International food trade is important for developing countries: while for many a relatively large share of exports consists of agricultural commodities, these countries are in fact principally net importers of basic food products, and spend a major part of their export revenue on such imports.
For this reason, many developing countries are concerned about the risk of increasing world food prices, and about the risk of having to import more food on commercial terms if food aid was reduced. Both risks could 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 (and therefore higher prices and potentially, less food aid) as well as to lower stocks (implying 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). This recognized these potentially negative effects and called for special facilities to address difficulties of financing imports of basic foodstuffs.
Financing is a major issue in food trade. Firstly, if importing countries have financing difficulties, 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. In only a few net food-importing countries do state enterprises remain in a monopoly position in food imports; by and large, private traders are now responsible for importing food. Thus, the structure of food importing in developing countries is now dramatically different from that which prevailed in the early 1990s.
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 to finance their purchase. Moreover, in the absence of government intervention, import demand for food may lead to a change in the demand for finance. The absence of government-backed financing will be an incentive to shift from purchasing large cargoes to smaller ones for immediate delivery, so tenders covering several months’ needs will no longer be appropriate. The local, private traders and processors may be large in local terms, but tend to have little track record and 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 need a better understanding of 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 sets out to:
1. describe 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 outline 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. actors (traders, developed country and developing country banks, export credit agencies, state-owned and private importers, local government entities, etc.);
b. 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); and
c. factors influencing financing conditions, and best practices.
2. identify weaknesses and problems in these current systems, including legal and regulatory constraints.
3. propose 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 Least-Developed Countries (LDCs), and Net Food-Importing Developing Countries (NFIDCs) during times of high world market prices.
It should be noted that food trade finance is part of a worldwide system: while there are factors that specifically influence food trade financing (such as price changes), it is also affected by other developments in trade finance. For example, the 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.
