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  • 10.3.2-RISK AND THE RELATION TO TRADE CREDIT-TREND RISKS

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  • Trend risks

     
     
    Market risk. World demand for coffee is stable with limited growth potential only. High production keeps prices generally low and there is little scope for expansion of trade profitability other than through competition, consolidation, or expansion or diversification of activities. Diversification usually means getting involved with a larger number of commercial counterparts, which can increase performance risk.

    Margin (profitability) risk. The concentration of roaster buying power and the large roaster's need for increased transparency in green coffee pricing both put pressure on margins, again potentially affecting trade profitability, while costs rise because of changed buying patterns and a greater need for risk management (hedging). Having fewer and larger partners also means having larger performance risks. Margins are also likely to be affected as e-commerce sites gain recognition and price transparency increases, certainly for the more standardized qualities of coffee.

    Volatility risk
    . For many it is becoming more and more difficult to trade back-to-back (make matching purchases and sales simultaneously), and more and more position taking is required. While the base price risk can be hedged (the market as a whole rises or falls), it is impossible to hedge the differential risk or basis risk (the value of the coffee bought or sold rises or falls compared to the underlying futures market). Modern communications provide instant price news worldwide, bringing increased price volatility.

    Country risk.This is a risk rating applied to all international lending, based on the lender's assessment of the political, social and economic climate in the individual country where the funds are to be employed. Country risk often weighs quite heavily in the total risk assessment attaching to the financing of trade with coffee producing countries. The more unstable a country or its economy, the poorer the country risk rating will be. Such ratings will also include an assessment of the probability that a country may suddenly introduce or reintroduce exchange controls. Poor ratings increase the cost of borrowing and may result in the bank demanding loan guarantees from sources independent of the country concerned. If banks feel the country risk is unacceptably high then they will buy country or credit insurance.

    What is not always appreciated is that country risk also applies to the buyer's country of residence. If an exporter trades with bank-supplied finance then the bank will usually reserve the right to pre-approve the exporter's buyers and sometimes even the individual transactions. If a sale is to be made to an unusual destination, country risk will play a role in that approval process. It is easier for an international bank than for an individual exporter to make such judgement calls.