What are the recent trends impacting agri‑commodities trade finance?


What are the recent trends impacting agri‑commodities trade finance?

20 Nov, 2018

The agribusiness industry is at the juncture of trends which have a concrete impact on the way agri-commodities trade finance is being and will be conducted.

Driven by evermore demanding consumers in terms of sustainability and transparency, agribusiness has to rethink its traditional model. Digital tools make possible this transformation by connecting in a quick and reliable manner all actors in each sub-market of a very fragmented agri-sector. As part of this industry transformation, historical trade finance partners are currently adapting their value proposition to keep up with the new agri-business.

Consumers: Quality and sustainability

The first of these trends is the increasing interest from consumers on the quality and sustainability of food, extending as well to the way it is produced: preservation of water resources, soils, forest and biodiversity, working conditions, restrictions on child-labour... Regarding the quality of the agri-produce itself, the consumer in many countries seeks transparency through labels and certifications and is offered, in mature markets, ways and means to ensure and control traceability throughout the value chain. This trend spreads rapidly in developed markets of Europe, North America and Japan, and among the higher revenues population of emerging countries.

In the specific agribusiness industry many banks have elaborated and made public a specific agriculture policy which applies on all their agri-financings. Trade finance banks well versed in the transactional financing model have a definite advantage for ensuring traceability as they are used and equipped to follow tightly location and status of the commodities financed, from producing areas to export terminals, high seas and warehouses at destination.
"In the specific agribusiness industry many banks have elaborated and made public a specific agriculture policy which applies on all their agri-financings. "

Market: Digitalization and granularity

Digitalization is a 2nd trend significantly impacting the way trade finance banks finance agri-commodities. This, in complement to the trend for sustainability, contributes to a possible atomization/fragmentation of markets and flows with diversification of underlyings – as a merchant's model evolves from volume-driven models to value–driven models. In the search for margins, agri-merchants tend to extend their reach to what used to be considered previously minor agri-commodities (such as pulses for example which present an extremely wide assortment of names, types and grades). In the more classical commodities, client's requests for single origins, the development of flows of organic and certified goods and the growing necessity generally to preserve the high quality specifications of the commodities require specific traceable logistics and transportation means to prevent comingling with conventional and /or lower quality commodities. This fragmentation of the flows, driven by customer specific demand for sustainability and traceability is today made possible and further helped by digitalization in issuing, exchanging and processing documents and is bound to go further. In parallel, we observe at the same time a higher use of containers as a way of transportation of the commodities we finance all across the board of our agri-commodities portfolio. Trade finance banks active in the agri-sector finance today transactions which have a lower average value and a lower average volume than few years ago and need to keep adjusting their costs accordingly. Here digitalization and blockchain are the compulsory paths to reduce significantly processing and checking costs associated to trade finance.
"This fragmentation of the flows, driven by customer specific demand for sustainability and traceability is today made possible and further helped by digitalization in issuing, exchanging and processing documents."

Non-bank actors: financing and "farmers management"

The third trend is the increasing role of the non-bank actors of the value chain in actually distributing financings. This is possible by the combination of available technology (phone-payment systems, specific credit cards systems) with a growing concern from merchants/and agri-food industries in the more labor intensive agri-segments (cotton, coffee, cocoa) on the availability of agri-commodities to sustain their needs. Merchants and industries therefore enter into programs aiming at strengthening their supply chain through a combination of agri-techniques teaching and training, supply of inputs, financing of orchard replanting when necessary – as seen in the cases of cocoa and coffee – and/or cash-partial payments during the growing of the crop. This provides the farmer with more regular revenues and makes the farmer activity more rewarding. These programs have also the purpose of an enhanced global quality of the crop, possibly including as a target the meeting of certification criteria. With a prepayment component and some micro-finance aspect and even in some cases a capital expenditures financing component, these programs require specific funding, which, for the capital expenditures, goes beyond the usual one year max time horizon of trade finance. Such longer financings are part of the "farmers management" function that merchants and agro-industries develop progressively and will naturally entail some recourse on the balance-sheet of said corporates.
The future is indeed exciting for agri-trade finance banks with leading involvement in the larger sustainability and traceability issues, with the necessity to make full use of digitalization to finance and process more diversified and lower average volume transactions and with growing solicitation for additional types of financings!

This article was first published on BNP Paribas Switzerland.
Sector Head Agribusiness EMEA, BNP Paribas Specialized Trade Solutions
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