Collapsing Trade Finance and its Impact on Food Security; Urban Farming worth a look

by Dave

Just-in-time supply chains are geared for efficiency not resiliency. With no slack built in, any  disruption in international shipping, due to collapsing trade finance, can leave store shelves empty of essentials, especially food. A scary thought.

In times like these, the Cuban success with urban farming (forced upon the island by the end of the Soviet Union’s largesse after that country’s implosion) is worthy of emulation, at least partially, in many Indian and LatAm cities. For those who will not adopt any idea not originating in the United States, the Cuban urban farming model is in line with the Victory Gardens that U.S. Americans were asked to maintain during both World Wars. Book Alert: Food Not Lawns

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.

Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer’s issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall.  Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected. Trade finance is rapidly communicating the stress on bank liquidity to the real economy.  It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York.  It could collapse the employment, the well being and the political stability of most of the world’s population.

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