The Credit Crisis and Agricultural Export Credit


The worldwide credit crisis is having a direct impact on the availability of credit to finance the annual $14 trillion of international trade. Traders are turning to government programs to fill the gap. When the USDA Foreign Agricultural Service announced in early October the availability of $3.5 billion in Commodity Credit Corporation (CCC) export credit guarantees, within 48 hours it received over $8 billion of applications. Pressures for more government programs will likely continue to increase in the months ahead.

In recent years CCC export credit guarantees have had a declining influence on U.S. exports. For fiscal years (FY) 2000-2004 allocations for the GSM-102 program were about $4.5 billion per year and applications were about $3.0 billion per year. By FY2007 allocations had declined to $3.7 billion while approved applications declined to $1.4 billion. For FY2008 credit allocations were $3.3 billion and applications approved were $3.1 billion. Over those eight years U.S. agricultural exports more than doubled from $50.8 billion in FY2000 to $115.5 billion in FY2008. The current USDA forecast for FY2009 made in November shows export value declining to $98.5 billion.

For FY2009 USDA has a maximum of $5.5 billion of credit guarantees to allocate as mandated in the 2008 farm bill and chose to front load the allocations at the start of the new fiscal year. In mid-December 18 agricultural groups requested the House and Senate Agriculture Committees consider waiving or eliminating the cap as part of an “economic stimulus” package that is expected to pass in early 2009.

The credit guarantee program is targeted to middle income developing countries. The least developed countries general cannot afford to pay for food imports and depend on PL480 and the Food for Peace Program donations. Developed countries like Japan and the EU can pay cash or use commercial credits programs without government guarantees. Countries that qualified for the early October allocations included South Korea for $600 million, Southeast Asian region countries for $500 million, Russia for $400 million, Turkey for $400 million, South American region countries for $400 million, Central American region countries for $350 million, Eurasia region countries for $300 million, Caribbean region countries for $200 million, Africa and the Middle East region countries for 100 million, China for $100 million and Mexico for $100 million.

All of the allocations in October were for credit of up to 36 months. Credit is usually extended in dollars by a U.S. bank to an approved foreign bank with irrevocable letters of credit. Ninety eight percent of the principal and a portion of interest are typically covered by the guarantee which allows a U.S. bank to offer competitive credit terms based on the London Inter-Bank Offered Rate (LIBOR). After a firm sale is made the U.S. exporter applies for a payment guarantee before the export date and pays a fee based on the country risk of the buying country. The fee structure is based on rulings by the WTO that export credit programs must be risk based and fees cover long-term program operating costs and losses.

These types of government credit programs are part of the ongoing Doha Round of WTO trade policy talks because of the potential for terms that can be viewed as export subsidies. The argument has been that developed countries can afford to finance cheap credit while developing country competitors have no choice but to sell at lower market prices to offset the low-cost credit.

The WTO is well aware of the problems of tight credit for trade financing. WTO Director-General Pascal Lamy had a meeting with financial experts in April and a follow-up meeting in mid-November. In a speech to an informal meeting of heads of WTO delegations immediately after the November meeting Lamy noted that during the Asian financial crisis of the late 1990s and other smaller credit crises the WTO worked with the World Bank, the International Monetary Fund (IMF) and other groups to aid developing countries hardest hit by credit problems. He estimated the liquidity gap in trade finance in mid-November at $25 billion and believed the gap could be managed by the World Bank, the IMF, private banks and other institutions working together to manage risk.

The coordinated effort Lamy talked about has taken shape. The U.S. Federal Reserve established a $600 billion swap fund with other countries to make dollars available to central banks. Brazil, Mexico, South Korea and Singapore have $30 billion swap lines with the Federal Reserve. The World Bank has made $3 billion in trade credit available. The U.S. Export-Import Bank has a $2.9 billion credit guarantee program with South Korea. Once banks recognize that many trade finance loans are solid and provide higher returns than other lending, some are likely to reenter the market.

The reemergence of government lending for private trade activities is a troubling development for trade policy, but doing nothing is not an option. Developing countries need to continue to import food and exporters have ample supplies. Once the U.S. Federal Reserve and other central banks massively intervened to protect some borrowers and lenders, the credit markets were reshaped in favor of borrowers with implicit or explicit government guarantees. Lending for trade finance for developing countries became more risky relative to government protected markets.

The WTO should be involved in the policy discussions to contain the damage to current trade flows and prevent the proliferation of implicit export subsidies. Now is the time to find ways to unwind the government control of credit before it becomes institutionalized and much harder to undo.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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