International Trade, Agricultural Commodities , and Private Investment Funds.

There are many independent, family owned and managed businesses (SMEs) involved in selling agricultural commodities like grains and chicken parts from South America to China. The business of international sales of agricultural commodities involves many intermediaries. In this article we will be discussing how international private investment funds can help SMEs doing international trade.

The role of the intermediary.

?Farmers in countries like Argentina, Colombia, or Mexico are very busy tending to their operations. They don't have time to go to China and develop strong business relationships over six months to a year to secure the international trade of their products. We refer to this trade as international in nature because the farmers supplying the products are in one country, for example, Brazil and the commodities are being shipped from Brazil to China.

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The process of networking, business-development, and communication between farmers in South America and buyers in China is just as demanding and time intensive as it is in any other industry. So, when it comes to commodities in general, apart from the large carpet institutions and corporate commodity brokers, there is an ecosystem of entrepreneurial owner-managed businesses that specialize in bringing farmers in one country together with buyers in another country. These businesses are known as intermediaries.

?These owner-managed entrepreneurial intermediaries are organizations earning less than $100 million a year. They are not regulated institutions like banks or regulated financial services companies. They are privately owned SME's.

?Compliance is a major issue for intermediaries.

The problems of international business apply to these intermediaries because as described above they're all family-owned SMEs.? Because they're small SMEs, when it comes to the international financial transactions one of the largest problems that they face is Compliance. ?This is because there is a perfect storm of sorts.?

Letters of Credit from Chinese Banks

One of the reasons for this high compliance risk is that buyers in China, will issue letters of credit from Chinese banks to secure the transaction.?

There are no U.S banks that have branches in China.

?That means that most U.S. banks, especially private banks, will not monetize Standby letters of Credit (SBLC's) issued by banks in China.

?This means therefore that small intermediaries facilitating sales of agricultural products from Brazil to China have to either:

?1.??? Find banks and intermediaries in Asia or Europe to monetize the Chinese SBLCs or

2.??? Hire consultancies of former bankers and intermediaries that specialize in monetizing SBLC's from banks in China.

It is important to realize that U.S. banks in particular do not have a lot of international experience and capability in-house when it comes to operating internationally.

Of course, we all know that U.S. banks facilitate international trade for large corporations and large regulated financial institutions however these rules do not apply to privately owned SME's doing international business.

Large U.S. banks and community banks are not international, that means their management does not have international experience or perspective.

?When it comes to facilitating international business for SMEs, U.S. banks are becoming less and less effective over time mostly because there are no banks on the ground in any country outside the US. (The large U.S. banks of course see this as a reduction of risks.)

SME's therefore have to find their own solution to this problem because there is no way for the 10 largest banks to implement systems that enable them to know and truly understand the compliance risks presented by hundreds of thousands of SME's doing international business.

Summary of the problems faced by SMEs in the international agricultural commodity trading business (otherwise known as international trade):

1. Owner managed businesses are viewed as high Compliance risk by US private banks.
2. U.S. banks do not have branches in China.
3. International wire transfers are subject to delays.
4. Banks do not allow SMEs to accept payments on behalf of third parties.
5. Groups of intermediaries struggle to attain reliable escrow services that all parties can be confident in.
6. Suppliers in Latin America require 20% of funds up front from an intermediary to secure the deal so that the buyer will issue an SBLC. However, this is difficult to monetize.
7. SME's putting deals together have to spend significant time and resources traveling between farmers and buyers.
8. SME's need to be able to raise funds in order to do international trade more profitably.
9. One deal may involve up to 10 intermediaries who are all separate companies and do not know each other. There is no trust between these intermediaries which makes the transaction more complex because negotiations take longer. Because everyone is trying to secure their individual position.
10. SME brokers often need to keep the buyer confidential to prevent being circumvented by another intermediary in the chain.
11. Some of the contracts have to be between the supplier and buyer but the intermediaries cannot be party to these contracts after the fact and without obligations.

?One thing we have noted is the amount of time it can take to complete a successful deal for SMEs doing international business in this space. A deal can sometimes take a year or more which of course has a massive impact on the cash flow of all parties involved. So, we outline below an idea that could potentially address all of the above issues significantly.

?How international private investment funds can help SMEs doing international trade.

?Reduce banking delays and costs.

• By having a regulated international private investment fund a number of intermediaries can group together and operate the private investment fund. The very fact that the private investment fund is regulated well greatly reduce problems in doing international banking transactions.
• This is because a regulated entity is viewed differently by the Compliance department of a bank. In a nutshell the bank views or regulated entity as being responsible for its own compliance because it is regulated. This means when the international private investment fund or an entity owned by it such as a company opens a bank account with a bank and the bank sees that the investment fund is regulated and operated and run by a regulated fund manager, the company will not be flagged immediately as high risk.

Reduce cost of capital and work in a trusted environment.

• An international private investment fund that is a revocable trust can bring working groups of SME’s doing international business together.?
• If each intermediary is a beneficiary of the trust and as well as having contracts in place, then the addition of fiduciary obligation to all parties and the principles of loyalty and confidentiality will do more to secure the right of each party involved in the transaction than any contract alone kind do. ?

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We will discuss these solutions further in the next edition.

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When you know… You can Trust.