is generally limited to borrowers that can be regarded as “good credits” and, in any case, can be more expensive than for example warehouse receipt finance (discussed below).

E. Commercial paper

Companies can issue commercial paper for sale to institutional investors. These notes (to put it simple, promises to buy X amount of money at time Y, perhaps paying Z interest at certain dates) can be the cheapest form of finance for large, reputable companies. Companies that are perhaps not that reputable may be able to obtain a bank guarantee (an aval) on their notes, and obtain finance in this manner.

Both these forms of finance seem underexploited by developing country food companies, as far as NFIDCs and LDCs are concerned. Exceptions are possible – after all, in 2002 the food group Indoservices from Indonesia, not exactly a country with a good credit rating, was able to issue US$ 200 million worth of commercial paper on the international market - but they seem to be rare.

F. Forfeiting

As discussed in section A, when the seller provides a credit to a buyer, it is likely that the transaction generates “trade paper”. This trade paper can be discounted on the factoring or forfeiting market, that is, it is sold to banks or investors. Both are forms of receivables finance – that is, a financier pays a company cash up-front for the money owed to it by its customers.

Factoring is not used much for food trade finance. The forfeiting market is more important in international food trade. Forfeiting is the principal outlet for without recourse discounting. In a forfeiting transaction, an exporter (seller) remits to a forfeiting company guaranteed debt (usually bills of exchange, promissory notes, banker's acceptances and bills of exchange, or other freely negotiable instruments, which are normally in a hard currency - US$, German Marks and Swiss Francs are the major denominations) which results from a sale on credit. The forfeiting company pays him cash, upfront, the face value of the debt minus a discount (it should be noted that in practice, the normal mechanism is that a trading company receives, say, a 180-day letter of credit, and discounts this with his bank; the bank then sells this paper on the forfeiting market).

The discount represents the interest that the forfeiter discounts for the full credit period covered by the bills/notes in structuring a forfeiting deal. The discount rates are fixed and based on the London Interbank Offered Rate (LIBOR). In addition to the discount rate the forfeiter will charge a fee. Most of the paper traded in the forfeiting market is guaranteed by banks. The problem in this market is that it has only limited depth for each country, and when much paper from a country is offered, discounts increase fast (so the trader has to built in a high price premium to compensate for this). Still, forfeiting possibilities are available for most African countries, for example.

From a buyer’s perspective, it can be interesting to explore with his suppliers the possibility to use forfeiting. Provided that under local regulations, banks can provide an aval, this mechanism can significantly lower import financing costs through the use by the seller of short-term, fixed-rate financing. Moreover, the importer can obtain better conditions from his supplier by having a bank committing to the payment to the exporter at maturity. And the costs can be lower because the time that the bank would be exposed to the buyer’s credit risk is less than in the case of a L/C (only from the arrival of documents until the maturity of the draft). Instead of using an aval, one can also obtain a bank’s guarantee or Stand-By Letter of Credit.

G. Counter trade and Bilateral Payment Agreements

Counter trade is an umbrella term for trade practices whereby the seller/exporter is contractually obliged, as a condition of his sale, to undertake a reciprocal commercial action which benefits the buyer/importer, or the importer’s country. There is a range of counter trade mechanism, from barter (the exchange of goods) to buy-backs (an equipment provider is paid with the products that are produced with the equipment he provided). The most common form of counter trade are counter purchase transactions. In a counter purchase, the seller is granted normal payment terms but agrees at the same time to buy goods from the importer or from a company nominated by the importer (i.e. to utilize all or a percentage of the payment received to purchase products from the buyer's country), or agrees to arrange for their purchase by a third party within a specific period of time (usually one to five years). The payment that he receives from the buyer is normally blocked on an escrow account until he meets the counter purchase obligations.

A Bilateral Payment Agreement (BPA), also called “account trade”, is a system of settlement of monetary obligations arising from trade between two states. Under this arrangement, appropriate authorities, normally the Central Banks, enter into an arrangement to pay each other or guarantee payments for imports undertaken by the corporate or individual citizens of the respective countries, for commodities to be agreed.

The Central Banks, or other foreign trade banks of the contracting states, set up “clearing accounts” which record the flow of mutual trade. At the end of each agreed time period (e.g., each three months), the balance is settled in the currency of the accounts (usually US dollars), carried forward into a new agreement, or the countries resort to “switch trading” (which allows third parties to buy one country’s “trading credits”) to restore the account balance.

Designated local banks are appointed to handle the trade transactions. These trade transactions are usually denominated in US$, but the settlement between the Central Bank and the local banks are in the applicable local currency.¹⁹

The designated local banks of the BPA countries have to establish correspondence banking relationship among them. Generally, Letters of Credit are used for the transactions, and the Central Bank pays the exporter (through the local bank) once documents are prepared according to the terms and conditions of the Letter of Credit.

The consequence of having a BPA in place is that for the importers and exporters, credit risks are virtually eliminated. Central Banks assume the risks vis-à-vis the local banks, who in turn assume the risks on local companies. As long as exports take place according to the commercial contract, the exporter is assured to receive payment in domestic currency. This implies also that exchange rate risks are eliminated. For importers, the existence of a BPA leads to easier access to banking facilities.

H. Warehouse receipt finance

Increasingly, traders are resorting to the use of structuring techniques to enable them to continue selling commodities to developing countries. One simple form is warehouse receipt finance, where the international trader will take control over the logistics chain, control the commodities while they move down the commodity chain, and only distribute the commodity from a distribution point (warehouse) inside the country in small quantities, often against cash payment. The risk that the commodity is stolen from the warehouse, or effectively expropriated by the government, can be covered by insurance (including, for Southern African and Eastern countries, by a new World Bank-created sovereign risk insurer called the African Trade Insurance Agency²⁰). Structuring adds costs, but it is often still cheaper than building in the risk premiums that would be necessary for non-structured sales.

Warehouse receipt finance is commonly used for food imports into Africa, both by international traders who use it as an instrument to alleviate payment conditions for their clients, and by banks financing the upcountry storage and processing of imported food commodities. A simple form of this is also known as “consignment sale”, in which a trader or bank keeps ownership over goods deposited in an upcountry warehouse, but an importer acts as agent for the sale of the food.

I. Islamic finance

Islamic finance is mostly structured finance: the financiers, rather than taking a risk towards a borrower, take a risk on the transaction that they are financing. There are a range of techniques to finance food imports; the most common is “mudabaha”, in which, on the request of an importer, the bank buys the food commodities, paying cash, and immediately sells them on to the importer at deferred payment terms.

Islamic finance has been used for food imports into NFIDCs and LDCs. For example, the Islamic Development Bank reported that it during 2002, it financed imports of wheat into Egypt, by the country’s Ministry of Supply; and grains into Tunisia, for the Ministry of Agriculture.

Islamic finance is also used by some trading companies, to refinance individual trading operations.

Chapter IV

CURRENT FOOD FINANCING PRACTICES OF NET FOOD IMPORTING COUNTRIES

Currently, different export strategies are used for different commodities trading. This basically reflects the competition aspect and margins that characterize the different commodities trading. For instance, wheat trading is still relatively governed with the traditional and safe but more costly letter of credit instrument and rice trading is being more and more traded with cash against documents instruments which provide more flexibility but at the same time induce more risks to traders. This chapter describes the major international trade finance practices with regards to the imports of bulk foods by LDCs and NFIDCs.

A. Open account sales

When a seller has a long-standing commercial relation with a buyer, he may be willing to sell on open account terms. Under this payment arrangement, the seller usually gives a revolving credit line to the buyer. The buyer has a reasonable time to process the commodities and sell them before he has to reimburse; in effect, the seller finances the buyer’s working capital needs.

Certain large traders are by-passing the traditional, more secure methods of financing such as letters of credit and are now making sales on an open account basis, to reduce transaction costs. This is relatively rare in the case of developing country food imports, but if it occurs, the situation is often one of the seller being a nationally-based exporter (rather than an international trade house), and the buyer a processor (e.g., a flour mill).

B. Documentary collection

This mechanism is widely used in the rice trading. With the privatization of the rice trading that is taking place by itself in most importing countries, new players are stepping in and international traders are faced with stiff competition which lead them to providing financing facilities to their importers. Today the rice market is a private well organized sector with new operators (these a re basically previous wholesalers who are typically becoming operators in their countries as is the case in Senegal) confirming their position.. International trades are taking the risk of delivery until the arrival of goods to the port of destination. They would normally require a down payment of 10% as a guarantee of payment. They would provide the financing provided that there is margin for it.

Once the draft is avalized by a local bank, the international trader is able to discount the notes and will receive payment before even shipping the goods. Discounting avalized notes is a financing mechanism that is widely used in Africa in the rice trading. It is mainly the bank that is taking the risk. Discounting may be done by either international or local banks. First rule that banks will apply to mitigate the risk is to keep control over the goods. This is done basically by having all shipping documents assigned to them. Once the goods arrive to destination, they are stock and the control of goods is done through collateral management. Other strategy to reduce the risk is the insurance that is taken over the goods while they are shipped and when they are stocked. In addition to this the bank will also take a margin (15-25%) on the line of credit that is open to the buyers.

C. Sales under Letter of Credit conditions

Letter of credits are used for exports by state entities to large buyers which often are also state entities (government-to-government). These exports are often credit-driven: credit is used as a competitive tool. Repayment periods often go beyond the commercial length of the transaction. The financing mechanism is generally either a direct credit or a, a confirmed deferred payment letter of credit.

The role of letters of credit in the wheat trading is still very noticeable. Letters of credit are usually issued in the buyer's country and confirmed by a well-established international bank. Deferred letters of credit are opened at the moment the transaction is put in place in order to avoid market and transport risks. Once the letters of credit is confirmed, it can be discounted by the confirming bank and the deferred sales agreement is transferred into sight sales.

The role of letters of credit in the rice trading is decreasing to the advantage of Cash against Documents (CAD), which is gaining more and more of significance. This is mainly due to the competition, which is taking place in this arena. Nowadays letters of credit represent less than half of the transactions. They are mainly used when dealing with new or difficult markets.

Private sector imports in countries where such trade is longer established, from the USA or other countries with large credit insurance programmes, may be under letters of credit. In these cases, the importer often opens a L/C, in US$ or other hard currency. This is a costly matter for him as the local bank often requires large collateral, but this cost is compensated by the fact that the seller can benefit of very affordable credit insurance (much lower than the normal sovereign risk premium) and therefore, can pass on the benefits of this in the grain price. The bank may provide deferred payment terms under the L/C, but the seller (particularly if it is a trading company) will generally not provide any credit terms.

Trade under letters of credit is feasible where banks in the exporter’s country have good credit lines with banks in the importer’s country, and the importer is able to provide the required securities to his bank. In many cases, bank-to-bank credit lines are a bottleneck. Most western banks, even the largest, have for example credit lines with banks in not more than a dozen or so African countries. For regional trade, such credit lines can be even more difficult to find. There are exceptions, however. For example, country credit lines are not a bottleneck for India-Bangladesh relations. The major supplier of wheat and rice to Bangladesh is now India, and thus, a major part of these imports take place under L/Cs opened by a Bangladeshi bank, and confirmed by an Indian bank.

The ability for an importer to open a L/C can also be a restrictive factor, in times because of government intervention. The regulations as they exist in Egypt are similar to those in several other LDCs and NFIDCs. These regulations in effect force importers to carry the full financing burden for food imports, in hard currency. In March 1999, the Central Bank of Egypt advised all banks operating in Egypt that L/Cs must be covered 100% in cash by the importer. This replaced the previous procedure whereby banks and their clients reached their own agreements and covered, usually, only 10-20% of the L/C’s value. As a result of this new role, a shortage in US Dollars in the market was recognized by foreign companies operating in Egypt. In general, the exporter may not ship the goods before the opening of a letter of credit has been notified by the Egyptian bank. If the goods are shipped before the letter of credit is opened, the importer runs the risk of being fined up to a maximum of the value of the goods.

But even where such full collateralization is not imposed by the Government, it often is practice: banks do not have the expertise to use other, more efficient ways to secure their loans.

D. Transactions under counter trade and Bilateral Payment Arrangements (BPAs)

Counter purchase and barter are occasionally used for food imports by NFIDCs and LDCs. Examples are small-scale transactions between Nepal and China, several schemes used by Cuba for its imports, and a barter agreement signed in December 2002 between the Egyptian state company, the Food Industries Holding Company, and Syria to export 100,000 tons of Syrian durum wheat in exchange for Egyptian rice and potatoes.

However, the more important form of counter trade for these countries are the so-called Bilateral Purchase Agreements – which one could consider as a governmental framework for counter purchases. BPAs have been used as the financing framework for exports of several food products to NFIDCs and LDCs.

q Palm oil: Malaysia has entered into BPAs with the governments of Bangladesh, Cuba, Djibouti, Egypt, Myanmar and Sudan which allow these countries to import palm oil from Malaysia against payment with in the country’s commodities. Under these so-called Palm Oil Credit and Payment Arrangement (POCPA), the importer can defer payments for two years (at a LIBOR-related interest rate for US$-denominated loans, and in other standard reference rates for loans denominated in other currencies, e.g., Yen). This has been a useful export promotion tool. In 2000, 135 million US$ worth of palm oil was exported under the POCPA scheme. Only countries which agree to import a certain minimum volume of palm oil from Malaysia can be included in the scheme.

q Wheat: in early 2003, Egypt entered into a five-year agreement with Russia and Ukraine under which it would be able to pay for Russian and Ukrainian wheat with Egyptian products – presumably under a BPA arrangement. Pakistan has discussed a possible BPA with Afghanistan, for the export of wheat to that country, but finally decided to provide credit insurance to private exporters instead.

q Rice: As governments of exporting countries intensified their efforts to secure rice sales, a large number of transactions have been made in recent years under government-to-government agreements, often in the form of barter trade arrangements. This includes arrangements between exporters such as Myanmar, Pakistan, Thailand and Vietnam, and importers such as the Malaysia, Indonesia, the Islamic Republic of Iran, Iraq, the Philippines and Sri Lanka. Thailand and Vietnam have also BPAs with Cuba which covers, inter alia, Cuba’s imports of rice from these countries.

E. Warehouse receipt finance

For private sector imports in recently privatized grain trading systems, the mechanism used is often warehouse receipt finance. A major reason for this is that the new importers have not yet had the time to build up a track record with either local or international banks, or with international suppliers.

In several sub-Saharan African NFIDCs and LDCs (including, to name but a few, Côte d’Ivoire, Mali, Mauritania and Zambia), warehouse receipt finance is much used in food imports, particularly for wheat, maize and rice (as well as sugar). The mechanism is used to enable food

processors (e.g., flour mills) to import the raw material and process it, and also, in the import of the final product. Generally, it is used by international traders who have an office in the country, and who “extend” their international finance to the local food flows by keeping control over the physical inventory. Warehouse receipt finance is very much used in rice trading where a tri-partite agreement is signed between the trader, the bank, and the collateral manager which will secure the repayment of the transaction.

F. Intra-firm trade

Imports by large traders into a country where they have a local office. Normally, sales to the local company will be in US$ on a CIF basis, on deferred terms. Very often these types of sales are used to provide funding to the local office by the head office. Trade finance is the cheapest source of international finance, and this method is therefore more convenient than obtaining working capital financing via a local bank in either US$ or local currency. Sometimes the head office discounts such a receivable with an international bank, but in most cases it will be financed by the head office via its regular funding vehicles. Islamic funding is a favorite funding vehicle for these types of trades. The local office will sell to local buyers, either on a cash basis, or under small, rapidly revolving credit lines.

G. Cash-paid imports by major corporate and government-owned entities

Commonly, imports by large corporate (often processors) or government-owned entities are on a cash on delivery basis - using either Cash Against Documents or, less commonly letters of credit (these are more expensive, and these buyers often have enough of a track record to avoid using them). These buyers normally raise the funds for this from the local banking system (through hard currency loans, meaning that they take the currency risk), sometimes using expensive overdraft facilities; at times, local stocks are pledged as collateral. In certain cases, they may be able to raise funds from international banks thanks to a government guarantee.

Chapter V

WEAKNESSES IN INTERNATIONAL FOOD TRADE FINANCING SYSTEMS

Credit relations have two components: who provides the finance; and who takes the risks. Thus, credit relations can be constrained by two factors: finance capacity, and risk-taking capacity. This section discusses how the main forms of food finance discussed in the previous chapter are constrained in these two respects, particularly in the case of an increase of world food prices which, given certain import needs, would lead to larger financing requirements.

Trade driven by long-term corporate relations, on open account terms

In this case, the seller provides the finance to the buyer, and takes a risk on him, determined in the first instance by the size of the credit line he permits. Normally, these credit lines are fairly limited, at most enough for one normal trading “cycle” – that is, the time that the food commodities are actually in the hands of the importer. The seller may be able to refinance himself, using promissory notes issued by the buyer, but the markets for such refinancing are shallow, even if the notes are discounted with recourse to the seller. Similarly, there are not many possibilities for the seller to lay of his risk; with the partial exception of US exporters who can use the Supplier Credit Guarantee Program of USDA to cover up to 65% of their credit risk. It is also worth noting that in practice, open account sales, when they concern developing country buyers, will not always go according to expectations – temporary disruptions outside of the control of the buyer which slow down his “asset conversion cycle” (the time he needs to convert the commodities he imported into cash), temporary problems in concerting local currency into the needed hard currency to continue imports, occasional losses due to market developments which require the seller to wait a bit longer for his money, and so on. All these are a normal part of open account business. The seller has to be willing to be flexible, while at the same time retaining his capacity to discern temporary disruptions and serious problems for his buyer.

Open account sales thus require the seller to have real interest in continuing his commercial relationship with the buyer, and a strong trust in the buyer. Such relationships are not easily built, but once they are in place, they can take shocks (e.g., price shocks) up to a certain level. The constraint here is likely to be the cash position of the seller – given his own credit lines and other funding sources, can he afford to extend more credit to his buyers (and even if they want to, will their bank allow them)? For some exporters, then, increased prices for the food that they export may mean that they can export less under existing open account terms, for others it would be possible to increase credit lines to keep sales volumes stable.

Exports by state entities

While in some cases, the government export agency has a volume target or limits (in the case of Thailand, up to 500,000 tons of rice for sales under government-to-government contracts), in general, the state trading corporations (including the Australian and Canadian Wheat Boards), have administratively-set “credit ceilings”, set in nominal terms. They may be able to lay off part of the risks with a separate credit insurance agency (e.g., AWB uses this mechanism), but such risk coverage may be limited or overly expensive.

So under normal circumstances, these entities could well be forced to reduce their exports, in volume, to countries deemed “risky” if grain prices increase, just to stay within their credit limits. But in practice, these agencies can return to their governments to ask for extra risk cover. For example, it is noted in a report by the Australian Government²¹ that “there may well be at certain times a ‘market gap’ in terms of the unwillingness of the private sector (individually or as part of a syndicate) to provide the total amount of capacity/risk/financing required to support wheat sales to a particular country. This will usually reflect the fact that the country concerned is felt to involve repayment risks of an unacceptable level. But since this will often not be of an ‘all or nothing’ nature, it could then be manifested in a shortfall between the cover/capacity required and that available.” The report then notes that this kind of market gaps or market failures can be a reason for the “National Interest Account”, under which the government can cover the risk of exports to particularly risky countries (and the government of Australia has made active use of this possibility). Of course, this “market gap” identified by the Australian government is one which affects all food exporters and importers, but, in the absence of a multilateral approach, only exporters whose government is willing to give a helping hand will be able to overcome it (which necessarily distorts trade patterns).

Transactions under Bilateral Payment Arrangements (BPAs)

Under a BPA, in order to effect a purchase, the importer has to open a letter of credit with a local bank, in local currency, for the value of the goods imported. While the BPA is unlikely to be greatly affected by the level of prices of the goods traded under it (unless if price changes lead to a dramatic imbalance in bilateral trade), an importer’s ability to open such a letter of credit may be a constraint to food trade in the case of a price rise. Most developing country banks have no experience in the kind of structured finance techniques that would allow them to raise their credits in line with the value of a client’s underlying business. Rather, their credit limits are determined by the amount of traditional collateral (real estate, cash).

Private sector imports using warehouse receipt finance

Warehouse receipt financing are generally put in place to enable transactions in high-risk environments. The financings are normally done on the basis of the client’s “borrowing base”, which is the sum of the client’s physical inventory and his receivables (as long as they are controlled by the bank’s agent), with a certain discount for various risks. When food prices increase, so does the value of the inventory, and the receivables due from those who buy the client’s products.

With respect to bank credit lines, warehouse receipt finance does not imply any credit exposure to the client, nor (normally) for an international bank to the country because some mechanism to mitigate sovereign risk (e.g., insurance) is normally built in. This is even so for South-South trade. Thus, there are no constraints to the bank raising its credit lines when there is a need.

In other words, this financing mechanism provides sufficient flexibility to deal with food price increases. Unfortunately, it is still relatively known in most LDCs and NFIDCs.

Private sector imports on a letter-of-credit basis with deferred payment, facilitated by credit insurance

The constraints here are in two areas. Firstly, the importer has to open a letter of credit with a local bank acceptable to the foreign credit insurance agency. As has been mentioned above, local banks, who are often not very good in commodity finance, will either require full collateral in the form of real estate or cash (thus, their credit line will not increase in line with the value of the goods imported), or give a credit line that is mostly determined by traditional balance sheet analysis (and thus difficult to increase).

Secondly, the export insurance agency has to have sufficient country and bank risk ceilings to absorb an increased demand for coverage. Given that its ceilings are determined on an annual nominal basis (not in volume equivalent), and fall within a mandated total ceiling, such an adjustment can be very difficult.

Thus, this form of food trade, which is rather important, is vulnerable to world food price increases.

Private sector imports on a letter of credit basis with deferred payment, without credit insurance

When traders agree on usance or deferred payment letters of credit (or for that matter, documentary collections using time drafts), they will normally discount these documents with the banking system. As noted by the Finance Director of the Canadian Wheat Board, “some credit sales are done using letters of credit with payment terms. Most exporters discount these when they negotiate their documents. The only time this is a problem is when the buyer's bank runs out of credit with the exporter's bank.”²²

This aptly summarizes the problem which compounds the problem of the importer having to be able, in the first place, to open the letter of credit. The credit limits of developing country banks (expressed, of course, in nominal terms) with banks in developed countries are rather limited, if they exist at all (many of the major European bank, for example, only have credit limits with banks from less than a dozen African countries, and then often only to the extent that these African banks retain cash accounts with them). Moreover, they can be changed from one day to next on negative news from the country or even from its neighbors.

Imports through international traders’ local offices

This is intra-firm trade, and there is no reason to believe that such trade would be constrained by price levels. It is true that international trade houses have country ceilings set by a credit committee, but such ceilings are open to revision, and if the increased exposure is necessary to maintain normal trading volumes with a country, this should not be unduly difficult.

Imports by large corporate or government-owned entities on a cash-on-delivery basis

These entities raise their hard currency funds from local banks or, with a government guarantee, from international banks. In both cases, there are likely to be volume constraints. In the case of local banks, firstly, these may have a lack of hard currency available, and secondly, they would normally have limits in place for lending to large clients, to avoid that these take up too large a part of their loan portfolio (although in the case of government importers, the government may be able to override these concerns, in particular in dealing with government banks).

Even with government guarantees, international banks are constrained in their lending to countries by country ceilings, unless if they can refinance themselves (and the refinancing markets for obligations from LDCs and NFIDCs is not very deep). Moreover, the country’s own ability to give government guarantees may be constrained by its obligations towards the International Monetary Fund, which frowns on such guarantees (and may even explicitly ban them as one of the conditions in their structural adjustment programmes with a country).

Conclusion

Food trade involves large sums of money, and given the time that it takes food to go from the producer to the final consumer, the financing needs of food trade are large. There is a major difference in financing costs between developed and developing countries. So as far as North-South food trade is concerned, the commercial counterparties and financiers have an incentive to keep the financing burden in developed countries to the extent possible possible. Food does not flow into LDCs and NFIDCs in one uniform manner. If one way does not work well, there are incentives for importers to look for other ways. Similarly, when food finance meets obstacles, financiers will look for ways around the obstacles, and try to find a second-best, or even third- or fourth-best solution.

Given the incentives to look for solutions to food trade, and food trade financing problems, it should come as no surprise that a whole range of food trade finance mechanisms can be found in LDCs and NFIDCs. But it is somewhat surprising that despite these incentives, the financing of food imports into LDCs is often highly inefficient and, for significant parts of the trade chain, international finance is absent. To express it in another way, it is surprising that so much of the burden of food trade finance is on the importing countries, where the costs of capital are relatively high. Naturally, those involved in the food trade chain will not bear the associated costs. Rather, they will pass them on to final consumers, directly or through the government budget.

It is difficult to dissociate the inefficiencies or constraints in the current system of food trade finance with the ability, or lack thereof, of the system to deal with price- or volume-shocks. If one wishes to enhance the resilience of food trade finance to such shocks, the whole system of food trade finance needs to be upgraded. Otherwise, importers will not be able, for example, to use effectively special new facilities to deal with sudden extra financing needs.


In the most common forms of food import finance, the major constraints are linked to credit ceilings. These are expressed in nominal amounts, so if food prices increase, existing limits will allow only a lower volume of food imports. Figure 10 illustrates this for the case of payment on the basis of local bank avals on buyers’ payment obligations. This is a major form of short-term credit in rice trade. The arrows indicate the main areas of constraints in the system which may make it difficult to adapt to larger food import needs.

Firstly, there are local constraints. The local bank may not accept to add its aval to the trade bills (expressing the obligation of the buyer to make a payment at a certain moment in the future) for all local buyers; and if it accepts these trade bills, it will be up to a certain credit ceiling, and up to a certain tenor. If the tenor coincides with the time that the buyer needs to sell the imported food, his own financing burden will be minimal. But if the tenor is less (as is commonly the case), the buyer will need to find funds somewhere else, e.g., using his own equity. Importers often have to give credit to their offtakers, and the burden on equity is generally strong. There is some flexibility in the system as importers often import a range of commodities and other goods, and will shift the use of their capital in response to shifting profit margins on trade. But in the end, there is only so much equity capital to go around, and if import prices increase, the importer may be constrained in his import volume.

The second bottleneck comes between the local bank and the international bank. First, not all local banks can provide acceptable avals. Only local banks that are highly regarded by international traders and banks can do so. By accepting a local bank’s aval, the trader as well as the international bank takes a credit risk on the local bank, and a risk on its country. In both cases, there are limits. These limits may be very low – e.g., up to a million US$ (and this is for all exposures, including letters of credit, for all transactions). In practice, one of the consequences is that international banks do not like longer-term exposures because this freezes up their risk capacity, preventing them from doing further business. So if they accept a local bank’s aval, it will normally be for short periods (one, at most three months). These limits are in nominal terms and are not adjusted to enable the continuing flow of a certain volume of food – thus, they will act as a constraint in the case of higher food prices. To some extent, though, these limits are influenced by the capacity of the local bank to meet its obligations under international payment arrangements. A local bank which can speedily process paperwork and respond to queries will have a better reputation in international circles, and can expect to see its credit ceilings rising (according to western bankers, there is still a lot of room for improvement in this domain).

International banks can of course lay off local bank risks on the secondary market, but here too, there are constraints. The market depth for any particular risk is limited, and the discounts on a country’s or a bank’s paper quickly increases once a certain volume of this paper is brought into circulation. Another way for international banks to lay off local bank risks is through their countries’ export credit agencies. In countries like Australia, Canada and the United States, governments clearly recognize the importance of credit lines for local banks, and they provide coverage on a bilateral basis (with a considerable budget – e.g., in the year 2000, more than US$ 2.5 billion was spent by the US government on its main programme, GSM). While these countries may resist a multilateral solution to a problem that they are now resolving through a bilateral mechanism, they could perhaps consider how their programmes can be adapted in such a way that, in case of higher import needs, programme budgets are increased (although one could argue that this would amount to yet more export subsidies, an issue that would not arise for a multilateral export credit facility).

Similar constraints characterize credit systems based on letters of credit – the dominant form of payment and basis for financing for wheat, maize and vegetable oils trade (see figure 11). In this case, a first constraint is often the ability of the local banking network to provide lines of credit to importers, under which they can open letters of credit. In many cases, they now base such credit decisions on the real estate and cash collateral that the importers can provide. So if prices increase, the credit limits to which the importer is imposed will force him to reduce his imports. An obvious, albeit medium-term, response is to provide advice and training to developing country banks on commodity financing techniques. Warehouse receipt schemes and related credit-support schemes could enable these banks to safely link credit lines to an importer’s financial needs.



The other frequent constraint is the need to have the letter of credit confirmed by international banks. Like avals, such confirmations are limited by the credit ceiling that banks have on the country and the bank. It should be noted the confirmation adds to the cost of the import transactions. Confirmed letters of credit can also be discounted by the confirming bank in the secondary market, and the constraints are then similar to those described above for the ability of the bank to sell local bank risk on the secondary market.


The situation is somewhat different in the case of import financing arranged through warehouse receipt schemes (see figure 12). In this case (as for trade houses’ intra-firm trade), finance is hardly vulnerable to price increases. The main bottlenecks (see the arrows in figure 12) in the case of warehouse receipt finance are linked to physical availability of warehouse infrastructure, to the legal and regulatory environment for warehouse receipt finance, and to the skills of local and international banks, and of local collateral managers. The only bottleneck in terms of nominal value is related to the availability of insurance coverage for goods in stock in a local warehouse - for some countries, such insurance is scarce.

In conclusion, if one wishes to make the food import financing system for LDCs and NFIDCs more efficient, one should consider an integrated programme of interventions.

Providing general balance of payment support may in some cases have very little effect, and even in the best of circumstances would be a very crude and inefficient instrument to tackle food import finance constraints; rather, one needs targeted measures. In other words, one of the possibilities mentioned in the Marrakesh Decision, drawing “on the resources of international financial institutions under existing facilities” – meaning in particular the IMF’s Balance of Payment facilities – in order to deal with short-term problems in financing normal levels of commercial imports”, would seem to be impractical. Even if one were to adapt these facilities to reduce IMF conditionality, finance is still not likely to come in time, nor would it be targeted at those who are actually able to undertake food imports.

Support should start with local capacity-building, enabling local banks to become better counterparties for international banks (which will lead to higher credit ceilings), and making them familiar with warehouse receipt finance (the financing form that is the most resilient to food price increases, and provides the largest scope for upcountry finance for importers). These banks should also be given more access to advice on matters related to commodity finance – international organizations, with support from the donor community, could consider enhancing their advisory functions in this area in a considerable manner, perhaps through a dedicated facility. Capacity-building should also encompass government officials (so that they know which rules and regulations hinder food import finance, and how these can be improved) and potential service providers such as collateral managers. Capacity-building is essential: without it, even if one enhances the capacity of local banks to obtain offshore credit lines, local importers may still not be able to meet the bank’s collateral requirements for, say, opening a letter of credit.

Then, under a new facility, one can provide extra country risk capacity. One way of doing this is to provide extra insurance capacity, e.g., low-cost sovereign risk insurance for goods in stock (as African Trade Insurance, set up by the World Bank, does for a number of countries in Eastern and Southern Africa). One can also provide extra liquidity on the secondary market, providing for example forfeiting facilities, or buying food-trade-related paper from certain countries once the implicit margin on these purchases becomes particularly high.²³ Another possibility is to provide currency convertibility risk coverage, which would protect the financier from the risk that, if sufficient local currency revenue is captured, he will be unable to convert this into hard currency and transfer it out of the country in reimbursement for his loan. On a bilateral basis, Bilateral Payment Agreements can shift country risks from an exporter to his government.

Such a new facility set up to facilitate food import finance can also provide extra bank credit risk capacity. For example, an international agency can add a guarantee to the avals provided by local banks, or provide insurance for local bank credit risk. One mechanism that most international banks now use to provide credit lines to local banks is to collateralize these credit lines – e.g., through keeping control over the offshore hard currency reserves and accounts of the local bank. The range of acceptable collaterals could perhaps be increased by new insurance facilities, which would, for example, allow a local bank to keep a local currency account with a branch of the international bank (or deposit local treasury bills) as acceptable collateral for a hard currency credit line. Furthermore, it is perhaps possible to make more of an effort to familiarize western banks with developing country banks, so that they are more likely to open lines of credit.

In all these cases, one works with the system – smoothing the path for certain forms of finance, opening the way for others. In many cases, one can use leverage to good effect (relatively low-cost actions can make a lot of extra finance available, or lead to considerable reductions in financing costs). One does not have to create completely new tools (instead, one can rely on proven tools) nor introduce market-distorting practices – rather, one extends the benefits of an efficient financial market to food importers in developing countries and, by implication, to the hundreds of millions of food consumers in these countries.

CHAPTER VI

Implications for the structure and operational modalities of an international “revolving fund” for the financing of food imports

Following concerns that greater liberalization of trade in agriculture may lead to negative effects in terms of the availability of adequate supplies of basic foodstuffs on reasonable terms and conditions, the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Countries was adopted. As a mechanism to cope with the possible short-term difficulties in financing normal levels of commercial imports of basic foodstuffs, 17 net food-importing countries made a proposal in the current WTO negotiations for the establishment of a “revolving fund”. This fund is intended to ensure that adequate financing is available to LDCs and NFIDCs during times of high world market prices.

This chapter explores how such a fund could function in the current context of international food trade. It follows on an earlier FAO report on the same issue, and has benefited from discussions in the WTO’s Interagency Panel on Financing Normal Levels of Commercial Imports of Basic Foodstuffs. The issue of the causality between the WTO reforms and either the level of the prices of basic foodstuffs, or the variability of these prices around their trend is not addressed here. Rather, it is recognized that while foodstuff prices at the moment are lower than several years ago, there always is a risk that they may increase sharply in a relatively short period; and if this happens, then problems in financing normal levels of commercial imports of basic foodstuffs are indeed likely to occur. The chapter describes how a fund which, in a way, acts as an “insurance” against this risk can be set up. Like all other forms of insurance, if the event against which one took out coverage does not occur, the “insurance premium” (the cost of the “revolving fund”) is lost. But as is argued here, the costs of a well-designed fund do not need to be high.

Developing country food imports are now mostly in private hands

Over the past decade, most government-owned food import agencies have been dissolved. Some have been exposed to competition and now function alongside private sector traders. Only in a few net food-importing countries have state enterprises remained in a monopoly position in food imports. Thus, the structure of food imports in developing countries is now dramatically different from that which prevailed in the early 1990s. By and large, private traders are now responsible for importing food, and get little assistance from their own government in obtaining the funds for this.

Where food imports take place within a private sector framework, governments tend to take a hands-off approach, leaving it to private traders and millers to procure foods on the international market, and finance its purchase. In a handful of countries, private sector imports coincide with a more hands-on role of the government in financing imports, setting local prices, etc. For some commodities in some countries, governments have helped set an enabling framework for food imports.²⁴ Most countries have now freed exchange controls, so hard currency is no longer centrally located, and importers have to procure it by themselves. In the large majority of cases, the private traders are locally owned. There have been a few large international traders which 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. The local, private traders may be large in local terms, but tend to have little track record (until a few years ago, the government arranged food imports), and limited financial strength. They are generally diversified, importing the whole range of bulk food commodities, and often, other products as well.

Given their limited financial capacity, local traders have a strong preference for buying on deferred payment terms – e.g., the seller provides the goods, and agrees to be paid 60, 90 or 180 days later (the seller will normally discount these payment flows as discussed in earlier chapters). This allows them to import the foodstuffs, sell them on the local market, and use the proceeds to reimburse the seller. The longer the payment terms, the better, particularly because this allows the buyer to make larger-volume purchases which can lead to considerable savings in transport costs. The financing costs of these deferred payment sales are effectively hidden in the price of the product – the seller will charge a price equal to the price which the traders would be paying if they had the needed cash, plus the interest charges that the international trader is faced with, plus a risk premium, plus a profit margin. Banks that have looked into this have found that the implicit interest rates can easily be in the 20% range, except when the seller can benefit from credit insurance from his government (more on this below).

International financing for developing country importers

Developing country importers normally rely on their suppliers for financing their imports. The suppliers can provide for this in four ways:

• They can arrange for an international bank loan to be put up alongside the food trade (which may involve a certain amount of risk sharing between the supplier and the bank, in case the importer does not reimburse).

• They can borrow themselves from a bank (or use their own working capital) to enable sale on deferred payment terms.

• They can obtain a credit or credit insurance from an official agency, which provides cover for 90-95% of the risks of the credit.

• They can use financial engineering techniques to mitigate country and credit risks.

In the first case, the credit will form part of a bank’s country exposure. Banks have credit lines for each country with a specific ceiling; and often, separate ceilings for each industry within the country. Once the credit line is exhausted, it is very difficult for a loan officer to get permission from the credit committee to provide new credit. Credit ceilings are normally set for fairly long periods, and only revised when there are specific conditions meriting its revision. Each loan has a risk weighting (country risk forms a large part of this), and banks generally target a “risk-adjusted rate of return” – the higher the risk, the larger the return should be.

In the second case, the credit will form part of the trading company’s credit exposure. Trading companies operate very much like banks (and have little choice in this, because they depend so strongly on external finance), with credit ceilings for each country. Revising credit ceilings is slightly easier than in banks, but credit committees are still very vigilant. The credit exposures that the trading company gets in this way are often discounted in the forfeiting market (which removes them from the trader’s country risk exposure), and the costs of forfeiting are built in, from the beginning, in the commodity’s price.

Official credits and credit insurance (which allows banks to exempt loans from country ceiling restrictions) are very important in international food trade. Both the USA and EC have a wide range of programmes, as do a small number of food-exporting developing countries (such as Argentina and Malaysia). Typically, these programmes shift the credit risk from the exporter to the export credit (insurance) agency, with only 5-10% of the risk still remaining with the exporter. It is often against such credits or credit insurance that exporters agree to sell on deferred payment terms. These agencies have specific budgets for their operations, often mandated by specific parliamentary budget approvals; most have been complaining in recent years that their budgets had been cut to such a degree that they have had to reduce their services.

In these three cases, the transactions generate “trade paper” (the importer acknowledges delivery, and promises to pay in, say, 90 days). If this trade paper receives an “aval” (a type of guarantee) from a reputable local bank, then this trade paper can be discounted on the secondary market, that is, it can sold to investors. It can be discounted with recourse (meaning that if the importer does not pay, the exporter has to pay the investor). It can also be discounted without recourse – the investor takes the credit risk. The forfeiting market is the principal outlet for such without recourse discounting. The forfeiting market has only limited depth for each country, and when much paper from a country is offered, discounts increase fast (so the trader has to built in a high price premium to compensate for this).

Increasingly, traders are resorting to the use of financial engineering techniques to enable them to continue selling commodities to developing countries. One simple form is warehouse receipt finance, where the international trader will take control over the logistics chain, control the commodities while they move down the commodity chain, and only distribute the commodity from a distribution point (warehouse) inside the country in small quantities, often against cash payment. In fact, the international trader becomes also the importer, and the local trader becomes a mere distribution agent. The risk that the commodity is stolen from the warehouse, or effectively expropriated by the government, can be covered by insurance (including, for Southern African and Eastern countries, by a new World Bank facility). Financial engineering adds costs, but it is often still cheaper than building in the risk premiums that would be necessary for non-structured sales. However, the possibilities to use financial engineering are limited by a lack of expertise in developing countries (meaning that local banks in general cannot supply the necessary supports) and in certain cases, inappropriate government policies (e.g., bankruptcy rules).

What happens if there are sudden new food import needs?

The current food financing system is not very good for dealing with shocks. As can be clear from the discussion above, apart from structured finance, the other three sources of import finance are all limited – there are fixed ceilings that are very difficult to change. So if food import needs of a certain country increase (because of price increases, or larger needs for food imports on commercial terms), it is quite likely that, other circumstances remaining equal, existing credit lines are insufficient. People still need the food, of course, and the market will find a new equilibrium. This would normally have one or more of the following components:

• Local traders start rotating their capital and their stocks faster – using the same credit line to import, say, twice as much food (instead of reimbursing over 90 days, they reimburse in 45 days, and buy another cargo). This does not have many negative consequences, but there are some limits to this, imposed by the logistics of international food trade (transport takes much time).

• International traders sell more on the assumption that they will place the resulting paper into the forfeiting market – which, given the limited depth of the forfeiting market for most developing countries, will lead to higher discounts for the country’s paper, which is reflected in higher prices charged for the food.

• Opportunistic traders –looking for high risk/high profit opportunities- come in, selling at a relatively high price (and in practice, with a serious risk of delivery of sub-standard commodities or other contractual problems).

• Local traders start paying their bills late, using funds due for a credit on one commodity to import another. This will ultimately lead to higher risk premiums, and thus, higher food prices.

• International traders do more structured finance deals.

For food consumers, this “market solution” has as one consequence that the prices that they would have to pay for their food are higher than would have been necessary had financing costs not increased. There are also likely to be short-term supply disruptions which, by themselves, can also drive up local prices. Governments which provide targeted support to vulnerable groups would be squeezed between a desire to continue targeting their assistance, and pressure to use its budget to help a larger group of consumers.

The overall balance of payment situation influences the capacity of the private sector to solve financing problems. If there is no surge in export revenues at the same time that food import needs increase, it is likely that the local currency will depreciate (which would force traders to raise local prices, which in turn increases trading risks), and a risk that the government will intervene in the foreign exchange market (this, in turn, creates risks for foreign financiers and thus will lead to higher country risk premiums). If there is a surge in export revenues and thus, the overall balance of payments does not deteriorate, these problems are less likely. However, this does not mean that financing problems are automatically resolved. Those benefiting from higher export proceeds are unlikely to be the same companies that need to procure new financing for their food imports, and the latter would still be faced with the financing ceilings as described above.

Can an international food financing facility be useful?

Given the above, a new financing facility for food imports, particularly to help countries deal with import shocks, would be very useful. It would help the continuing flow of food at a reasonable interest rate. However, given the prevalent system of food imports, a fund that would provide ex-post loans, to help countries replenish the hard currency lost through higher food imports, would have little or no impact on the ability to keep food imports going in times of increased food financing needs.

Local traders who need to import more food need funds, or new credit lines, at once. It is very hard to imagine how the possibility (not certitude) that one-two years in the future, their government will get a new loan will influence the willingness of international traders or banks to give them affordable loans now. It is even hard to imagine that the government would authorize a new, dedicated credit line for food imports without being absolutely certain that the disbursements under this credit line will be refinanced from an international fund credit line – no Ministry of Finance is likely to accept an arrangement of this kind. If there is the certitude that such refinancing will be possible, then the question is why should it take one-two years? It should be possible to make funds available at once.

Moreover, if the logic of the ex-post payments is purely to replenish the country’s foreign exchange reserves, not to support food imports at the time of need, then one can question why the “food trade balance” is considered in isolation – it would be more logical to consider the balance of payments as a whole.

Can one design a scheme that provides funds when there is a need for increased food financing instead of after?

It is possible to design “trigger mechanisms” that are sufficiently immediate to enable the disbursement of new food import credit lines at the moment that there is a need for such credit lines. These trigger mechanisms have the added advantage that they are external to the beneficiary countries, and thus, the actions of the governments of the beneficiary countries need not to be scrutinized; this makes the operations of the food financing facility easier as no policy review function is necessary, and it can considerably speed up disbursement.

Increased financing needs for food imports can result from three factors, two of which are out of the local government’s hands, and one of which it can have an influence over through its policies:

1. higher world market prices for food

2. a shift from food imports on preferential terms/food aid, to commercial food imports

3. An increased food deficit, as a result of a disaster, bad policies, or other factors.

As has been noted by others, donors would have difficulty to accept compensating a country for the effects of its own poor policies. Thus, increased import needs because of factor 3 would be compensated only after considerable scrutiny, and probably, financial disbursements would be linked to serious conditionality. If the cause of the increased needs is a disaster, then there should be more food aid, not loans. One could thus argue that it is highly preferable for an international fund to concentrate on the increased financing needs that may result from factors 1 and 2. In practical terms, import statistics are also only available with many months of delays; and then, may be an imperfect reflection of the needs for extra import financing, as it may be that in the absence of proper financing facilities, local importers were unable to make extra imports despite larger local needs.

In contrast, information on the first two factors is available with no or little time delay. World market prices for food are available on a real-time basis. Although it will require technical discussions, it should not be difficult to establish, for each country, a baseline price index, and monitor the changes in these indexes. A say, 20% increase in the index could then trigger the availability of new funds. Data on preferential food imports and food aid are also available on a reasonably timely basis (donors tend to programme such schemes), and a reduction of the volume of food available under such schemes can in all likelihood be determined in advance. These data are already gathered by existing organizations (in particular, the FAO and the International Grains Council), so it would not be necessary to construct an expensive new monitoring system.

How could a market-friendly food financing facility be structured?

The following sets out one possibility to structure a facility for the financing of food imports. The structure is designed to enable financing of food imports when there is a need, rather than to compensate balance of payment losses after the fact. It builds on existing practices of international trade and of international finance. The kind of operations described below is perfectly familiar to food buyers, banks, and food suppliers and they would have little or no difficulty in understanding the mechanisms and applying them. The structure of the facility also reflects the fact that the major concern in finance is not so much to find clients interested in borrowing, but to secure reimbursement, and it is assumed that a similar concern applies to donor countries which make funds available or provide loan guarantees. Thus, the structure described below contains strong measures to reduce the risk of loan default.



One possibility for the structuring of an international financing facility is the creation of earmarked financing windows in the LDCs and NFIDC’s that are interested. These windows would remain dormant as long as certain agreed triggers are not breached, but become active once there is a need for new finance for food imports. A small secretariat would be charged with monitoring trigger signals. The secretariat should also elaborate, with interested governments, what should be the trigger levels, and what should be the link between available food import credit and the level reached by the trigger factors, on the basis of clear criteria established by the international community.

To ensure that, if there is a need for new food financing, funds will be available, the international community can provide conditional guarantees rather than finance – in other words, there is no need to have a large amount of money in a non-utilized account. At the national level, the government would have to agree that any sums borrowed under the facility will be reimbursed – it needs to give a sovereign guarantee. If food imports are a state monopoly, the government could decide that the food parastatal or its parent Ministry administrates the fund. If food imports are largely in private sector hands, then the actual lending to traders should be through local banks. It would then make most sense to locate the national window with the Central Bank, which in turn works with interested local banks to familiarize them with the new window. Local banks can then inform local traders.

The secretariat of the international facility should also establish a list of reputable international food suppliers, which it could do itself, but which more efficiently could be done through international banks with which it will work in the future to distribute the actual funds.

As long as the automatic triggers that the international community has agreed on are not breached, the financial facilities remain dormant. When they are breached, there can be a clear sequence of events to enable traders to obtain the funds necessary to import food. As is indicated in the following chart, the sequence of events would start with the international secretariat advising a country that triggers have been breached, and that now, a credit line of a certain amount is available for food imports, and will remain available for a limited number of months.



The local government, if it feels there is indeed a need for more financing for food imports, can then notify the local banks who have agreed to be part of the scheme that the window is now open. These banks, in turn, contact their clients. There are then a number of ways for traders to access the fund. The chart shows how it would look like if access to the window is on a first-come-first served basis. Another possibility is to auction off access rights among the local traders, for example on the basis of the interest rate they are willing to offer. If on a first-come-first-served basis, the local trader would enter into an import contract with a reputable foreign supplier (the list of which should be made available). With a copy of the contract, he now approaches his bank with the request to have the transaction financed – for 80, 90, 95%, details are to be elaborated. The local bank would look at the request, and if they are comfortable with the credit risk of the local trader or with the risk mitigation mechanisms that he proposes (or agrees to), the bank will forward the request to the national window. The national window will then normally send this request on to the international facility, which should then automatically make the required payment for the food imports under the contract. This whole process could be done in a matter of a few days.

There are various ways in which the international facility can obtain the funds needed. It could request donor countries to provide funds in place of some of their guarantees. Or it could borrow from banks against the government guarantees (these give a AAA credit rating, which enables the facility to borrow money cheaply). In certain conditions, it could raise the funds at even lower cost on the capital market. There are also various ways in which the foreign supplier can be paid. The easiest and less risky approach is probably to work through reputable banks, which guarantee that once they make the payment, the food will indeed be shipped in accordance with the contract. Many banks have the skills and experience to do this (in effect, it can be as simple as the opening of a letter of credit), and it would probably not be worthwhile to build up such specific expertise in the secretariat.

Once the payment has been made, or the foreign supplier feels secure that it will be made, shipment of the foods will be arranged, in such a way that the supplier will be paid the remaining 5, 10 or 20% which the importer is supposed to pay directly. It is virtually impossible that the funds are diverted to other uses.


Then, after some time, the local trader (importer) has to reimburse the loan, in local currency. If he does so in time, the local bank reimburses the national window. Both payments are in local currency. In theory, loans could be denominated in hard currency, but this would expose the local trader and local bank to risks that can much more easily be managed at the level of the national window. The national window, in turn, reimburses the international facility for the payment made to the trader; and the international facility could in turn reimburse its source of funds. The donor guarantees can then become dormant again.



The fund should be set up in such a way that it strongly reduces the risk of non-reimbursement. The best way to do this is to create stakeholders in a proper reimbursement process. One element in this is that the local banks which actually interact with local traders have to take a part of the credit risk. So if the trader defaults, the bank would still be obliged to reimburse, say, 20% of the loan amount. One cannot make this percentage too high, because then, the local bank’s credit lines for certain traders or for the food business could be too easily exhausted. But it has to be high enough to ensure that the bank takes active measures to ensure reimbursement. One of the activities of the secretariat should be that it arranges training and advice to local banks so that they feel comfortable with such a role in provide financing to food importers. At the national level, the government would provide a sovereign guarantee, so even if there is a local loan default, the international facility should be reimbursed. If the sovereign defaults, the donors’ guarantees would be called upon. Presumably, this can be handled in the same way that multilateral financiers now deal with sovereign defaults by their member countries. A final element one could consider is the use of one of the various instruments that are now available to deal with price risk; which could help to reduce credit risk. If international prices have increased, the local trader will have to increase local prices. This may be difficult, and moreover, the government may intervene to reduce consumer prices (e.g., by reducing import taxes). The local trader thus runs a serious risk of making a loss on the transaction – which greatly increases the risk of default on the credit. A price risk management component can help local traders to keep prices low, to the benefit of consumers and simultaneously, making default less likely.

It should be noted that governments can have some leeway in deciding on the pricing of the food under this scheme. It would be advisable if the scheme is set up in such a way that traders who benefit from it pay the same interest rates that they would pay in the absence of a crisis situation (interest rate subsidies tend to lead to distortions). The national window would pay a much lower interest charge. The difference can be used in several ways, e.g., to set up a mechanism to deal with credit risk, or to subsidize food distribution to vulnerable groups.

A fund as sketched above has several advantages. Extra food imports can take place within weeks of an observed need for new financing for food imports. The use of funds is strictly controlled – diversion of funds is virtually impossible. Risks for food suppliers are minimal, which will lead to greater competition among suppliers, and to lower prices. The normal flow of food trade is not disturbed or distorted. Disbursement is easy, with procedures that require little time or documentation. Strong safeguards are built in to ensure loan reimbursement. As the secretariat can be very small and donors would provide conditional guarantees, not funds, the burden on donors’ funds would be minimal. Thus, if there are no market shocks in the years to come, no funds will have been wasted. Finally, a fund like this makes itself superfluous after one or two decades, as its activities to create sufficient capacity among local banks to manage the proper distribution of loans will ultimately lead to these banks being able to give such loans on their own behalf.

Annex 1

Decision on measures concerning the possible negative effects of the reform programme on least-developed and net food-importing developing countries

1. Ministers recognize that the progressive implementation of the results of the Uruguay Round as a whole will generate increasing opportunities for trade expansion and economic growth to the benefit of all participants.

2. Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least-developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.

3. Ministers accordingly agree to establish appropriate mechanisms to ensure that the implementation of the results of the Uruguay Round on trade in agriculture does not adversely affect the availability of food aid at a level which is sufficient to continue to provide assistance in meeting the food needs of developing countries, especially least-developed and net food-importing developing countries. To this end Ministers agree:

(i) to review the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention 1986 and to initiate negotiations in the appropriate forum to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme;

(ii) to adopt guidelines to ensure that an increasing proportion of basic foodstuffs is provided to least-developed and net food-importing developing countries in fully grant form and/or on appropriate concessional terms in line with Article IV of the Food Aid Convention 1986;

(iii) to give full consideration in the context of their aid programmes to requests for the provision of technical and financial assistance to least-developed and net food-importing developing countries to improve their agricultural productivity and infrastructure.

4. Ministers further agree to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favor of least-developed and net food-importing developing countries.

5. Ministers recognize that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties. In this regard Ministers take note of paragraph 37 of the report of the Director-General to the CONTRACTING PARTIES to GATT 1947 on his consultations with the Managing Director of the International Monetary Fund and the President of the World Bank (MTN.GNG/NG14/W/35).

6. The provisions of this Decision will be subject to regular review by the Ministerial Conference, and the follow-up to this Decision shall be monitored, as appropriate, by the Committee on Agriculture.

Annex 2

Production, exports and imports of cereals and vegetable oilseeds

Table A.1

World production of main cereals and vegetable oils, in million metric tons

Source: FAOSTAT Agriculture & Food Trade database.

Table A.2

Geographical distribution of cereals production, 2001

Source: FAOSTAT Agriculture & Food Trade database.

Table A.3

Exports of cereals by major exporting zones, in million metric tons

	1998	1999	2000	2001	Annual average 1998-2001	Share
North America	100	111	110	106	107	40.53%
Asia	36	31	39	38	36	13.64%
EU(15)ex.int	20	27	29	29	26	9.85%
Lat Amer& Car	28	21	26	26	25	9.47%
Oceania*	20	22	22	19	21	7.95%
Transition Markets**	18	19	14	19	18	6.63%
Africa	3	2	2	3	3	0.95%
World	256	265	273	263	264	100%

* Oceania: Australia, Fiji Islands, New Caledonia, New Zealand, and Papua New Guinea.

** Transition markets: Armenia, Albania, Bulgaria, Azerbaijan, Belarus, Estonia, Georgia, Bosnia Herzegovina, Hungary , Croatia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova Rep, Macedonia, Czech Rep, Poland, Romania, Russian Fed, Yugoslavia, Slovenia, Slovakia, Tajikistan, Ukraine and Uzbekistan.

Data for the EU exclude intra-trade. Source: FAOSTAT Agriculture & Food Trade database.

Table A.4

	1998	1999	2000	2001	Annual average 1998-2001	Share
Asia	14	16	17	20	17	48%
Lat Amer & Car	6	7	6	7	7	19%
North America	4	3	2	2	3	8%
EU (15) ex.int	3	2	3	3	3	8%
Transition markets*	0.74	0.67	1.00	1.00	0.85	2%
Africa	0.59	0.60	0.59	0.53	0.58	2%
Oceania**	0.42	0.44	0.53	0.51	0.48	1%
World	32	35	35	38	35	100%

Exports of vegetable oils, by major exporting zones, in million metric tons

* Transition markets: Armenia, Albania, Bulgaria, Azerbaijan, Belarus, Estonia, Georgia, Bosnia Herzegovina, Hungary , Croatia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova Rep, Macedonia, Czech Rep, Poland, Romania, Russian Fed, Yugoslavia, Slovenia, Slovakia, Tajikistan, Ukraine and Uzbekistan.

** Oceania: Australia, Fiji Islands, New Caledonia, New Zealand, and Papua New Guinea.

Data for the EU exclude intra-trade.

Source: FAOSTAT Agriculture & Food Trade database.

Table A.5

Imports of cereals (wheat, maize and rice) by major importing zones, in million metric tons

Source: FAOSTAT Agriculture & Food Trade database.

Table A.6

Imports of vegetable oils by major importing zones, in million metric tons

Source: FAOSTAT Agriculture & Food Trade database.

Table A.7

Imports of wheat, maize, rice, palm oil and soybean oil by LDCs,

2000 and 2001, in million US dollars

Source: FAOSTAT Agriculture & Food Trade database.

Table A.8

Imports of wheat, maize, rice, palm oil and soybean oil by NFIDCs, 2001 and 2002

(in million US dollars)

In bold: the three largest importers for each commodity in each year.

Source: FAOSTAT Agriculture & Food Trade database.

Annex 3

Trade flows for wheat, maize, rice, palm oil and soybean oil

Wheat

Wheat dominates world food trade. FAO estimated world exports of wheat in 2001 at US$ 14.6 billion (US$ 18.2 billion including wheat flour). While the major part of world market wheat exports comes from just five countries (United States, Canada, Australia, Argentina and France), in recent years, coinciding with lower Canadian and Argentine exports, there has been an increase in exports from Russia, Ukraine, and Kazakhstan.

In the five years up to 2001, Latin America and the Caribbean accounted for between 14-15% of world wheat imports. The major exporters to the region are the USA, Canada and Argentina. For the NFIDCs and LDCs in the region²⁵, wheat is their major food import.

North Africa²⁶ is a major importer of wheat, accounting for 11-14% of world wheat imports; this amounted to US$ 2.26 billion in 2001. The major importer is Algeria, followed by Egypt, Morocco, Sudan, and Tunisia. Except for Algeria and Libya, and Sudan which is an LDC, they are all NFIDCs. The major suppliers to the region are, in order of importance, the USA, France, Australia and Canada.

Sub-Saharan Africa accounts for 4-7% of world wheat imports, worth US$ 1.1 billion in 2001. Most of these countries are considered NFIDCs or LDCs²⁷. Among them, Kenya, Côte d’Ivoire, Ethiopia and Senegal are particularly large importers. The main exporters to this region are France (accounting for one third of the total) followed by Australia, USA, Germany and Argentina.

Asia accounts for 40-43% of world wheat imports; among the NFIDCs and LDCs, Pakistan (which, however, has become a net wheat exporter since 2001), Bangladesh, Sri Lanka and Yemen are the major wheat importers. Their major suppliers are the USA and Australia.

As for the Pacific NFIDCs and LDCs²⁸, they have a share in world wheat imports of 4 to 7%, with Australia acting as their major supplier.

Maize

Around 11-13% of maize produced in the world is internationally traded. In 2001, world trade amounted to US$ 8.87 billion. A small number of countries are responsible for most exports, although not all of them are necessarily large producers. USA dominates (with a market share of more than 50%, in some years close to 70%), followed by France, Argentina, and China. It should be noted that China has been both a significant maize export and importer during the last decade. NFIDCs account for 10 to 12 % of world maize imports (depending on the year), LDCs for 1-4%. Egypt is the major importer among NFIDCs, with 3-6% of world maize imports. Among LDCs, Yemen is the major maize importer, accounting for almost a quarter of the group’s total.

In the five years up to 2001, Latin America and the Caribbean accounted for 14-19% of world maize imports. The major exporters to the region are the USA and Argentina, followed by South Africa, Mexico and Brazil. Among the NFIDCs and LDCs in the region, Venezuela and Peru are the major importers, followed by Dominican Republic, Honduras and Jamaica.

North Africa accounts for about 6-10% of world maize imports (worth around US$1 billion in 2001). Egypt is by far the leading importer of maize followed by Tunisia, Morocco and Sudan. Main exporters to the region are USA, Argentina, EU (namely the Netherlands and France), Eastern Europe (Hungary, Romania, Croatia and Ukraine) and China.

Sub-Sahara Africa accounts for 2-6% of world maize imports (with an import value of around US$ 260 million in 2001). Kenya and Mozambique are major importers followed by Angola and Lesotho. The main suppliers of the maize imported by the region’s NFIDCs and LDCs are South Africa and USA, followed at a large distance by Zimbabwe and Italy.

Asia imports about 47-53% of world maize imports (around US$ 5 billion in maize imports in 2001). The role of NFIDCs and LDCs in the region, however, is minor, less than 2% of total world imports. Jordan and Yemen are the major NFIDCs and LDCs importers, respectively followed by Sri Lanka and Bangladesh. A major exporter to the region is Argentina followed by USA and Canada.

For the Pacific NFIDCs and LDCs, their import of maize is very limited.

Rice

Rice is the third most produced cereal in the world after wheat and maize. However, the international market for rice is thin and volatile. Most countries where rice is an important staple food have traditionally pursued a high degree of rice self-sufficiency to achieve food security. Only 4-6% of world production is internationally traded, and export volumes are driven more by domestic supply/demand balances than by world market prices. As a result, compared to the world market for wheat and maize, rice prices in international markets are rather unstable. A small production shortfall in an important rice producing country often results in a surge in import demand and triggers a sharp rise in international prices. This, in turn, can seriously hinder importers’ ability to secure affordable supplies on the world market.

Asia represents nearly 90% of world rice production, 70% of world exports and more than 50% of imports. Of the world’s seven largest rice exporters, only one (the United States, in the fourth position) is not Asian. In Asia, the principal exporting countries are Thailand, Vietnam, China, India and Pakistan.

NFIDC and LDC imports of rice represents about 19-23% of world rice imports (US$ 1.55 billion for 2001). Among the countries in these groups, Côte d'Ivoire ranks first in imports followed by Senegal (2% of world imports) and Cuba (2%). Sierra Leone, Haiti, Yemen, Niger, Jordan, Burkina Faso, Kenya and Guinea each accounted for about 1% of world imports.

The USA is the major rice supplier to Latin America (representing around 45% of total imports) followed by Uruguay and Guyana.

North Africa (which represents about 1% of global rice import) imports mainly from Egypt, Thailand, India and the USA. Sub-Saharan Africa’s share in world imports is rather variable, with a share that fluctuated between 6% and 25% in the period 1997-2001. It imports mainly from Asia: Thailand (in 2001, Africa accounted for 47% of total Thai rice exports), Viet Nam, India and Pakistan.

In the period 1997-2001, Asia accounted for about 40-52% of world rice imports. Yemen, Jordan and Bangladesh are important NFIDC importers. India is the major supplier, at times supplying 85% of the total demand in the region. Among the Pacific NFDICs, the Solomon Islands are the largest importer, followed by Vanuatu. They buy their rice mostly from Australia.

Palm oil

Worldwide trade in vegetable oils totals approximately 33 million tons, of which 15 million tons are of palm oil and 8 million tons are of soybean oil.

World exports of palm oil valued about US$ 5 billion in 2001. Malaysia accounted for 59-70% of palm oil exports, followed by Indonesia with a market share of 12-24% (more volatile than Malaysia’s exports because the government, at times, stops exports in order to ensure abundant supply on the local market). Among the producers, Papua New Guinea (with a 2% market share) is the third largest exporter, while and countries such as The Netherlands, Singapore and the United Arab Emirates are important re-exporters.

The major palm oil importer is India, which in the 1997-2001 period accounted for 15 to 20% of total world imports. It was followed by China with 8 to 12%.

NFIDC and LDC imports represent between 20-26% of world palm oil imports. Pakistan is among the most important importers (with imports representing between 6-11% of world palm oil imports), followed by Bangladesh, Kenya, Yemen, Myanmar and Tanzania.

Soybean oil

World export of soybean oil was estimated at about US$ 3 billion in 2001. The major suppliers are Argentina (with a share of 27-37% of world exports) and Brazil (13-18%), followed by the USA (9-18%²⁹), The Netherlands (7%) and Germany (5-7%). In the latter countries, the exported soybean oil is produced from imported soybeans. India, Bangladesh, China, Iran, Pakistan, Russia, Peru. Venezuela, Morocco and Egypt are all large importers of soybean oil.

NFIDCs and LDCs account for about 25-38% of world soybean oil imports (over US$ 900 million in 2001). Among them, Bangladesh is the largest importer (its share in the world market fluctuated between 3% and 13%), followed by Morocco (2-4%), Peru, Egypt, Venezuela, Bolivia, Dominican Republic and Pakistan.

NFIDCs import relatively large volumes of soybeans that are locally crushed to produce soybean meal (mainly used for animal feed) and soybean oil. This practice is largely absent in LDCs, which do not have the necessary crushing plants and thus import the final products.

Annex 4

Major international grain and vegetable oils trading companies

The major international trading companies for cereals and vegetable oils are described below. There are also a number of end-users (e.g., Unilever, Procter & Gamble) that are large direct buyers of, in particular, vegetable oils from origin countries, but they are not included here.

• Alimenta SA is a major Swiss private trading company, with a significant presence in world vegetable oils markets. It is, among other things, a partner of Archer Daniels Midland in the world’s largest groundnut oil company (Golden Peanut Cy, the largest processor of groundnuts in the US, and which has worldwide trading operations).

• American Rice Inc. (USA) accounts for about 4 percent of the world rice market. It markets around one fifth of US rice, and also has a joint venture with Vinafood I, one of Vietnam's major rice exporters.

• Archer Daniels Midland Co. (USA) is a major US agricultural processing and trading firm, the world’s second largest grain trader after Cargill. Much of its trading operations are through its Germany-based trading arm Toepfer International, in which ADM has an 80% share. Toepfer alone trades over 40 million tons of grains, oilseeds and oils a year. ADM is the largest crusher of soybeans in the USA, with a 31 percent market share (which is around one sixth of world production), and a 30-40 percent market share in Europe (another 4-5 percent of world production).

• Ascot Commodities (Switzerland) is the rice trading arm of oil company Addax & Oryx (one of the world’s three largest oil traders, also active in oil production and distribution), with its trading offices in Geneva. It is a major supplier to African markets (primarily to West Africa and countries in the Indian Ocean), with sales of over 500,000 tons in 2001. The transactions for rice trading are mainly carried out through cost and freight sales, covered by guaranteed letters of credit. However, the consignment of rice stocks, under the control of a reputable inspection company, is also possible, but is limited to a few markets.

• The Bunge Group (Argentina) formerly known as Bunge y Born, annually trades some 30 million tons of soybeans, wheat, maize and other grains. It is responsible for about a fifth of world trade in oilseeds and oils, and is a major cereals and soybeans exporter from Argentina and Brazil. The group operates one of the world’s largest flour milling operations. Bunge is the largest soybean processor in the western hemisphere with substantial business in Brazil and Argentina (through an alliance with Aceitera General Deheza S.A.).

• Capital Rice Co. Ltd. (an affiliate of the STC Group, a Thai conglomerate of trading and manufacturing companies in the field of agro-industry), established in 1977, accounts for about a fifth of Thailand’s rice exports. Capital Rice exports jasmine rice, white rice, parboiled rice as well as other varieties, to Asia, Africa, America, Europe and the Middle East.

• Cargill is a privately-owned agricultural trading firm and processing firm headquartered in the USA, playing a major role in world markets for grain and oilseeds processing and trading, for livestock and poultry, for cotton, and active in a range of other commodities. The company is the world’s largest food trader, with a volume of over 50 million tons of cereals and oilseeds/oils traded. It is, among other things, the world’s largest maize trader, accounts for 20 percent share of US wheat exports, and a quarter of Argentina’s exports of wheat, maize and soybeans. It is also actively involved in palm oil trade.

• Glencore International AG is a privately-owned commodity trading house organized under the laws of Switzerland and, together with its subsidiaries ("Glencore") is a leading trader in diversified natural resources (metal and petroleum) and a large trader in cereals.

• Kuok Oils and Grains is a Singapore-based commodity trading firm, with large operations in vegetable oils such as palm oil and coconut oil, and feed grains.

• Louis Dreyfus is a French family firm specialized in agricultural trade, accounts for some 15 percent of world market trade in grains and oilseeds.

• Japanese trading house Marubeni, through its Columbia Grain subsidiary in the US, is the third largest wheat exporter from the USA, exporting some 3.5 million tons of wheat a year (3.5 percent of world trade). Marubeni also has a stake in United Grain Growers Limited, a leading Canadian wheat exporter.

• The National Federation of Agricultural Cooperative Associations, ZenNoh (Japan), is the third largest exporter of maize from the US (and also, the third largest soybean and oil exporter). The federation represents over 1,000 cooperatives bringing together most of Japan's 4.7 farming households. ZenNoh also procures soybeans and oil from Canada and Australia, and is active in the rice and livestock markets in Japan.

• Nidera is a family firm with its headquarters in The Netherlands, and major trading operations in Latin America. It annually trades some 18 million tons of soybeans, wheat, maize, rice and other grains.

• Hong-Kong based Noble group is a large, diversified commodity trading company, with, among other commodities, operations in a range of grains and oilseeds.

• Novel, a privately held firm based in Switzerland, is one of the world’s largest rice traders.

• Olam, a trading firm headquartered in Singapore (and which is part of a large Indian conglomerate), is a large rice trader, and among other things one of the principal suppliers of rice to African countries.

• Peavey Co. (USA), a trading division of Conagra (a leading US diversified food company), is the fourth largest wheat exporter from the USA.

• Rustal, a privately held firm based in Switzerland, is one of the world’s largest rice traders.

• Soufflet S.A. Group is France’s largest wheat buyer and miller, with an annual volume of over 2 million tons. The company is also active in a range of other cereals, in France and the USA.

• The Rice Corporation, TRC (USA) is a major rice trading company, with worldwide trading operations, and rice mills in Europe, Latin America and the USA.

• United Harvest LLC is a joint venture between United Grain Corporation (a subsidiary of the Japanese Mitsui trading house) and Cenex Harvest States. In 1999, the company exported 5.8 million tons of wheat, close to 6 percent of world exports.

Annex 5

Major state trading companies – food exports

• Australia

The Australian Wheat Board Ltd. (AWB) is Australia's major national grain marketing organization and one of the world's largest wheat management and marketing companies. Its core business function is to serve the needs of Australian grain growers, and specifically wheat growers, by marketing and financing their grain. In particular, AWB has the responsibility for the management and marketing of all Australian export bulk wheat. In 1999, the government guarantees for AWB operations were lifted, and AWB became a commercial entity, although with a monopoly on wheat exports. AWB Limited also competes in the trading and management of non-wheat grains including barley, sorghum, oilseeds and pulses. AWB can provide credit to the buyers, normally up to 360 days.

Around 90% of the grain managed by AWB is wheat. The wheat pools managed by AWB are a significant contribution to the Australian economy, accounting for around 3% of the total value of Australia's exports and about 12% of Australia's total farm exports.

The Rice Marketing Board for the State of New South Wales (RWC) has a monopoly on rice exports in Australia. The Board provides trade finance through the operation of a Growers Capital Equity Roll Over Scheme, for procurement and storage of rice. It has appointed SunRice, previously know as the Ricegrowers’ Co-operative Limited, as its’ Agent to operate those facilities – in local purchases and exports.

• Cambodia

The Green Trade Company (GTC) is a public company involved in the trade of foodstuffs and other commodities. It owns rice mills and warehouses, and is involved in export/import trade. It also manages food security stocks, and is involved in market operations to maintain price stability. The company is under the technical supervision of the Ministry of Commerce and under the financial supervision of the Ministry of Economic and Finance.

• Canada

The Canadian Wheat Board (CWB) is the world’s largest wheat exporter. CWB is a farmer-controlled corporation created under Canadian federal legislation that markets wheat and barley through a “single desk” on behalf of farmers located in Manitoba, Saskatchewan, Alberta and the grain growing region of British Columbia. Thus, CWB pools grain from the producers in Western Canada and exports it on their behalf; the total earnings (plus government subsidies) are then distributed among the producer pro rata their deliveries (this is known as a "price pool"). In 1999/2000, the CWB handled 16.4 million tons of wheat, and 7.2 million tons of other grains. CWB accounted for some 18 percent of world exports. The CWB can either deal directly with the buyer or with grain companies which act on its behalf. There are 24 accredited exporters and two international exporters which purchase grains from the Board for resale to customers. The customer decides whether to deal directly with the CWB or to use one of these private grain companies.

The most common payment mechanisms used are:

(a) In-store sales: warehouse receipts evidencing title to grain held in commercial seaboard terminals (in the importing country) are exchanged for cash payments.

(b) Prepayment: A cash deposit covering the projected shipment value is made prior to vessel loading with an adjustment to actual made upon completion.

(c) Sight letter of credit: Payment upon presentation of documents.

(d) Term letter of credit: Payment terms typically range from 90 to 180 days.

While most of the CWB’s sales are paid cash, some 5% to 15% is on credit. In 2001/2002, credit sales stood at C$ 521 million, 12% of total sales, down from C$ 703 million the previous year.³⁰ If it provides direct credits, the CWB borrows the money from the market (through issuing commercial paper and medium-term notes, rather than through bank borrowing), lends it to the client (at a mark-up), and is itself responsible for obtaining reimbursement. If it fails in the latter, it has recourse to the government.

• China

The Government exercises full control over international trade in rice and other cereals. Decisions on the volume of imports and exports are taken by the State Planning and Development Commission in consultation with the State Council. China usually exports rice of medium to low quality, while importing high quality fragrant rice. The Ministry of Foreign Trade and Economic Co-operation (MOFTEC) then administers cereal trade, while actual transactions are carried out by a state trading enterprise, of which the China National Cereals, Oils and Foodstuffs Import and Export Corporation (COFCO) is the major one.³¹ COFCO manages the country's rice exports (and has a monopoly on rice imports), accounting for more than a tenth of world trade. It is a regular bidder on tenders by state importing organizations. COFCO is also a large exporter of maize, and active in a range of other food crops. While COFCO dominates in rice, the country’s other licensed international grain trading enterprise (owned by a provincial government and active in exports since April 1999), the Jilin Grain Group Imp. & Exp. Co. is the major maize exporter, with an estimated export volume in 2002 of 4 million tons. In addition, it exports rice.

• India

India's state-run Project and Equipment Corporation (PEC) is a large exporter of non-basmati rice, often selling through bidding on tenders.

• Myanmar

Myanmar has a mandatory rice procurement policy in which farmers must sell a fixed amount of rice to the government each year at less than half the market price. If farmers do not produce enough to meet their quota, they must buy extra rice on the market to make up the deficit. The Government uses the procured rice to provide low cost rice to selected groups, and for exports through Myanmar Agricultural Produce Trading (MAPT), an agency of the Ministry of Commerce.

• Pakistan

The Trading Corporation of Pakistan is responsible for government-to-government trade agreements signed by the Government of Pakistan, including for wheat and rice trade (e.g., exports to Iran). Pakistan is a major rice exporter. All trade is done by the private sector. The state-owned Rice Export Corporation was abolished several years ago. Today, another state trading agency, the Trading Corporation of Pakistan (TCP), plays a limited role in the rice trade by facilitating government-to-government exports through the private sector. The GOP, in consultation with the Rice Exporters Association of Pakistan (REAP), has established a quality review committee to certify the quality of Pakistani rice prior to shipment in an effort to boost the image of Pakistani rice, and especially Basmati rice. Pakistan has a modest export financing scheme, managed by the State Bank and channeled through commercial banks. It provides special credit facilities to certain exporters who have irrevocable proof of orders.

• Thailand

The Grain Division of the Department of Foreign Trade of Thailand often responds directly to tenders for rice imports, and if successful, then enters into government-to-government deals. In 2000/01, the government was allowed to trade up to 500,000 metric tons (compare to 750,000 metric tons in 1999/2000). The rice trading structure of Thailand gives emphasis to the private sector. Inter-government rice trade will take place on a case-by-case basis, and only if it is necessary. Rice exports within the international rice pool are supervised by the Department of Foreign Trade, Public Warehouse Organization, and the Marketing Organization for Farmers. The Bank of Thailand and the Export Import Bank of Thailand (EXIM) can provide trade credit to paddy rice traders and rice exporters.

• Vietnam

In Vietnam, the Northern Food Corporation and the Southern Food Corporation Inc. (Vinafood I and II), both state entities, dominate rice exports (but there are also other government-owned and private rice exporters). The Southern Food Corporation is a large exporter, accounting for around half of the country's exports and somewhat less than one tenth of world trade. It is responsible for large government-to-government contracts which are the result of successful bidding at a tender. It also administrates the export quota of others - mostly provincial government who may use (international) private traders as their agents. The Northern Food Corporation is a smaller exporter. It administers export quotas, but its own exports are mostly limited to government-to-government contracts with politically important allies. It accounts for less than 1 percent of world market trade.

Annex 6

Major state trading companies – food imports

Below is a description of state entities that play an important role in their country’s food imports. In addition to these, some other state entities may also import foods to supply a particular constituency – e.g., for the army.

q Cape Verde

Until 1998, market food supplies were essentially handled by the Government, through two parastatal companies: EMPA for maize, rice and other major items (bean, sugar, milk) and MOAVE for wheat. These two companies supplied the market through commercial imports and saw to domestic distribution. They were also responsible for food aid sold for counterpart funds and Government financing of food security activities, in agreement with donors. Since 1998, this system has been liberalized, and private traders operate alongside the government agencies.

q Comoros

The Office National d'Importation et de Commercialisation du Riz (ONICOR) has the monopoly on rice imports in the Comoros.

q Cuba

The Empresa Cubana Importadora Alimentos (Alimport), a government agency operating under Cuba’s Ministry of Foreign Trade, accounts for some 95% of agricultural imports into the country.

q Egypt

There are two state entities involved in grain and vegetable oil imports: the General Authority for Supply Commodities (GASC) and the Food Industries Holding Company (FIHC).

GASC is an agency of the Ministry for Supply and Home Trade, which imports all wheat (but also other commodities such as pulses, dairy products, red meat live animals and vegetable oils, etc.) for distribution in the subsidized sales system (2.5 to 3 million tons a year, a bit less than 40% of total wheat imports; it also buys a similar volume of locally produced wheat). As one of the largest wheat importers in the world, Egypt buys seven million tons of the cereal annually, traditionally mostly from the US. American wheat traditionally competes with French, Australian and Canadian products for Egyptian government tenders, but since 2001, many private sector millers have been turning to cheaper products from Hungary, Ukraine and Russia with lower freight costs. GASC has been able to maintain its high purchasing levels of US wheat through credit facilities provided by American aid programmes to Egypt.

FIHC is an agency of the Ministry of Public Enterprises, involved in the trade in sugar, wheat and vegetable oils. It sells in the free market.

q Kenya

The National Cereals and Produce Board (NCPB) has, as its main responsibilities, to reduce fluctuations of domestic maize prices, and the operation of the national strategic grain reserve. While in many years, NCPB exports maize, in deficit years it imports grains alongside private sector importers. When it imports grains it buys through an open tender, and pays from its own funds, or using local bank credit lines or special credits allocated by the Government of Kenya.

q Malawi

The National Food Reserve Agency (NFRA) is responsible for managing the country’s grain reserves, but it also imports grain when necessary (and administrates food aid grants). Contracts are usually tendered when they exceed K300, 000 and they are paid in advance.

q Mauritania

A parastatal, Société Nationale d'Importation & d'Exportation (SONIMEX), imports and distributes food alongside a number of private sector traders.

q Mauritius

The State Trading Corporation (STC)³² set up in 1982 is responsible for importing a number of essential commodities into Mauritius: petroleum products, cement, and rice and wheat flour. The STC maintains supplies of these commodities and ensures their efficient marketing and distribution. It has an annual turnover of US$ 220 million. The Corporation handles some 80,000 tons of wheat flour which are purchased from the local miller or imported. Flour is a government subsidized commodity. STC is the sole importer (some 50,000 tons a year) of subsidized non-luxury rice from India, China and Pakistan, and is also involved in the importation of luxury rice where it does not have a monopoly.

q Morocco

The Office National Interprofessionnel des Cereales et des Legumineuses (ONICL) accounts for around a quarter of total cereal imports into Morocco. Most of this is used for the production of flour for subsidized sales.

q Sri Lanka

The Cooperative Wholesale Establishment (CWE) comes under the purview of the Ministry of Commerce & Consumer Affairs. It is also known popularly as SATHOSA. It is the largest trading organization in the country, with an annual turnover of around US$ 210 million. CWE used to have a monopoly on all grain imports into Sri Lanka, but this was liberalized in 2002. Wheat imports are now directly by the country’s sole flour mill, while for rice and vegetable oil, CWE competes, in its imports, with the private sector. For these rice and vegetable oil imports, CWE issues open tenders, open to both local and foreign bidders.

q Tunisia

The National Cereals Board (Office tunisien des cereals, OTC) has a monopoly on the imports of the two major grains, wheat and barley, into Tunisia. It can, however, also authorize private traders to make imports on OTC’s behalf. OTC generally imports on the basis of a restricted tender or direct contacts with the principal traditional suppliers to the board.

The National Vegetable Oils Board (Office National de l'Huile) has the monopoly of vegetable oil imports.

In the case of both Boards, import financing is generally on the basis of opening letters of credit payable 180 days from the bill of lading. Only if the products have to undergo some form of value added in Tunisia (e.g., processing, packaging), there can be separate bank financing for periods up to 1 year. Banks provide an overdraft facility, and may cover their risks through pledges over the stock.

q Zambia

The Crop Marketing Authority (CMA) main responsibility is to manage the country’s strategic grain reserves. The private grain millers normally account for most imports. But in cases of a food shortage, CMA can also act as an importer. The CMA was created in 2002 to replace an earlier government agency with the same responsibilities, the Food Reserve Agency (FRA), which had a history of defaulting on its payment obligations.

Annex 7

Major export credit agencies and programmes relevant for world food trade

This annex provides a summary of the major export credit and credit insurance agencies in the countries exporting grains and vegetable oils, focusing on their role in these exports. It is note worthy that the export credit agencies of Argentina and South Africa are not involved in agricultural trade.

Australia

Australia’s Export Finance Insurance Corporation (EFIC) offers export credit insurance for up to 180 days through its commercial window, and up to three years through its “national interest window”. EFIC coverage to wheat exporters (AWB and the private exporters licensed by AWB) is up to 80% of their exposure – the exporters pass this on to their buyers through credit up to 80% of the value of the grains, and with a tenor of up to three years.

In cases where the risk is too great or where the acceptance of a contract would unbalance EFIC’s portfolio, EFIC can make credit available though the "national interest window". This requires a Ministerial decision or, as was the case in response to the Asian crisis, a Cabinet decision that extension of additional insurance coverage is in the national interest. Such credits allow longer-term coverage, with all risks ultimately covered by the Australian state.

Brazil

The Government of Brazil has four export credits and credit insurance programmes which can be used for its food exports.

The principal arm of the federal government involved in agricultural export finance is the Banco do Brasil, a quasi-government bank. In 1997, it made nearly US$ 550 million in loans for agricultural exports.

To support the export finance operations of other banks, the Brazilian government has set up the PROEX programme. Under this programme, banks can refinance their loans to exporters at relatively low rates (equivalent to those available internationally). Most products eligible for financing under the PROEX programme are capital goods, but it can also be used for some semi-processed agricultural and food products which are eligible. One of its programmes is an interest rate equalization mechanism for post-export loans, designed to ensure that Brazilian exporters can offer credit terms in line with those offered in the international markets.

For longer-term credit, the government national development bank, BNDES, provides several facilities. Since 1996, the BNDES’s Export-Import division (BNDES-EXIM) is becoming more aggressive in providing export financing for Brazilian firms. BNDES-EXIM operates by identifying creditworthy banks in foreign countries for which it opens lines of credit. These banks can then, on behalf of clients that they have to accept, buy from Brazil, with BNDES-EXIM immediately paying the exporter, and the foreign bank reimbursing the loan over a period of several years.

Finally, the Brazilian Export Credit Insurance Company (SBCE) provides export credit insurance. It was established only in June 1997. Its aim is to cover Brazilian exporters against commercial and political risks and force majeure losses that may affect export credit operations. SBCE was set up as a private company, having as shareholders Brazilian insurance companies (Banco do Brasil, Unibanco, Sul America e Minas Brasil) and the Companie Française d’assurance pour le commerce extérieur (COFACE). SBCE covers up to 85 percent of commercial risks and up to 90 percent of political risk and force majeure losses. Political risks and long-term (more than 2 years) commercial risks are ultimately borne by the treasury through the Export Guarantee Fund (FGE) managed by BNDES and capitalized by shares held by the government. In 1999, SBCE issued cover for $1 billion worth of exports, 55 percent of which was for other South American countries.

Canada

The Canadian export credit insurance agency, Export Development Canada (EDC), is a “crown corporation” (that is to say, a government entity that operates on private sector principles) which provides short – term export credit insurance and medium and long term direct loans. Its insurance cover to food exporters is for up to 100% of their financial exposure, at rates that are low compared to other export credit insurance agencies. A major share of the business in one of its windows, providing cover for sales to private wheat buyers, is managed through the Canadian Wheat Board.

France

There are a number of private companies that provide export credits and export credit insurance in France; one of them, Compagnie Française d’Assurance pour le Commerce Exterieur (Coface), which is owed in majority by Natexis Banques Populaires (formerly the Banque Française du Commerce Exterieur, BFCE), manages a large export guarantee programme on behalf of the French government. Natexis is also used by the French government for providing interest rate subsidies for export credit, in order to reach the minimum “CIRR” interest level as allowed under the OECD agreement.

Coface offers short-term credit insurance around the world, with affiliates in many countries. In France, it manages the government’s export insurance scheme. Each year, the Minister for the Economy, Finances and Industry (MINEFI) determines the possibilities for providing guarantees for export operations. The guarantee is granted by the Director of the Foreign Economic Relations, taking into account the opinion of the "Commission des garanties et du crédit du commerce extérieur". The risks are managed by Coface on behalf of the State. The guarantees are explicitly meant to stimulate the international operations of French companies, in particular towards developing countries considered too risky by private insurers. Coface is active in supporting food trade finance, covering, for example, the regular French-Cuban “wheat for sugar” trades, and wheat and maize exports to Korea. The Coface programme is announced in terms of total tonnage of wheat (and recently barley). Typically, France announces a programme for a certain volume of wheat for a certain country or region, and the programme keeps running until it is used up or until another programme replaces it. Coface coverage does not require the use of a letter of credit; documentary collections can be covered.

Germany

Hermes Kreditversicherungs AG (Hermes) is a consortium of a private sector insurance company and a quasi-public company that provides official export credit insurance, including for agricultural trade on behalf of the German government, similar to Coface of France. Hermes also provides short-term export insurance on its own account, according to standard market practices. Germany has another export credit and credit insurance agency, the Kreditanstalt für Wiederaufbau (KfW), owned by the German government and the federal states (Länder); but KfW’s export credit and credit insurance activities are in capital goods exports and project finance, not in agricultural exports.

Malaysia

Malaysia has an export credit insurance programme, and a credit programme.

The Malaysia Export Credit Insurance Bhd (MECIB), ultimately owned by the Ministry of Finance, provides coverage to exporters. For example, in 2001, it signed an indemnity agreement with Compagnie Bancaire de L'Afrique Occidentale of Senegal which would allow it to insure Malaysian exporters. "Before this, Malaysian exporters were not very confident of exporting to non traditional countries in Africa and they have to be extra careful with corresponding banks there," said MECIB general manager Mohd Noordin Abbas. "This agreement will encourage Malaysian exporters to export their goods to Senegal on irrevocable Letters Of Credit issued by CBAO," he added. The facility is a deferred payment term credit facility of up to 180 days for a revolving amount of US$5 million. Any issue of Letter of Credit from CBAO can be negotiated by Malayan Banking Bhd or Standard Chartered Bank and insured by MECIB. This new facility was primarily meant to promote palm oil exports.

The Export Credit Refinancing (ECR) Scheme is a short-term credit program administered by the central bank for eligible manufactured goods and selected primary commodities. Loans are extended by commercial banks at rates lower than commercial base lending rate. Credit for 80 percent of value is covered pre-shipment or 100 percent post-shipment. Pre-shipment credits are available for a maximum term of four months, while post-shipment credits are available for six months. Total loans to the agricultural sector in 1996 included U$1.25 billion for the palm oil sector.

Pakistan

In Pakistan, the Government decided in February 2002 to open up the State Bank of Pakistan's Export Finance Scheme (EFS) for private sector wheat exporters. The facility had become available for rice exporters a year earlier. Under the scheme, banks which provide post-shipment finance can be refinanced by the State Bank at an 8% per annum interest rate. The banks are allowed to charge exporters a spread of at most 1.5% over this refinancing rate. Banks are supposed to provide finance as part of the letter of credit process – in other words, an acceptable foreign bank opens a letter of credit, with deferred payment terms; the Pakistan bank pays the exporter at once, and refinances itself with the State Bank.³³

The availability of the scheme is expected to boost Pakistan’s cereal exports. In 2001, the government had privatized wheat exports, but the private traders were waiting for the country’s banks to start providing export finance so that they could benefit from the available market opportunities (particularly in Afghanistan).

Thailand

Thailand’s Export-Import Bank (ExIm Bank) operates several financing facilities to promote agricultural exports.

1. A “packing credit”. This is a short-term (up to 180 days) facility meant to allow exporters to procure and process goods for export. Under the programme, accredited exporters can obtain a credit, at a rate of not more than 10% a year, from commercial banks, against a simple promissory note (which needs to be backed by sales and export documents). The commercial bank can refinance 50% of the promissory note’s value with ExIm Bank, at a 5% interest rate. In 1996/97, approximately US$ 790 million was available to rice exporters under this programme.

2. A revolving line of credit for pre-shipment finance. The line of credit is negotiated directly between ExIm Bank and the exporter. It can be expressed in Baht, US$ or Yen. Once a line of credit and a credit agreement have been established, the exporter can draw on it when a letter of credit has been opened by a foreign buyer or after the buyer has sent a purchase order. In order to deblock the credit, the exporter has to issue a promissory note to ExIm Bank, and send it together with proof of the letter of credit, or the purchase order. Any amount repaid is available for drawdown against other purchasing documents.

3. Negotiation of Export Bills. This is a post-shipment finance facility, similar to forfeiting. Once an exporter has shipped his merchandise, he issues an export bill, which, he can discount with ExIm Bank. If exports are under a Letter of Credit, any exporter can discount his export bills. If there is no Letter of Credit, the exporter previously has to be approved for a line of credit by ExIm Bank.

4. Export Credit Insurance. ExIm Bank provides exporters with payment risk coverage (for political and commercial risk). Conditions depend on the kind of export contract and payment procedure. ExIm Bank establishes credit limits for individual exporters and banks.

5. Credit Facility for Export Agriculture Produce. This is a medium-term credit facility of up to 2 years to finance export of agricultural produce undertaken by a Thai government agency to a buyer's country under a specific repayment period. This is often for large export contracts that the government sees as a way to support its domestic rice price. The Ministry of Commerce makes the proposal to sell rice to, say, Iran, under a two years credit line. Government agencies, in particular ExIm Bank, are then assigned to offer loans to Thai exporters (which allow them to offer, in turn, loans to Iranian importers), under the overall supervision of the Ministry of Commerce. The Ministry of Finance guarantees the loans.

6. Express Export Credit. This is aimed at (small) exporters who sell under Letters of Credit to foreign buyers, but are unable to use this as a basis for pre- or post-shipment loans with local commercial banks because they do not have sufficient assets for collateral purposes. If all directors of a company provide a personal guarantee, a credit line of up to two million Baht is available to an eligible exporter within three working days after submitting all required documents.

7. Pre-Shipment Financing Facility for SMEs or PSF (SMEs). The facility’s objective is to help exporters especially those with limited financial strength to meet their pre-shipment working capital needs. Credit consideration emphasizes exporters’ manufacturing capability, repayment ability, as well as foreign buyers’ financial status and credibility.

USA

The USA government operates a confusing number of export credit and credit insurance programmes (see Box..). Broadly speaking, the major programmes are operated by the US Department of Agriculture (USDA); the US Agency for International Development (USAID), which has a number of food aid programmes which include sales on highly concessional credit terms; and the US Export-Import Bank (Ex-Im bank), which can provide export insurance.

The main programmes, as far as the export of bulk foods is concerned, are operated by the Commodity Credit Corporation (CCC), part of USDA. It has two credit insurance programmes which cover foreign bank risks, one for credit insurance up to two years (GSM-102, by far the largest – sales registrations in the fiscal year 2002 totaled US$ 3 billion, the same as three years earlier), one for longer terms (GSM-103, with no registered sales in 2002; in the previous year, registered sales volume was around US$ 44 million). Exporters are charged a premium for the credit guarantee. These fees range from 0.15 to 0.67 percent of the guaranteed value of exports under GSM-102, to 1.5 to 2.67 percent under GSM-103. It also has one programme to cover short-term foreign buyers’ credit risk (SCGP, with US$ 452 million in sales registrations in 2002, double that of the previous year, and up from US$ 46 million in 1999).

Both the GSM programmes receive a fixed minimum amount under 5-yearly “Farm Bills”. For example, as mandated by the 1996 Farm Bill, GSM-102 was to receive not less than $5 billion each fiscal year through 2002, and GSM-103 not less than $500 million each fiscal year through 2002. Within these credit ceilings, CCC establishes yearly country ceilings for the GSM and SCGP programmes – table 4 gives an overview for GSM-102 for fiscal 2002 (October 2001 to September 2002). Generally, ceilings are allocated for all agricultural products, but there may also be sub-lines for individual commodity groups.³⁴ U.S. exporters, foreign buyers, and banks, may request that CCC establish a GSM-102, GSM-103, or SCGP programme for a country and/or commodity. Only a part of these credit ceilings is, in effect, used. For example, in 2002, the GSM-102 credit lines for East Africa, Egypt, Morocco, Southern Africa, Sri Lanka and Tunisia (just to mention the NFIDCs and LDCs in the group) were not utilized. There were no applications from exporters for their use. Most of the GSM-102 coverage is for oilseeds and oils (24% in 2002), followed by feed grains (21%) and wheat (18%).

In practice, most of the credit guarantees are for trade with other OECD countries, and only a small part goes to net-food importing developing countries. in the period 1995 to 1998, only 17.3% of US export credit went to NFIDCs – a percentage (for example, according to the OECD, Analysis of Officially Supported Export Credits in Agriculture) much higher than that of other countries, e.g., for the EU it was 4.3%, Australia 2.3%, Canada 2.8%.

Loans guaranteed under the GSM program carry a lower interest rate and a longer tenor (i.e., maturity) than unguaranteed commercial bank borrowing. In the fiscal year 2000, of a total of more than $2.5 billion in major commodity exports under GSM, less than $20 million (or less than 1% of GSM registrations) was sold using loans with a tenor of 18 months or less – 99% was for longer tenors.³⁵

It should be noted that the main US export credit insurance programme, GSM, has two major disadvantages from the point of view of a private importer. Firstly, it requires importers to open dollar-denominated, irrevocable letters of credit, which in itself can be a difficult proposition for many private firms, and can carry significant costs. Secondly, the government may appoint a particular bank as the only bank to provide private companies with access to the GSM programme, and this bank can then charge high fees or a high interest rate, or (not uncommonly) impose on the beneficiaries that they pay back the loan relatively fast while the bank makes full use of the extended payment terms of the GSM programme.



The Supplier Credit Guarantee Program has been less actively utilized than GSM. However, as the purchase of commodities worldwide has tended to shift to the private sector and away from government buying entities, the SCGP represents a valuable attempt to tailor credit offerings to this private market. Allocations and use have been increasing rapidly in recent years. Most of the use has been for exports to Mexico (63% of the whole programme use in fiscal 2002).

USAID operates several export-promotion initiatives for food crops, which include concessionary finance and even grants. The most important ones are the PL 480 programmes. In fiscal 2002, commodity allocations for food aid under PL 480 were US$ 520 million, enough to buy 2.5 million tons of commodities. The other USAID programmes added another 300,000 tons. PL 480 Title I, for which US$ 150 million was allocated³⁶, is in principle for government-to-government sales, with the beneficiary government reimbursing over a long period (up to 30 years) and at a low interest rate (say 1%). Reimbursement can be in local currency. It can also be used for the “Food for Progress” programme, which assists private sector development. In this case, the food aid is generally “monetized”, which means that it is given to an NGO such as, say, CARE or World Vision, which sells it onwards to a local company (public or private). The sale is generally in local currency, and often, collateral management is used to mitigate payment risk (the grain or vegetable oil is delivered into the buyer’s warehouse, but put under the control of an independent collateral manager who is only authorized to release the goods when acceptable payment has been received). PL 480 Title II is an emergency and private assistance donations programme.

The mission of Ex-Im bank is to help finance the sale of American goods and services worldwide, with the long-term goal of creating and sustaining jobs in the United States. Food exports are important for the US economy, and accordingly, supporting food financing is an important activity for Ex-Im Bank.

Ex-Im offers three primary means of financing:

1. working capital guarantees

2. export credit insurance, to protect against default on exports sold under open account terms and drafts and letters of credit that are not the obligation of a US entity.

3. and direct loans, or guarantees of commercial loans.

Ex-Im can provide coverage for the food commodities discussed in this paper for up to 98 percent of the commercial risk and 100 percent of the political risk. Coverage can include sales into or out of consignment and sales made from an overseas warehouse, and even payments in a foreign currency.

¹ Cereals include wheat, rice, maize, barley, sorghum, millet, oats, rye, buckwheat, quinoa, fonio, triticale, canary seed and mixed grain.

² FAOSTAT Agriculture & Food Trade database.

³ Fiches techniques, Le marché mondial des céréales, July 2002 – agridoc – CIRAD ECOPOL.

⁴ According to an article by Michael Olsen, Director, Export Finance, the Canadian Wheat Board, 16 February 1999, http://www.statpub.com. “of approximately C$110 billion in sales made by the CWB over the years (not adjusted for inflation), roughly C$17 billion have been made on credit. Of this amount, about $6 billion remains unpaid.” By mid-2001, this had increased by C$ 7.1 billion. Such unpaid loans are usually rescheduled, over long periods and at a low interest rate; 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).

⁵ Agriculture and agri-food specific programs, http://www.inacservices.com/grantsa.html

⁶ It can be noted that, perhaps to maintain competitiveness, Australia, China and the USA also introduced major credit insurance covers for exports to Korea.

⁷ http://www.dfat.gov.au/media/releases/trade/1998/981112_1.html.

⁸ 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 which may approximate several US$ per ton.

⁹ 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.

¹⁰ For example, in August 2001, Malawi’s NFRA borrowed US$ 33 million from South Africa’s ABSA Bank, at a very low 4% interest rate, to import a planned 150,000 tons of maize from South Africa.

¹¹ Charles O’Mara, “International perspectives”, Agricultural Outlook Forum, 21 February 2002, http://www.usda.gov/agency/oce/waob/oc2002/speeches/OMARA.pdf

¹² A “Gentleman’s Agreement” among OECD governments imposes a certain discipline in the provision of export credits and export credit insurance. Under the agreement, official insurance and credits can only be given for credit transactions exceeding 24 months, can not be for more than 85% of the transaction size, loan tenors should reflect the working life of the goods and services being sold (with a maximum of 8½ to 10 years for developing countries), and the minimum interest rate is the “Commercial Interest Reference Rate”, CIRR (this represents a market-related rate that for most OECD countries is based on the secondary market yield for fixed rate government debt plus a fixed spread of 100 basis points). However, agricultural goods are excluded from the agreement. Discussions to include it have been going on for several years, but governments have not yet reached an agreement.

¹³ Governments cannot afford to leave the issue aside, because of the "non-circumvention provisions" of the Article 10 of the WTO Agreement on Agriculture. Under these provisions, export subsidies not subject to specific reduction commitments (which include export credit programmes) cannot be used in a manner that results in circumvention of the agricultural export subsidy commitments. Therefore, granting export credits or credit guarantees to a product in excess of the WTO-bound export subsidy commitment level, or food aid which does not meet the specific criteria of the WTO, would be a violation of WTO obligations.

¹⁴ See James Rude, “Reform of Agricultural Export Credit Programs” The Estey Centre Journal of International Law and Trade Policy Vol. 1(1), 2000. Discussions are ongoing. For example, in a proposal made in November 2002, the US proposed the following:

• Agricultural credits need to be repaid in 180 days for exports to developed countries, and in 30 months for developing country recipients. Emergency exceptions, to respond to a sudden, significant and unusual deterioration in a recipient country’s economy would be possible.

• Interest rates should not be below the costs of capital borrowed on international markets

• Strict notification requirements would be in place.

¹⁵ Another way of looking at political versus commercial risk: an overseas buyer may default for two reasons:

(i) He is not able to make the required payment (deposit) in the local currency to his central bank or a commercial bank. This is commercial risk.

(ii) He has deposited the payment in local currency, but the conditions in his country make it impossible for him to convert that amount into hard currency, or, if he can convert it, to export the hard currency from the country. This is political risk.

¹⁶ Particularly UNCTAD. Potential applications of structured commodity financing techniques for banks in developing countries, UNCTAD/ITCD/COM/31, Geneva, 2001.

¹⁷ Explaining how the Banker’s Acceptances market works, for example, would take several pages – those who are interested in this can approach UNCTAD Commodities Branch for its training materials on these issues.

¹⁸ In the case of a usance letter of credit, he requires a draft drawn on the issuing/paying bank for the amount of the invoice (the draft is, in this case, an unconditional order to the bank to make a payment in accordance to the specifications of the letter of credit). With a deferred letter of credit, no such draft is required (in some countries, there are high stamp duties on drafts so companies prefer to avoid them).

¹⁹ Exchange rates for such BPA settlements between the Central Bank and the participating local banks are quoted and published by the Central Bank. The local banks are, however, free to negotiate exchange rates with their customers as they take all responsibilities relating to all arrangements relating to the bank facilities with their clients.

²⁰ Its website is http://www.ati-aca.com.

²¹ Australian Department of Foreign Affairs and Trade, “International Developments in Export Credit and Finance Services”

²² « CWB defends credit sales for wheat », http://www.statpub.com, 16 February 1999.

²³ On the secondary market, paper is traded at a discount to its face value. The face value expresses the amount that will be paid when the paper matures, e.g., US$ 73,249 in three months time. When one knows at what price the paper is traded now, one can calculate the implicit interest rate. Thus, one can easily use the interest rate as a trigger factor for buying paper on the secondary market, for the purpose of providing liquidity.

²⁴ The best example of this are the framework counter trade arrangements into which the governments of a few countries (e.g., Egypt, Myanmar, Sudan) have entered to enable local traders to pay food imports in local currency or with local commodities, and in particular, the “Bilateral Payment Arrangements” promulgated by Malaysia to enable poorer countries to buy its palm oil.

²⁵ Barbados, Cuba, Dominican Republic, Haiti, Honduras, Jamaica, Peru, Saint Kitts & Nevis, Saint Lucia, Saint Vincent and the Grenadines, Trinidad and Tobago, and Venezuela.

²⁶ Algeria, Egypt, Libya, Morocco, Sudan and Tunisia.

²⁷ With the exceptions of Cameroon, Gabon, Ghana, Namibia, Nigeria, Congo, Seychelles, Swaziland and Zimbabwe.

²⁸ Kiribati, Samoa, Solomon Islands, Tuvalu and Vanuatu.

²⁹ The share of the USA in the more than US$ 10 billion value of world exports of soybeans is much larger, 50-60%. Most of this is exported to China, the European Union, Japan and Mexico for local processing.

³⁰ Canadian Wheat Board, Annual report 2000/2001

³¹ Review of Basic Food policies, Commodities and Trade Division, FAO, Rome 2001.

³² See also Alexander Bohrish, Observations and Recommendations on the Import Procurement Practices of the State Trading Corporation (STC) of Mauritius, consultancy report to UNCTAD, September 2001.

³³ An interesting footnote to this export facility: according to an article in Dawn, an Pakistani economic periodical, in October 2001: “Many of the scheduled bank officials are somehow unaware of the State Bank of Pakistan's (SBP) export finance facility in US dollar available since early this year. Some exporters who approached their bankers for dollar financing of their exports were shocked when told that, "no such scheme exists,” a representative of Small and Medium Sized Rice Exporters, Zulfikar Thaver told Dawn here on Saturday. Confusion prevails as ignorant bankers were not ready to finance exports in US dollar.”

³⁴ USDA can also specify who can be the beneficiaries; e.g., for Tunisia, only the National Office of Oil can buy oilseeds, with a Central Bank L/C; and for Jordan, the buyer of wheat has to be the Ministry of Industry and Trade.

³⁵ Kevin Becker, Cobank, “Improving USDA’s export credit programs in the trade title of the Farm Bill”, testimony before the United States House of Representatives Committee on Agriculture, June 2001.

³⁶ Among the NFIDCs and LDCs, Eritrea, Pakistan, Peru and Sri Lanka were among the programme beneficiaries in fiscal 2002.