U.S. Grains Council – Importer Manual, Chapter7

U.S. Grains Council – Importer Manual, Chapter 7

Financing U.S. Grains Imports
 
International grain transactions present both the exporter and
importer with a variety of risks that must be handled and minimized
to better facilitate the transaction. 
 
A major business risk to the importer is the performance of the
exporter - will the grain purchased meet the contract quality and
quantity specifications, and will the grain be shipped on time? The
exporter also faces a similar performance risk - will the importer
provide the proper shipment mode in a timely manner (in case of an
FOB transaction), and/or will the goods be discharged quickly (in a
CNF transaction) without problems arising from political upheaval
or changing import regulations? 
 
However, arguably the greatest risk the exporter faces is the
payment risk. This risk can surface in many forms -the importer's
non-acceptance of the grain at destination due to quality complaints,
or the importer's default due to changing market conditions or lack
of foreign exchange. The larger the payment risk is to the exporter,
the greater the risk "premium" the importer will pay as part of his
purchase price.
 
The payment risk is handled with a number of different payment
options, each reflecting varying levels of payment risk control. This
chapter will help the importer to identify the various payment
options, specify when and why a payment option is used, explain
how  each payment method operates and identify the advantages and
disadvantages each payment option presents the importer. 
 
The most commonly used method of payment for international grain
transactions is the letter of credit, a method that comes with a range
of options. In addition, this chapter will look at open account
transactions, the cash against documents payment form, the barter
(countertrade) method and other lesser used payment options.
 
 
 Letter of
Credit

 
A contract between an importer and an exporter may call for
payment under a letter of credit, often abbreviated as L/C or LC. A
letter of credit is a written commitment by a bank to make payment
at sight of a defined amount of money to a beneficiary (exporter)
according to the terms and conditions specified by the importer
(applicant). The letter of credit should set a time limit for
completion and specify which documents are needed to confirm the
transaction's fulfillment. 
 
More properly called a documentary letter of credit, it is important
to remember that a letter of credit is an additional contract dealing
with credit between the applicant (importer) and the issuing bank
and is separate from the original grain contract. 
 
Proper letters of credit have the following basic components:
 
Applicant: The party applying for the letter of credit, usually the
importer in a grain transaction.
 
The Issuing Bank: The bank that issues the letter of credit and
assumes the obligation to make payment to the beneficiary, usually
the exporter.
 
Beneficiary:  The party in whose favor the letter of credit is issued,
usually the exporter in a grain transaction.
 
Amount: The sum of money, usually expressed as a maximum
amount, of the credit defined in a specific currency.
 
Terms: The requirements, including documents that must be met for
the collection of the credit.
 
Expiry: The final date for the beneficiary to present against the
credit.
 
These are the necessary components of any letter of credit for the
credit to become a valid, operable instrument. In addition, letters of
credit come in various forms that define their level of risk. A
revocable letter of credit allows the issuing bank (at the applicant's
request) to amend or cancel the credit at any time without the
approval of the exporter (beneficiary) and is the most risky form. In
contrast, an irrevocable letter of credit has terms and conditions that
cannot be amended or changed without the expressed consent of all
parties, the issuing bank, the exporter (beneficiary) and the importer
(applicant). Finally, the addition of a commitment by a bank other
U.S. Grains Council – Importer Manual, Chapter 7 113
than the issuing bank to irrevocably honor the payment of the credit,
provided the exporter meets the terms and conditions of the credit,
results in a confirmed irrevocable letter of credit. 
 
 
HOW DOES A LETTER OF CREDIT WORK?
Once the exporter and importer have concluded a transaction that
calls for payment under some form of letter of credit, the importer
makes an application for the credit to the bank, either locally or in
another country, that will issue the credit.
 
The importer/applicant will give the issuing bank instructions that
cover such items as:
• The full, correct name, address and contact
information of the beneficiary, usually the exporter.
• A brief description of the grain involved, including
the quantity, quality and unit price.
• The method, place and form of shipment, the location
of the final destination and other shipping issues
including transhipment, partial shipment and the
latest shipping date.
• The full, correct description of the documents
required, including the period of time after the
documents are issued within which they must be
presented for payment. In addition, the credit should
specify if payment is to be immediate (at sight) or
with some degree of deferment (i.e., four days after
acceptance).
• Details of the letter of credit itself, including the
amount (usually expressed as a maximum), the
expiry date, how the credit will be made available
and the transferability of the credit.  
• The type of credit, the revocable credit, the
irrevocable credit or the confirmed irrevocable letter
of credit. 
 
Upon the issuing bank’s approval of the credit application, the letter
of credit is usually advised to the exporter; that is, the bank makes
the exporter (beneficiary) aware that a letter of credit is opened.
 
The advising is often done by a bank other than the issuing bank,
and this second bank may also confirm the credit. Once the importer
and exporter are satisfied that the credit is operable, the exporter
ships against the original grain contract and presents the required
documents and a draft (the instrument by which the exporter directs
U.S. Grains Council – Importer Manual, Chapter 7 114
the importer to make payment) to the confirming, correspondent or
issuing bank, as the case may be. Upon checking the documents for
accuracy, the bank(s) passes the documents onto the importer and
makes payment against the draft to the exporter.
 
 
WHAT ARE THE ADVANTAGES/DISADVANTAGES OF
LETTERS OF CREDIT?
The confirmed, irrevocable documentary letter of credit payable at
sight is the most commonly used type of letter of credit in
international grain transactions. This credit presents the exporter
with the least risk. Generally, the importer bears the cost of opening
the letter of credit. The cost of confirming the letter of credit is an
item of negotiation in the original grain contract. As risk and cost
are inversely related, letters of credit present the importer with the
highest cost payment option. In addition, the existence of a letter of
credit does not obligate the exporter to ship the grain purchased by
the importer. However, due to the substitution of a first-class
commercial bank's credit for that of the importer's, the exporter's
payment risk premium is greatly reduced and the resulting price to
the importer usually reflects no risk premium. 
 

 
Payment
Against
Documents
 

Under payment against documents, the exporter instructs his bank
through a collection letter to forward a draft and the original
shipping documents to the importer's bank for payment. The
collection letter contains complete and precise payment instructions
to be followed by the importer's bank, including the timing of the
release of the shipping documents.
 
The release of the documents is either on a cash against documents
(cad) basis or on a documents against acceptance (d/a) basis. 
Payment under a cad arrangement is at sight, while payment under a
d/a arrangement utilizes a time draft. 
 
HOW DOES PAYMENT AGAINST DOCUMENTS WORK?
Under the original grain contract, the exporter makes shipment and
sends the shipping documents to the exporter's bank for collection. 
The exporter's bank then sends the shipping documents, along with a
collection letter, to the importer's bank, which then sends a
collection notice to the importer. The importer either makes
payment upon receiving the notice at sight and prior to possessing
the shipping documents; makes a cash against documents
U.S. Grains Council – Importer Manual, Chapter 7 115
arrangement; or the importer accepts a time draft obligating the
importer to pay at a future date (a documents against acceptance
arrangement). Only after payment or acceptance does the importer
receive the original shipping documents.
 
 
WHAT ARE THE ADVANTAGES/DISADVANTAGES OF
PAYMENT AGAINST DOCUMENTS?
The major advantage of the use of a cash against documents
payment is the low cost, versus using a letter of credit. Also, the
exporter can receive full payment prior to releasing control of the
documents, although this is offset by the risk that the importer will
for some reason reject the documents (or they will not be in order). 
Since the grain cargo would already be loaded (to generate the
documents), the exporter has little recourse against the importer in
cases of non-payment. A payment against documents arrangement
involves a high level of trust between the exporter and the importer
and should only be entered into between parties well-known to each
other.

 
 
Countertrade
 
 
The oldest method of payment in international trade is the
countertrade arrangement. The term covers a wide range of business
arrangements where payment is received in forms other than cash.
 
The various types of business arrangements commonly called
countertrade and used in the international grain trade can be divided
into the following categories: barter, counterpurchase and
compensation.
 
 
WHEN AND WHY IS COUNTERTRADE USED?
The use of countertrade arrangements by importers has increased
recently, due in part to poor demand for some countries' large
amounts of base commodities, the lack of or inconvertibility of local
currencies and/or a desire to help stimulate or comply with
regulations of importing countries' economies. Countertrade is most
often used by importers operating in a planned economy.
 
Also, countertrade arrangements are complex, usually involving
three or more separate contracts or protocols, often necessitating
parties other than the importer and exporter, and call for additional
payment and finance terms as part of the transaction. Great care
should be exercised when utilizing a countertrade arrangement.
 
 
WHAT FORMS OF COUNTERTRADE EXIST? WHAT ARE
THE ADVANTAGES/DISADVANTAGES OF EACH FORM?
Barter: This oldest form of countertrade involves the direct
exchange of goods having equal or offsetting value with no
exchange of cash between the two parties involved, the importer and
the exporter. Barters are transaction specific and handled under one
contract that calls for an exchange of specified goods - without
assigning a value to them - within a short time period. The exchange
of goods takes place directly between importer and exporter without
the need for a third party, such as a bank. 
 
The use of barter involves considerable risk to the exporter and the
importer as goods are shipped and documents exchanged directly,
often with one party executing an obligation prior to the other party
taking an action. This risk can be reduced by the posting of standby
bank letters of guarantee on behalf of the parties. While barter can
be potentially advantageous to the importer, as the importer receives
the commodity without any outlay of foreign exchange, not all
exporters find the risk acceptable or have the expertise to handle the
goods received from the importer.
 
Counterpurchase: This most frequently used form of countertrade
involves the use of two separate contracts - the commodity sales
contract between the exporter and the importer, and a separate,
although technically related, contract between the importer and the
exporter that obligates the exporter to buy a defined value of goods
(or services) from the importer's country over a fixed time period. 
As opposed to barter, counterpurchase arrangements call for each
transaction to be independent of the other. Thus, an exporter would
ship grain to the importer and invoice for the commodity under a
normal letter of credit, while the exporter might then arrange to
handle a cargo of the importer country's goods, such as coffee, under
a separate commitment to pay, thus satisfying the counterpurchase
obligation. This may involve the need for a third party, such as the
coffee exporter, in addition to the use of one or more commercial
banks. 
 
Since a counterpurchase arrangement is really two trade contracts,
each with their own payment terms, instead of a single, standard
grain contract, this form of countertrade is quite cumbersome and
the transaction may not be completed for a period of months or
years. An additional disadvantage is the need for the importer to
utilize foreign exchange, although this is offset with the revenue
from the counterpurchase. Although it is cumbersome,
counterpurchase trade appeals to many importing countries as a
means of assuring a more positive trade balance, and many countries
require its use in some form.
 
Compensation:  This final type of countertrade involves payment
for the imported commodity by the buyback of a resultant or related
product. For example, an importer would pay for a shipment of corn
with a previously agreed upon amount of compound feed. Like
counterpurchase, compensation arrangements involve two separate,
independent contracts and are usually tied to a long-term industrial
development or facility. Once again, payment by the importer to the
exporter normally is handled under a letter of credit or similar
method.
 
While compensation has many of the same advantages and
disadvantages as counterpurchase, compensation arrangements can
help favorably influence a lending institution to provide financing
for the establishment of a proposed industrial complex by providing
the importer with a steady source of supply and a fixed buyer of
output.  
 
 
 
Other
Payment
Methods
 
 
Consignment: Under this method of payment, an exporter usually
ships and stores grain in a bonded warehouse in the importer's
country. While the commodity is consigned to the importer, the
exporter retains title to the goods until local sales are made. Often
under consignment arrangements, a private or government bonded
warehouse company or commercial bank serves as "custodian" of
the goods and handles the administrative details. As this type of
payment arrangement involves a great deal of administrative and
managerial time and effort, while also presenting the exporter with a
high level of payment risk, most exporters enter into a consignment
sale only with an overseas subsidiary, joint venture company or an
importer very well-known to the exporter.
 
Open Account: While this payment term involves the fewest
restrictions and the lowest cost for the importer, it also presents the
exporter with the highest degree of payment risk and is only
employed between an importer and an exporter who have a long-
term relationship involving a great level of mutual trust. Upon
shipment under the original export grain contract (usually on FOB
terms), the exporter prepares the normal documents, such as bills of
lading and original invoices, as well as weight and grade certificates.
The exporter presents these to the importer directly, thus avoiding
U.S. Grains Council – Importer Manual, Chapter 7 118
the involvement of a commercial bank. The importer then pays the
exporter directly, usually via wire transfer, upon receipt of the
documents. Under an open account payment method, title to the
grain passes from the exporter to the importer prior to payment and
subjects the exporter to default risk. Furthermore, there is a time
delay in payment, depending on how quickly documents are
exchanged between exporter and importer. 
 
Cash in Advance: This payment method is virtually the opposite of
the open account option. The importer, after purchasing the
commodity under the original grain contract, sends the exporter a
cash advance or prepayment for either the entire shipment or a
portion of the shipment. The exporter, upon receipt of the cash
advance, makes shipment to the importer and provides all the
necessary shipping documents. While this method of payment
involves direct importer/exporter contact without direct commercial
bank involvement and is therefore inexpensive, the importer faces a
very high degree of payment risk under a cash in advance payment,
while retaining little recourse against the exporter for poor quality
goods or incorrect or incomplete documentation. 
 
 
 
Finance
Options and
Methods

 
In the simplest grain import transaction, the importer would
purchase from the exporter the grain desired and, upon shipment of
the cargo, would immediately make cash payment in full. However,
some importers want (or need) to make payment at a later date or
over an extended period. It is at these times that the importer needs
to understand the various financing options available.
 
Just as the various options explored in the payment section present
the exporter and importer with various levels of payment risk and
ways to manage this risk, the different financing methods also
address the risks presented by payment at a deferred time. The U.S.
government, in recognition of the need to minimize payment risks to
exporters and to facilitate grain exports, established the export credit
guarantee program, commonly known as GSM-102, and the related
intermediate export credit guarantee program, or GSM-103. These
two programs - funded at over five billion U.S. dollars per year - are
the major source of U.S. grain trade financing.
 
The confirmed irrevocable documentary letter of credit payable at
sight is the most commonly used payment instrument. It is also the
foundation for some common forms of import financing. This
section analyzes various financing options, including the time of
acceptance and deferred payment letters of credit, and the use of
discounting and refinancing forms of financing grain imports.
 
 
GSM
Financing
 

The U.S. government, understanding the need to provide credit
financing to expand agricultural U.S. export markets, established the
GSM-102 and GSM-103 programs. The GSM-102 program
provides credit guarantees for three months to three years, while the
GSM-103 program provides credit for three to ten years. The
programs are designed to provide an exporter (or a party assigned by
the exporter) a payment guarantee while supplying an importer with
the necessary credit terms to make the purchase, and provide for the
payment of 98 percent of the covered value and a certain portion of
the interest in case of payment default.  
 
These programs are administered by the U.S. Department of
Agriculture's (USDA) Commodity Credit Corporation (CCC). 
Importing countries are generally chosen to participate in the
programs where the need for credit to establish or maintain a market
is necessary and, most importantly, where the countries’ financial
conditions allow for a reasonable expectation that payments against
the credits will occur. Bulk commodities, such as feed grains,
account for the greatest amount of financing dollars.
 

HOW DO GSM PROGRAMS WORK?
Country allocations, stated in a set dollar amount and commodity
specific, are established annually through negotiation between a
foreign government and the U.S. government, usually through
USDA. The allocations are available to use for eligible export sales
during the U.S. government fiscal year, which runs from October 1
to the following September 30. While contracts must be signed by
September 30 of the fiscal year in which the allocation is made,
shipment may occur up to December 31 for the previous fiscal year
program.
 
With an allocation in place, an importer wishing to utilize the
programs should then check, either with an exporter, a commercial
bank or through the USDA directly, as to whether the allocation is
operable. A late payment of a previous export credit guarantee
commitment may temporarily suspend the current allocation. While
many of the importers working with GSM-102/GSM-103 are
actually government branches or trade entities, the importing
country's private sector can participate under the program, and
interested parties should check with their own government for any
restrictions, as the credits are repaid in U.S. dollars, which creates a
foreign exchange obligation. 

USDA encourages the participation of private sector importers in
these programs. However, in many instances, USDA will not make
allocations to a country unless the central bank of that country
makes assurances that the U.S. dollar obligation will be covered in
the form of a Credit Guarantee Assurance (CGA). A CGA is an
agreement which stipulates that if a foreign bank defaults on its
payments under the GSM programs, the government of the foreign
country guarantees to repay the obligation to the U.S. government. 
If a CGA is agreed to by a foreign government, it is then up to that
government to decide how it will allocate the use of the credits
among eligible importers in that particular country.  
 
In other instances, USDA may not require a CGA. In these cases,
individual foreign banks are analyzed and specific credit limits are
set for each bank. Foreign importers can then negotiate directly with
these approved banks or other banks within that country that have
commercial relationships with the approved bank or banks for
access to the GSM credit guarantees.  
 
Assuming the credit is operable, the exporter and importer negotiate
the original grain contract and the exporter's price includes the cost
of the export credit guarantee fee called the premium. The original
grain contract must call for payment under an irrevocable letter of
credit. In addition, the credit guarantee will usually only cover the
port value (FOB portion) of the transaction. A Cost and Freight
(CNF) contract utilizing GSM-102/GSM-103 for the commodity
will need to provide for two different payment terms, one for the
FOB value of the commodity and one for the ocean freight. The
premium schedule for the guarantee fee is based on the length of
time the credit is needed and based on the interest rates for U.S.
government debt obligations. The premium is equivalent to
approximately one-third of 1 percent per year on the outstanding
coverage for GSM-102.  The premiums are higher for GSM-103 due
to the longer credit periods. The GSM-102 premium is calculated
based on a minimum of three months of coverage.  
 
With a contract negotiated, the exporter will register the sale and
submit the guarantee fee to the Commodity Credit Corporation
(CCC). The CCC will evaluate the exporter's application and upon
approval, will send the exporter a payment guarantee letter. The
exporter usually then assigns the payment guarantee letter to a U.S.
financial institution, almost always a U.S. commercial bank. By
assigning the guarantee to a bank, the exporter reduces payment risk
to the same level as an irrevocable letter of credit payable at sight,
and CCC accepts the credit risk of the eligible foreign bank. A U.S.
commercial bank - if not the issuing bank - provides the importer's
U.S. Grains Council – Importer Manual, Chapter 7 121
issuing bank and the importer credit for the amount not covered by
the export guarantee, which is usually 2 percent. The exporter
receives payment for the grain upon shipment of the commodity and
presentation of the required documentation, and the U.S.
commercial bank receives payment from the importer's local bank
(or often the central bank) according to an agreed upon schedule,
secure in the knowledge the U.S. government has assumed the great
majority of the repayment risk.
 
If the importer wants to open the letter of credit with a bank located
in the importer's country, the local bank must be approved by the
USDA to participate in the programs. A list of approved banks can
be obtained from the USDA, a U.S. embassy agricultural or
commercial officer or from most exporters. 
 
While the fee for the export guarantee is included in the price the
importer will pay for the grain, the importer must also remember
that other costs are incurred, such as letter of credit opening fees,
confirmation fees, and most importantly, the cost of credit and fees
charged by the issuing bank and the U.S. financial institution
advising or confirming the letter of credit.
 
With the letter of credit issued by the importer's bank and advised to
the exporter by the U.S. commercial bank to which the exporter
assigns the payment guarantee letter, the exporter proceeds to ship
the grain and present the necessary documents to the U.S.
commercial bank for negotiation. In addition, the exporter must
submit to USDA within 30 days of shipment, a statement of export
and a revised payment schedule. The U.S. commercial bank passes
the documents on to the importer through the importer's bank. The
importer makes payments to the importer's bank, according to the
scheduled agreement, covering the principal and interest of the
credit, and the importer's bank makes payment to the U.S.
commercial bank as per their scheduled arrangement. Principal and
interest are usually paid by routine bank transfers to the U.S. bank
that finances the transaction at the rates and intervals defined in the
letter of credit or the financing agreement between the U.S. bank
and the foreign bank. CCC requires that the total accrued interest be
paid at each principal due date. Principal must be paid at least
annually. In most cases, principal is paid semi-annually, with
interest payments occurring at the same time. The U.S. bank
providing the financing may require that interest be paid at more
frequent intervals than principal. The interest rate is negotiated
between the U.S. bank and the foreign bank. In almost all cases, the
interest rate is based on a premium to the London interbank offer
rate (LIBOR). Occasionally, the U.S. prime rate is used to establish
U.S. Grains Council – Importer Manual, Chapter 7 122
the base rate, with a spread negotiated to establish the effective rate. 
Both the LIBOR and the U.S. prime rates float. It is permissible
under the GSM program for interest rates to be adjusted at periodic
intervals based on changes in the LIBOR or prime rate if these
adjustments have also been agreed to by the U.S. and foreign banks. 
It should be noted, however, that the interest negotiated between the
U.S. bank and the foreign bank is totally separate from the interest
rate and other terms negotiated between the foreign bank and the
importer. If the importer is going to repay the local bank in local
currency, then it is most likely that prevailing trade financing rates
will be incurred by the importer which may or may not be correlated
with LIBOR or U.S. prime rates. However, if the importer is
repaying the local bank in U.S. dollars (and, in effect, bearing all
exchange rate risks), it is useful to know current LIBOR and U.S.
prime rates when negotiating the terms and conditions of the
financing with a local bank.  
 
There is no penalty for early repayments. Therefore, even shorter
credit periods may be possible if the U.S. and foreign banks agree to
early repayments. The minimum guarantee fee remains the three
month fee and no refunds will be made by CCC when the banks
agree to early repayment.  
 
 
WHAT ARE THE ADVANTAGES/DISADVANTAGES OF
EXPORT GUARANTEE PROGRAMS?
The use of the GSM-102/GSM-103 financing programs is more
costly to the importer than a contract calling for a sight letter of
credit payment due to the number of parties involved and the need
for a guarantee fee. In addition, the fact that the credit is
denominated in U.S. dollars and covers an extended period of up to
10 years, presents the importer or the importer's bank with increased
foreign exchange risk. Although many program users are
government entities that can handle this exposure, private sector
importers can seek to cover foreign exchange risk through a local
bank or commercial institution specializing in foreign exchange
hedging. 
 
These few disadvantages are minimal compared to the benefits these
programs provide the importer. The GSM-102/GSM-103 programs
provide very competitive financing terms at a minimal cost to
importers who may not be able to import U.S. grains without the
credit facilities.

It should also be noted that as countries around the world privatize
their grain distribution systems and more trade will be occurring
between private agents and/or end users, the U.S. government credit
programs are adapting to meet these changes and reflect the needs of
private importers. Decreasing the minimum guarantee term to three
months, and approval of additional banks within many countries to
increase competition for the financing component, are just two
changes seen recently which add to the value of the program for the
importer. Also, other changes will be occurring in the near future
which will add further flexibility and benefits to these important
programs.  
 
 
OTHER U.S.GOVERNMENT PROGRAMS
 
Export-Import Bank of the United States:
The Export-Import Bank of the United States (EXIMBANK) also
offers programs which may be utilized for U.S. agricultural
commodity exports. Most of these programs are insurance policies
which the exporter or the U.S. bank takes on to reduce their
financial exposure. This coverage protects against both political and
commercial risk and may cover either single or multiple shipments
under the same contract. EXIMBANK also occasionally offers
credits or credit guarantees to selected countries or regions. Most
exporters will know which EXIMBANK programs could potentially
apply to a given situation and should be utilized as a resource when
investigating financing options.  
 

 
Letter of
Credit
Financing
 
 
THE TIME OF ACCEPTANCE LETTER OF CREDIT
The time of acceptance letter of credit is similar to a sight letter of
credit except that the importer agrees with the exporter to pay for the
grain at some future date, usually a term of 180 days or less. The
exporter, as beneficiary of the letter of credit, may present a draft
drawn from his bank or other negotiating bank and discount the
proceeds; that is, receive immediate payment less some fee that the
bank charges for the time value of money and the payment credit
risk.
 
 
HOW DOES THE TIME OF ACCEPTANCE LETTER OF
CREDIT WORK?
An importer/exporter follows the same steps as in the letter of credit
payment. The importer's bank opens a letter of credit at the request
of the importer. The importer's bank informs the exporter's bank of
the credit. The exporter's bank advises the exporter of the credit. 
Shipment occurs, and the documents are presented to the exporter's
bank. These are documents that include a draft calling for payment
at the agreed date - a time draft. Assuming the documents are in
order, the exporter's bank may add its acceptance to the time draft
and discount the time draft, making payment to the exporter. The
importer's bank then receives the documents and releases them to
the importer, who makes payment for the grain on the agreed date.
 
 
WHAT ARE THE ADVANTAGES/DISADVANTAGES OF
THE TIME OF ACCEPTANCE LETTER OF CREDIT?
An importer involved in the processing of feed grains finds this form
of financing advantageous, as it allows the importer the time
necessary to process and/or market the resulting products and use
the funds generated to pay the exporter. Additionally, the exporter
may be able to make sales to importers otherwise not possible
without the financing arrangement. However, these benefits must be
weighed against the premium the exporter may build into the
exporter's price representing the cost of discounting the draft. 
 
 
THE DEFERRED PAYMENT LETTER OF CREDIT
A deferred payment letter of credit differs from a time of acceptance
letter of credit in two very important ways. First, the deferred letter
of credit is for a longer time period, usually up to 360 days. Second,
this type of financing does not provide the exporter with the ability
to discount the draft since the exporter cannot present the draft until
the future date specified in the letter of credit. 
 
 
HOW DOES THE DEFERRED PAYMENT LETTER OF
CREDIT WORK?
The deferred payment letter of credit operates just like a sight letter
of credit payment with the only procedural difference being that the
exporter receives the payment from his bank at the agreed upon
future date.

 
WHAT ARE THE ADVANTAGES/DISADVANTAGES OF
THE DEFFERED PAYMENT LETTER OF CREDIT?
While providing the importer with a longer time period in which to
make payment for the grain, the cost of this financing method
reflected by the exporter as a premium included in the contract price
can be great and alternative financing methods, like the GSM-102
program, might prove less expensive.
 
 
DISCOUNTING AND REFINANCING FINANCE OPTIONS
Financing the importation of feed grains can occur by methods that
do not involve a letter of credit. The exporter may agree to accept
terms with the importer using an open account arrangement with the
additional stipulation of payment at a future date, creating a
receivable for the exporter. Similar to the time of acceptance letter
of credit, the exporter can then discount the draft with a bank willing
to accept the receivable and the inherent credit risk. The discounting
can occur on a non-recourse basis, where the exporter accepts no
responsibility for repayment, or on a recourse basis, where the
discounting bank can make a claim against the exporter in the event
the importer does not pay. While this method allows the exporter to
receive immediate payment for the feed grain, the payment risk to
the exporter (or to the discounting bank in the case of non-recourse
discounting) is very high and may cause the exporter to include a
large risk premium in the exporter's price.
 
Finally, there are a variety of conditions under which the importer's
bank may agree to refinance. The importer may have a revolving
credit arrangement used to finance inventories, for example. While
simply another form of draft or receivable discounting, the payment
risk is normally transferred from the exporter to the exporter's bank.
 
 
CCC SUPPLIER CREDIT GUARANTEE PROGRAM
The U.S. Department of Agriculture administers export credit
guarantee programs for commercial financing of U.S. agricultural
exports. These USDA Commodity Credit Corporation (CCC)
programs encourage exports to buyers in countries where credit is
necessary to maintain or increase U.S. sales, but where financing
may not be available without CCC guarantees.
 
Under the Supplier Credit Guarantee Program (SCGP), CCC
guarantees a portion of payments due from importers under short-
term financing (up to 180 days) that exporters have extended
directly to the importers for the purchase of U.S. agricultural
products. These direct credits must be secured by promissory notes
signed by the importers.
 
CCC does not provide financing but guarantees payment due from
the importer. A substantially smaller portion of the value of exports
(currently 65 percent) is guaranteed under the SCGP than under the
Export Credit Guarantee Program (GSM-102), where CCC is
guaranteeing foreign bank obligations. Program announcements
provide information on specific country and commodity allocations,
length of credit periods, the required form of promissory note, and
other program information and requirements.
 
The Foreign Agricultural Service (FAS) administers the SCGP.
Regulations for this program are found in 7 CFR 1493, Subpart D.
 
Eligible Countries or Regions: Interested parties, including U.S.
exporters and foreign buyers, may request that CCC establish a
program for a country or region. Prior to approval, CCC evaluates
the ability of each country to service CCC-guaranteed debt.
 
Eligible Commodities: The SCGP targets specific U.S. agricultural
products, with an emphasis on high-value products and market
potential.
 
Participation: CCC must qualify exporters for participation before
accepting guarantee applications. Exporters who have previously
qualified under the Export Credit Guarantee Program (GSM-102) or
the Intermediate Export Credit Guarantee Program (GSM-103) are
automatically eligible. New program applicants must have a
business office in the United States and must not be debarred or
suspended from participating in any U.S. government programs.
 
The exporter negotiates the terms of the export credit sale with the
importer. Once a firm sale exists, the qualified U.S. exporter must
apply for a payment guarantee before the date of export. The
exporter pays a fee for the guarantee calculated on the guaranteed
portion of the value of the export sale.
 
Financing: The importer must issue a dollar-denominated
promissory note in favor of the U.S. exporter. The note must be in
the form specified in the applicable country or regional program
announcement. The U.S. exporter may negotiate an arrangement to
U.S. Grains Council – Importer Manual, Chapter 7 127
be paid, in full or in part, by assigning to a U.S. financial institution
the right to proceeds that may become payable under CCC's
guarantee. Under this arrangement, the exporter would also provide
transaction-related documents required by the financial institution,
including a copy of the export report which must also be submitted
to CCC.
 
Defaults/Claims: If an importer fails to make any payment as
agreed, the exporter or assignee must submit a notice of default to
CCC. A claim for loss may also be filed, and CCC will promptly
pay claims found to be in good order unless CCC determines that
the guaranteed portion of the port value exceeds the prevailing U.S.
market value of the commodity or product exported.
 
For audit purposes, the U.S. exporter must obtain documentation
showing that the commodity arrived in the eligible country and must
maintain all transaction documents for 5 years after payments are
completed.
 
 
FACILITY GUARANTEE PROGRAM
The U.S. Department of Agriculture's Facility Guarantee Program
(FGP) is designed to expand sales of U.S. agricultural products to
emerging markets where the demand for such products may be
constrained due to inadequate storage, processing, or handling
capabilities. The program provides payment guarantees to facilitate
the financing of manufactured goods and services exported from the
United States to improve or establish agriculture-related facilities in
emerging markets.
 
The FGP, a USDA Commodity Credit Corporation (CCC) program,
is administered by the Foreign Agricultural Service (FAS). FGP
regulations are a subpart of the Export Credit Guarantee Program
(GSM-102) and the Intermediate Export Credit Guarantee Program
(GSM-103) regulations (7 CFR Part 1493).
 
Qualified Projects: The Secretary of Agriculture must determine
that the project will primarily promote the export of U.S.
agricultural commodities or products to emerging markets.
 
Emerging Market: An emerging market is a country that the
Secretary of Agriculture determines (1) is taking steps toward a
market-oriented economy through the food, agriculture, or rural
business sectors; and (2) has the potential to provide a viable and
significant market for U.S. agricultural commodities or products.
 
U.S. Content: Only U.S. goods and services are eligible under the
program. CCC will consider projects only where the combined value
of the foreign components in U.S. goods and services approved by
CCC represents less than 50 percent of the eligible sales transaction.
 
Initial Payment: An initial payment representing at least 15 percent
of the value of the sales transaction must be provided by the
importer to the exporter.
 
Payment Terms: Payment terms may range from 1 to 10 years,
with semi-annual installments on principal and interest.
 
Payment Mechanism: Payment must be made to the exporter in
U.S. dollars on deferred payment terms under an irrevocable foreign
bank letter of credit.
 
Coverage: CCC determines the rate of coverage (currently 95
percent) that will apply to the value of the transaction (excluding the
minimum 15-percent initial payment). CCC also covers a portion of
interest on a variable rate basis. CCC agrees to pay exporters or their
assignee financial institutions in the event a foreign bank fails to
make payment pursuant to the terms of the letter of credit. FGP does
not cover the risk of defaults on credits or loans extended by foreign
banks to importers or owners of facilities.