Structured commodity finance and

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Structured commodity finance and price risk
management their relevance for investment and
trade
Lamon Rutten Coordinator, Commodity Marketing,
Risk Management and Finance, UNCTAD and Senior
Advisor, International Task Force on Commodity
Risk Management in Developing Countries, The
World Bank
UNCTAD/CFC Workshop on Enhancing Productive
Capacities and Diversification of Commodities in
LDCs, and South-South Cooperation Geneva, 22
March 2001
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Why does price risk matter?
Leads to conservative behaviour less
investments, incl. by farmers
Reduces predictability
Risk
Exports
Can lead to unpleasant surprises
Imports
Investments
Government budget
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Unexpected price developments have an impact on
economic development. For example
Pressure on the currency
Pressure on the government budget
Oil import bill increase
Oil import rationing
Crowding out of other imports
Worsening of debt service capacity
Oil price increases
Pressure on energy-intensive industries
The terms of trade of farmers producing export
crops deteriorates
Increase in energy and transport costs
Public transport requires even larger part of the
expenditure of the poor
Social and political unrest
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Many price risks can be managed
The capacity to manage price risk creates better
predictability, and makes it possible to avoid
many potential bad surprises. The markets for
price risk management are very liquid for many,
but not all commodities. The cost of insuring
ones price risk exposure on liquid markets is
very low. Main problem lack of capacity in
developing countries to access these markets.
And so far, there has been virtually no support
for the development of such capacity.
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Why does structured finance matter?
Without structured finance
With structured finance
With secured finance
financier
financier
financier
Will the collateral disappear?
Will he reimburse?
Will he produce?

Potential borrower
Potential borrower
Potential borrower
goods
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Secured finance using warehouse receipts can
have major benefits
It enables farmers, including those who
otherwise would have no access to credit, to
access more bank finance at a better interest
rate and for longer terms, thus giving them
more opportunity to invest and more
flexibility in their sales.
E.g., farmers participating in a warehouse
receipt credit programme implemented by a US NGO,
TechnoServe, in Ghana's Brong Ahafo Region were
able to increase, from 1992 to 1996, their profit
on grain sales by an average of 66 percent per
annum. This was despite the fact that only local
bank finance (at 42 interest rates) was used.
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Warehouse receipt finance can revive commodity
processing
Working capital needs for a processor without
warehouse receipt finance
Raw commodities awaiting processing
Commodities in processing pipeline
Processed commodities awaiting sale
Working capital needs for a processor with
warehouse receipt finance
Raw commodities awaiting processing Financed by
bank
Commodities in processing pipeline
Processed commodities awaiting sale Financed by
bank
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Warehouse receipt finance can facilitate imports
Working capital needs for an importer without
warehouse receipt finance
Cereals, sugar, oil products, fertilizer in
transit
Commodities in central storage
Commodities in retail sites
Working capital needs for an importer with
warehouse receipt finance
Cereals, sugar, oil products, fertilizer in
transit Financed by bank
Commodities in central storage Financed by bank
Commodities in retail sites
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Some potential applications of structured finance
3
financier
Country A
1
Slaughter houses
Livestock producers
2
Country C
Country B
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Some potential applications of structured finance
(2)
2
Ministry assigns payment of fishing rights to
financier
financier
Country A
1
Fishing companies
Fishing rights
Ministry of Fisheries
Country C
Country B
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Some potential applications of structured finance
(3)
2
Bank assigns forex payments of migrant
remittances to financier
financier
Country A
1
Migrant remittances
Bank regularly processes migrant remittances
Bank
Country C
Payment of local currency equivalent of migrant
remittances
Country B
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The under-exploited potential of secured and
structured finance
Regular income streams for commodities and for
commodity-like services and financial flows
should not be only income streams. They should
also be used to generate cheap medium- to long
term finance. And even the potential to
generate such income streams can be enough to
obtain finance, which then can be used to turn
this potential into a reality. This is perfectly
doable, including in difficult countries. In
effect, the potential gains in such difficult
countries are particularly large.
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How to make more use of the opportunities of
secured and structured finance

• be open to considering legal/regulatory
  reforms.
• E.g., currency repatriation and export licensing
  rules should permit effective assignment of
  commodities and export receivables taxation
  rules and rules on use of notaries should not
  create unnecessary costs.
• Organize capacity- and institution-building
  activities. Convince donors to finance work in
  these areas, focusing both on government
  officials and on the private sector.

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For papers and powerpoints on commodity risk
management and structured finance WWW.COMMRISK.NE
T/UNCTAD (TRAINING)