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  • 10.3.4-RISK AND THE RELATION TO TRADE CREDIT-CHANGING RISK AND SMALLER OPERATORS

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  • Changing risk and smaller operators

     
     
    Smaller exporters, traders and importers are having to become more professional and specialized if they are to maintain or add to their traditional functions. If they cannot satisfy the demands of the larger roasters then they must concentrate on niche markets and smaller counterparts therefore, for example in the specialty or gourmet market.

    Their functions and margins may also be under threat from e-commerce or Internet trading. This may not necessarily compete with them, but may limit their ability to maintain adequate margins. If trading margins are inadequate then turnover has to rise or other activities have to be added - again factors that can have an impact on risk.

    If this involves them in more position taking, then their hedging requirements will increase accordingly, accompanied by exposure to unwelcome margin calls. Smaller operators mostly lack the margin cushion that large houses with direct or indirect exchange membership enjoy: large operators with direct access to the exchanges usually pay margins calls only over their net open position (long minus short). Margin calls can present particularly unwelcome and difficult swings in liquidity. Perhaps this is one more reason why so much trading has been on a PTBF (price to be fixed) basis in recent years. Until such contracts have to be 'fixed', hedging is not necessarily required because the price remains open. See 09.02 for more on trading PTBF.

    Unless a transaction is back-to-back, banks usually require outright purchases at fixed prices to be hedged immediately. Open hedging sales or purchases on the futures exchanges expose one to margin calls that need to be financed.

    Importers dealing with the strongly growing specialty or gourmet market need to 'carry' their customers: they must hold green coffee in stock for them, they must stock a range of different green coffees, and more often than not they must provide their clients with credit terms ranging from 30 to perhaps as much as 120 days after the actual delivery takes place. Risk attaches to all of these activities - see also 10.03.05 for more on this.

    Exporters wishing to sell to the specialty market must guarantee a certain minimum availability over a certain period of time. This automatically translates into price risk on the unsold stock holdings that need to be maintained as a result.

    If exporters want to secure a permanent foothold in the specialty market they may have to make crop finance advances to certain producers in order to safeguard supplies from future crops - risk again. Long-established and well-known exporters may be able to offset such transactions against forward sales to importers or roasters who also want to secure longer term supplies of a particular coffee.

    Clearly, long-term trends require careful monitoring. Most change has an effect one way or another on a risk situation somewhere, sometime.

    To these points one must add the risks attaching to the actual type of trade to be financed. These are the operational risks associated with the operations that are to be conducted, and the transaction risks that attach to each and every individual transaction. See also 10.04, Transaction specific risks.