9 October 2008

Grain shipments stalled in credit drought

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

So far the problem is mostly being felt in U.S. and South American ports, but observers say it is only a matter of time before it hits Canada.

"We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver.

The port troubles occur as financial institutions worldwide experience an unprecedented level of failures; even the strongest global banks are taking shelter in government bailouts. Tuesday, the U.K was expected to invest as much as £45-billion ($87.01-billion) in three of the country's biggest banks, while the U.S. government rushed to put in place its US$700-billion rescue package for beleaguered financial market players. Ottawa has so far resisted pleas for direct financial aid for exporters.

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship.

The Baltic Dry Goods Index, the main measure of shipping rates, is down 74% from its high back in May when trade with China was still strong.

"The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.

While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

Jason Myers, head of the Canadian Manufacturers and Exporters, said exporters across Canada are getting caught up in the turmoil as customers delay payments, forcing them to shoulder the cost.

"What some companies are saying is we can't pay you until our customer pays us, so it becomes a question of who bears the financial risk and the cost," Mr. Myers said. "We're hearing about it more and more."

What that means is that manufacturers are getting hit as revenue slows and long-time customers disappear from the order book altogether. As profits decline, investment in product development starts to fall, too, he said.

The Canadian Wheat Board, one of the world's biggest grain marketers, has yet to refuse a customer because of poor credit, according to a spokesperson. "As of this moment we haven't run into that problem," said Maureen Fitzhenry.

Officials at Viterra, Canada's leading grain handler, were not immediately available for comment.

The meltdown in financial markets has resulted in a dramatic slowdown in maritime trade, with major ports in Canada and the United States preparing for sharply reduced activity after several of the busiest years on record.

Statistics from the Port of Vancouver have yet to officially register a drop but at Long Beach and Los Angeles, among the biggest U.S ports, imports have already declined 9% this year.

1 comment:

N Sustainable said...

If a seller does not trust the buyer's bank, then the seller should insist on a letter of credit confirmed by a bank of his trust.
The payment obligation of the secondary bank is independent of the buyer's bank in a confirmed LC.

A sample contract with a "confirmed LC clause" can be found here

and you can ask all other questions regarding LCs at the
Letter of Credit forum