Commodity Finance -- 2nd Edition: Principles and Practice

By Weixin Huang

Very few books published so far have touched upon commodity finance and fewer still have provided a systematic explanation and analysis of the subject. It is however a subject that is relevant throughout almost every corner of the world. From food to gold, commodities are ubiquitous.

In this book, Dr. W. Huang, a practitioner and a trainer, covers commodities, commodity markets, commodity trade and the finance of commodity trade. As such, practitioners such as bankers and traders in commodity finance, and those institutions operating in this field, or planning to be active in this field, will all benefit from this book.

This revised and updated second edition is a hands-on summary of commodity finance, with a special chapter dedicated to real-life case studies of commodity finance.

Topics covered include:
– High-level overview of commodity trade and finance.
– The three major sectors of commodity finance: soft commodities, hard commodities and energy
– Commodity finance and emerging markets, as most commodity export countries are emerging markets countries.
– The special mechanisms and products of commodity finance, from plain vanilla products to more complicated structures. The concept of Supply Chain Finance is also covered in detail.
– Bank and country risk.
– Risk management principles, with practical case studies.
– The organization of a typical commodity finance bank.

The key benefits of the book are: For bankers – how to do business and what risks should be watched for? For traders, brokers and institutional investors – how commodity finance is done and what bank instruments can be used. For students – how is commodity finance handled and developed by banks?

Each chapter can be read independently. The content has been reviewed by both experts and newcomers, incorporating their comments on style and content, to ensure it is as useful and clear as possible.

• Language: English
• Publisher: Harriman House
• Release date: Mar 25, 2019
• ISBN: 9780857196668

Weixin Huang

Dr W. X. Huang is a career banker who has worked for Bank Mees Pierson, ABNAMRO (ex-Fortis) and Rabobank since 1990. He has served as Director of Trade and Commodity Finance in these banks. This background has provided him with extensive exposure to the subject of commodity finance. He received his MA (Economics) in China and MA (Asia Studies) in Japan. His PhD was linked to his research project in Erasmus University Rotterdam which ex-Mees Pierson sponsored, and he joined the bank thereafter. With his multidiscipline and multicultural education, Dr W. X. Huang is one of the few experts active both as a practitioner in commodity finance, and as a lecturer and trainer for banking. As an emerging market specialist, he has also been regularly invited to speak at international conferences, and works as a consultant for the International Chamber of Commerce, World Bank, EU, Deloitte & Touché, FMO and European Savings Bank, among others. He has published several books, of which the most recent one was Institutional Banking for Emerging Markets (John Wiley & Sons) which is regarded as a valuable addition to the literature for banking and finance. As such, his lectures and books are positively commented on both in the banking industry and universities. As an adjunct professor in several universities, he teaches banking and finance for MBA/EMBA/DBA students. With his hands-on finance background he has the rare privilege of being a bridge between the academic ivory tower and the banking reality.

Book preview

Contents

Edition note

Praise

Acknowledgements

About the author

Foreword by Lex Kloosterman

List of abbreviations

Introduction

Structure and logic

Why and how

Target readers

Chapter 1: Commodity Finance: Definition and Scope

Definition: commodities, commodity trade and commodity trade finance

Characteristics of commodity trade

Commodity markets and commodity exchanges

Commodity trade finance

Marketability of commodities0

Leverage finance

Emerging market linked

Pre-export production

Production

Post-production

Chapter 2: Commodity Finance: Commodity Flow and Emerging Markets

Commodity flow: a global overview

Soft commodities

Hard commodities

Energy

Financing commodity flow for the least-developed emerging markets

Commodity finance: the importance and the difficulties for some less-developed emerging markets

Guarantee funds for credit support in commodity finance

Other instruments

Commodity finance for commodity dependent countries: the case of Ethiopia – why and how

Background

The financial sector in Ethiopia

Commodity finance

The role of micro-financial institutions in commodity finance

Support from the government for commodity finance

Some implications for the case

Contracts and documents behind the commodity flow

The importance of contracts and documents

Major parts of a commodity contract and points of attention

Chapter 3: Commodity Finance: The Major Financing Mechanisms and Products

Plain vanilla products: commodity finance versus trade finance

Commodity finance: finance under a letter of credit

Commodity finance facilities: pre-export finance

Export receivables financing

Prepayment finance

Advantages for the lending bank and the borrower

Related risks under pre-export finance

Trade finance facilities: ownership-based finance

Ownership-based finance

Different forms of ownership-based finance

Advantages of ownership-based finance for the lending banks and the borrowers

Relevant issues on ownership-based finance

The risk issue

The legal registration issue

True sale issue

Liquidity of the commodities involved

Issues linked to a special category of commodity

Supply chain finance

Supply chain finance: the concept

Advantages of supply chain finance solutions for the lending banks and the borrowers

Risks involved with supply chain finance

Supply chain finance application: a case of supply chain finance for copper

Chapter 4: Country Risk and Bank Risk and Letters of Credit in Commodity Finance

Country risk and bank risk

Practical issues for country risk in a commodity finance bank

Assessment of the country risk

The bank’s strategy towards that country

Commercial motivation

Bank risk in commodity finance

Practical issues for bank risk in commodity finance

Banks without external credit rating

Limit size and business need

Bank limit utilization and the speed of credit approval

Letters of credit in commodity finance

Letters of credit as a payment undertaking

Letters of credit as an instrument for financing

Bank risk for emerging market banks: payment dispute and delay

Chapter 5: Commodity Finance and Risk Management

Multiple risks and risk analysis in commodity finance

Commodity finance and its multiple risks

Financing commodity trading companies: multiple risk management

Risk management in commodity finance: the supply chain approach

Risk management in commodity finance: the collateral management approach

Principles of collateral management

Considerations on risk management for warehouse finance

Risk management in commodity finance: the instrumental approach

Risk coverage instruments

Fraud risk in commodity finance

Fraud risk and its impact

Considerations in fraud risk management

Defaults and bad debts management for commodity finance

Case appraisal and solution search

Litigation

Debt sale and debt collection

Chapter 6: Commodity Finance and its Infrastructure

The organizational infrastructure of commodity finance in a bank

Front desk: relationship management

Credit analysis team

Risk management team

Commodity support group

Financial institutions

Credit approval department

Legal department

Bank analysis department

Country risk analysis department

Industry research department

Corporate social responsibility department

Commodity price hedging desk

Commodity finance and commodity market research

Commodity finance: the support group and the trade service department

Special competence for the trade service department

Commodity finance, global market operation and price hedging

Special competence for global financial markets department

Commodity finance, risk appetite and credit mentality

Special competence for the credit department

Commodity finance and financial institutions

Special competence for the financial institution department

Chapter 7: Commodity Finance: Trends and Outlook

The future of commodity finance

Commodity finance and the commodity cycle

Demand from Asian countries, especially China and India

Population growth

Export restrictions

Other factors

Commodities and investment in commodities

Investment in commodities

Investment motivation

Commodity finance along the supply chain

Commodity finance and environmental protection

Conclusion

Chapter 8: Commodity Finance Case Studies

Pre-export finance

Executive summary

Case study – Bank M

Executive summary

Haana Cocoa Board

Executive summary

Payment blocked by a local court

Executive summary

Commodity fraud

Executive summary

Financing of railway bills

Executive summary

Court decision

Executive summary

Appendix 1: Major Commodity Futures Agencies

Agencies for commodity risk hedge

Appendix 2: Major Commodity Flows for China During Peak Years

Appendix 3: Top Commodity Trading Companies Worldwide

Bibliography

Publishing details

To Xinrong and Xinmin

O, troupe of little vagrants of the world, leave your footprints in my words!

Rabindranath Tagore (1861–1941)

Edition note

This edition is based on the 2014 Euromoney edition.

In addition to technical updates and amendments after the feedback from previous readers, a totally new chapter of real-life cases in commodity finance is added.

The discussion on cases has been most welcome in all commodity finance training sessions.

Praise

In the current turbulence in the world economy, various changes are taking place, including in the finance and trade domain.

Dr W. X. Huang’s book on commodity finance is absolutely right on target in putting the spotlight on this important but often misunderstood subject. He has delivered his insight in a wide range of aspects, both practical and theoretical, together with a forward vision.

Dr W. X. Huang has extensive experience in commodity finance. This is derived from his life-long engagement in the financial sector in leading positions in banks, and in an advisory capacity on a truly global scale in educational roles. His book thus provides a distinct professional contribution to the field of commodity finance, including a much-needed focus on emerging economies.

Meinhard Gans, MSc, 
Chief Executive Office of Maastricht School of Management

Acknowledgements

The book could not have been written without incorporating the knowledge others have so generously shared with me.

Writing the book has reminded me of the discussions and debates with my colleagues/ex-colleagues/friends inside and outside the bank, which have helped me and contributed to the book.

The conversations on various occasions with commodity trading companies and their insights into the subject definitely allowed me to check and cross check many of the understandings.

It is kind of Lex Kloosterman, ex-management member of Rabobank, to write his foreword.

The following list includes only some of the people with whom I have enjoyed working and to whom acknowledgements must go:

Rolf Dijkhuis

Audery Elaine

Rob Bonte

Diane Boogaard

Chen Dazou

Yang Meng

Li Shen

Migurel Ionita

Maggie Dong

Menno Meijer

Maes van Lanschot

Eeclo Wolters

Gary Collyer

Kaman Cheng

Gerjan Lagerwerf

Johnson Chan

Hu Ronghua

Joost van den Akker

Jenny Choi

Janson Jord

Peter van Iershot

Sema Zeyneloglu

Seb Princen

Theo Bettenhaussen

Amy Wang

Upon my request, Menno Meijer, Yong Meng, Rolf Dijkhuis, Eeclo Wolters Gary Collyer, have read Chapter 7, Chapter 6 and Chapter 5 and have given detailed professional comments, despite their busy schedules.

Teaching at the Maastricht School of Management and training on various occasions has given me a lot of inspiration on the subject.

It is my great honour to have Mr. Meinhard Gans, CEO of Maastricht School of Management, and my 20-year friend and colleague, write his kind recommendation on this new edition of my book.

Thanks should also go to Kaman, Charles and Migurel, who have contributed to some charts and tables in the book.

Ms Melissa Oshungbure, Managing Editor of Euromoney which first published this book, has given so much help and comments on the book, including the title and content. She is right in saying manuscripts can feel that they are taking over your life towards the end!

Only with the efforts from Harriman House, especially our editor, Craig Pearce, who carefully planned the publication, and Liz Bourne, who raised detailed questions to improve the text, this new edition is possible with a new face.

A special word to Robert Speelman, who inspired me to venture into a commodity finance banking career.

Last but not the least, thanks to my family for putting up with many of my days and hours at the computer. The book is also theirs.

W. X. Huang

About the author

Dr W. X. Huang is a career banker who has worked for Bank Mees Pierson, ABNAMRO (ex-Fortis) and Rabobank since 1990. He has served as Director of Trade and Commodity Finance in these banks. This background has provided him with extensive exposure to the subject of commodity finance.

He received his MA (Economics) in China and MA (Asia Studies) in Japan. His PhD was linked to his research project in Erasmus University Rotterdam which ex-Mees Pierson sponsored, and he joined the bank thereafter.

With his multidiscipline and multicultural education, Dr W. X. Huang is one of the few experts active both as a practitioner in commodity finance, and as a lecturer and trainer for banking.

As an emerging market specialist, he has also been regularly invited to speak at international conferences, and works as a consultant for the International Chamber of Commerce, World Bank, EU, Deloitte & Touché, FMO and European Savings Bank, among others.

He has published several books, of which the most recent one was Institutional Banking for Emerging Markets (John Wiley & Sons) which is regarded as a valuable addition to the literature for banking and finance.

As such, his lectures and books are positively commented on both in the banking industry and universities. As an adjunct professor in several universities, he teaches banking and finance for MBA/EMBA/DBA students. With his hands-on finance background he has the rare privilege of being a bridge between the academic ivory tower and the banking reality.

Foreword by Lex Kloosterman

It is with great pleasure that I recommend this book, Commodity Finance: Principles and Practice, expertly written by Dr W. X. Huang, not only to any trade finance professional or commodity trader sharpening his or her knowledge on the subject, but also to finance graduates, who are preparing to enter the interesting domain of trade and commodity finance.

Having spent a full professional career in trade and commodity finance at Mees Pierson, Fortis and the last eight years at Rabobank, Dr W. X. Huang will prove to be an eloquent partner, teacher or reference for each reader of his book.

Most of all you will be delighted to have found through his book, this unique mentor, who will always accompany you in resolving the complexities of our trade.

List of abbreviations

BL Bill of Lading

BPO Bank Payment Obligations

BOT Build Operation and Turn Key

CBE Commercial Bank of Ethiopia

CBOT Chicago Board of Trade

CCO Commodities Collateralized Obligations

CFC Common Fund for Commodities

CME Chicago Mercantile Exchange

CRB Commodities Research Board Index

CSG Commodity Support Group

CSCE Coffee, Sugar, and Cacao Exchange

CSR Corporate Social Responsibility

CTA Commodities Trading Advisors

CTN Commitment to Negotiate

DBE Development Bank of Ethiopia

DFI Development Finance Institutions

FAG Fair Average Quality

FAO Food and Agricultural Organization

FI Financial Institutions

FOSFA Federation of Oils, Seeds and Fats Association

GAFTA Grain and Feed Trade Association

GSCI Goldman Sachs Commodities Index

ICE Intercontinental Exchange

ICO International Coffee Organization

IPE International Petroleum Exchange

LC Letter of Credit

LDC Least Developed Countries

LIFFE London International Financial Futures and Options Exchange

LOI Letters of Indemnity

LME London Metals Exchange

MATIF Marché à Terme International de France

MCR Maximum Country Risk

MMTA Minor Metal Trade Associate

NYBOT New York Board of Trade

NYMEX New York Mercantile Exchange

OBF Ownership-based Finance

OTC Over the Counter

SCC Savings and Credit Cooperatives

SGS Société Générale de Surveillance

SCF Supply Chain Finance/Structured Commodity Finance

UCP Uniform Customs and Practice

UNCTAD United Nations Commissions for Trade and Development

USDA United States Department of Agriculture

VAR Value at Risk

Introduction

Commodity finance is a subject that used to be related to the privileged few, but now extends to almost every corner of the world.

Today, commodities represent most of the fast-growing markets worldwide. Commodities, historically misunderstood, very often understudied and underrepresented in literature, are now receiving the attention they deserve.

One of the reasons for the attention is due to the fact that price volatility in commodity markets has increased substantially in recent years, which directly influences the global market including the index of stock exchanges. Demand for commodities has led to serious competition and has built up giant trading commodity houses. Some modern war zones or territorial conflict may even have links with interests in commodities.

We have, nevertheless, barely seen any book which systematically explains and analyses commodity finance for the emerging markets. This can hardly be explained by lack of interest. Most of the books published so far, especially those from the academic world, seem to focus on hedging on the price volatility of commodity prices – an old topic, yet with many new developments.

Why this subject has scarcely been extensively covered is also due to the fact that this part of finance is a niche of which the knowledge is available within a limited number of players. There are a couple of hundred real commodity finance bankers in the world. Not many of them are interested in writing a book. Professors of finance in the universities may not have been privileged to have exposure to this part of finance.

Obviously, it is too ambitious to write a comprehensive handbook for commodity finance. This book only intends to have a systematic discussion on the principles and practice of commodity finance. On the one hand, the intention is indeed a summary of what is happening in commodity finance with a hands-on approach. On the other hand, all the relevant aspects of this topic will be covered in a systematic way, that is, the book is intended to serve both as a textbook for students as well as a reference book for practitioners.

The combination of principles and practice is always a challenge – ‘principles’ tend to outline a framework at a macro level, whereas ‘practice’ describes the daily operation and its problems at a micro level. Whether this book has achieved such a modest target is certainly subject to the judgment of the readers.

Structure and logic

It is not surprising that, up until the end of the last century, commodity finance – the knowledge and expertise of it – is limited to a couple of hundred privileged people, mainly in Europe.

Books so far published on commodities and commodity finance can be divided into two categories: the description of ‘commodity markets’ and the ‘structured commodity finance’, which is still a vague or loose concept covering subjects from tolling, advance payment finance to pre-export finance. These are, of course, part of commodity finance, but not all of it.

Ideally, a book on ‘principles and practice of commodity finance’ should cover commodities, commodity markets, commodity trade and the finance of the commodity trade. This is the skeleton of this book.

Why and how

An incidental interview, which was intended to find a sponsor for my PhD research, opened the door for my banking career in commodity finance. For more than 20 years, I have changed banks as an employee and the banks for which I worked have changed their names. I, however, remain in this domain.

The book starts with a bird’s-eye view on commodity trade and finance as an introduction. Chapter 1 defines the concepts and scope of coverage, which will enable the discussion later to be more consistent and straightforward.

Chapter 2 gives a macro description of the three major sectors under commodity finance: soft commodities, hard commodities, and energy, as well as their global flow. This chapter develops further into a discussion of commodity finance and the emerging markets, as most commodity export countries are emerging market countries. It then shifts to a micro level for the case of Ethiopia, where commodity finance is done in special forms and via unique mechanisms. Together, these two chapters serve as a background for fundamentals.

Chapter 3 describes the special mechanisms and products of commodity finance. From plain vanilla products to the complicated structures of commodity finance, all are presented here.

As a large amount of commodity finance involves both bank and country risk, Chapter 4 particularly explores this subject.

Chapter 5 summarizes the risk management principles in commodity finance, with practical cases.

Chapter 6 is an organizational aspect of a typical commodity finance bank. From my limited reading, there is hardly any literature which can be found on this practical subject. Whereas departments and their functions within commodity banks may vary from one commodity bank to another, some common infrastructure is analyzed.

Chapter 7 ventures into the subject of a forward vision for commodity finance.

Upon the request of my readers after the first version, I have added an extra chapter – Chapter 8 – which presents a series of real-life cases in commodity finance.

Target readers

Although the sequence of chapters is organized with progress along the knowledge line, the book is written, on purpose, for separate reading and reference.

As such, the book is first intended for practitioners (bankers, traders and so on) who are interested in this subject and those financial institutions which have this business or plan to establish this business.

The book is also intended for business school students who major in finance, but have a special interest in ‘niche banking’.

By presenting exhibits, the book tries to avoid difficult jargon to make it accessible to a wider readership. Most chapters are read by both experienced and non-experienced people with their comments on style and content. The current version has taken their comments.

I have, in fact, been trying to accumulate material for more than 20 years by reading documents, discussing with colleagues and summarizing the different and difficult cases I have experienced. Part of the material has been used for training purposes.

That said, the attempt on this book is really open for any critical comments and suggestions, either for the content or for the format.

It is readily admitted that some of the readers might disagree with many of my observations. If this can, however, inspire an interest in this area and ultimately help to better understand this fascinating subject, it is a blessing for all of us.

Needless to say, all the mistakes are mine and any critical comments are most welcome via email: [e-mail]

W. X. Huang

Chapter 1

Commodity Finance: Definition and Scope

Definition: commodities, commodity trade and commodity trade finance

Commodities are the basic generic goods traded in the international market. They are generally raw materials used in the production processes.

Defining a commodity is not that easy, as there are many kinds of commodities. It is much easier to say which product is not a commodity than to say which one is. There is in fact no uniform definition of a commodity. Strangely though, there is no lack of consensus on the understanding of a commodity. Generally speaking, commodities are things of value that are traded in large quantities. Commodities are uniform to the extent that they are considered to be equivalent and interchangeable to those of other producers.

The quality of a certain commodity is often standardized for all producers. For example, the oil that is pumped up in Saudi Arabia is assumed to be of the same quality as the oil coming from the Gulf of Mexico. This makes commodities good substitutes for one another. This also makes trading on a global market much easier than for non-commodities that do not have this uniformity in quality.

Commodities are thus defined in this book as things of value and uniform quality. This homogenous nature of commodity quality provides possibility for exchange and distribution. This homogeneous nature also provides the possibility of a standard price.

The fundamental specifications of various commodities have been standardized by a number of commodity trade exchanges and trade associations. In the strictest sense, commodities, by definition, should meet some basic criteria such as:

they are usually used as raw materials in processing industries

their price is in most cases transparent

they are typically traded on commodity exchanges

there is a futures market for price hedging purposes, and so on.

Commodities are consumption assets whose scarcity has a major impact on the world’s and country-specific development.

Many believe that commodity markets have their roots in the trading of agricultural produce and livestock, but nowadays commodities go far beyond agricultural goods. As a matter of fact, commodities are traded inside and outside commodities exchanges.

Products under the ‘commodity trading contract’ can be classified/sub-divided as:

agri-products: such as grain, corn, sugar, etc.

livestock and meat: cattle, leather, fishmeal, feed meal, etc.

base metals: copper, copper cathodes, steel, alumina, aluminium, lead, zinc, iron ore, metallurgical coke and coal

precious metals: gold, silver, platinum

energy products: natural gas, heating oil, unleaded gasoline, crude oil, liquid chemical, LPG, etc.

Agri-products, or simply ‘agricultural’ as they are sometimes called, are linked to the food and agricultural sector including tropical products. A detailed list for food and agricultural products can include dairy, fish, grain, oil seeds (corn, wheat, soybean), vegetables, fruit, cocoa, coffee, sugar, orange juice, rubber, spices, cotton, tea and mate, beverages, nuts, vanilla, bean, grains and oilseeds, cotton, fertilizer, bio-fuel and near commodities.

By their nature, the business pattern for agri-products is seasonal, and weather conditions are critical to the production.

As food and agricultural products are linked to daily life, the health regulation is particularly strict. Moreover, many countries have a subsidy system for agri-products. The prices of the soft commodities are subsidized in order to ensure sufficient supply for daily basic needs.

Energy is the largest commodity sector and is of strategic importance to the economy. This is because energy is the lifeblood of industries. It is the driving force for the economy and other commodities. Energy utilization is crucial for our daily life, and with the growth of the economy, the demand for energy is also increasing constantly.

Due to rapidly increasing oil prices, the liberalization of energy markets and climate change etc., public interest is drawn to the energy sector. On the other hand, to secure a reliable and sustainable energy supply in the light of declining resources and climate change, mitigation will be key challenges for this century.

The trade volume of energy is often the largest compared with other commodities, but the trade period is short or very short.

In the last decade, active markets have been developed for electricity products, that is, electricity futures for delivery at specific locations such as California/Oregon borders and so on. Following the deregulation of electricity prices, these markets have mushroomed. More recently, OTC markets and exchanges have introduced weather derivatives.

The metal market can be divided into base metals, minor metals and precious metals. The market is scattered but well organized.

Base metals have a futures exchange available for hedging price risk but minor metals do not. Base metals include copper, zinc, nickel, lead, tin and aluminium and so on. Producing hard commodities may need special permission. It may also need special equipment. Recently, due to environmental concerns, exploration of some metal products is restricted.

Precious metals include gold, platinum and silver. Major producers of gold are South Africa and Russia. Platinum is used more often for industrial purpose. For example, platinum is used for refining petroleum-based products. It is used in the watch industry and jewellery industry. Major producers of silver are Mexico, Peru, Canada, Australia and the USA.

As a benchmark for investment in the commodity markets and a measurement of commodity market performance, the Goldman Sachs Commodity Index (GSCI) is a broad index of commodity price performance, calculated primarily on a world-weighted basis, and comprises the principal commodities that are the subject of active, liquid futures markets, containing 49% energy products, 9% industrial/base metals, 3% precious metals, 28% agricultural products and 12% livestock products.

For agricultural products, trading in wheat, corn and livestock is said to have begun in the 19th century. But trading in soybeans is relatively new. In the energy sector, crude oil was the first form of energy widely traded, but electricity was included later. The trading in carbon dioxide or sulphur dioxide emission rights is a recent development but has potential. ¹

All companies involved in the production, origination, processing, trading and/or consumption of commodities are commodity companies, including institutional metal commodity investors.

The prices set on the London Metals Exchange (LME) provide the basis for the majority of commodity trade in non-ferrous metals. Some commodity markets are, however, struggling to establish a single common and transparent basis for pricing a commodity. This is because it is difficult for commodity market participants to judge if they are paying a reasonable price for the particular commodity. Moreover, if the price is not set and not transparent, and the pricing system is not consistent, to hedge price risk by forward, futures and options will hardly be possible. The commodity transaction contract will have to be privately negotiated or tailor-made.

Commodity markets – commodity exchanges and the OTC markets are places where buyers and sellers meet and trade. They facilitate commodity flows and allow participants to exchange risk. Farmers, for example, can sell their crops at a fixed price on a future date, insuring themselves against variations in crop prices. Likewise, consumers can buy crops at a fixed price for future delivery.

Commodity finance involves the extending of credit to finance the purchase and sale of raw, semi-refined or semi-processed material of an animal, vegetable or mineral nature. Commodity finance is different from corporate finance, i.e. simple and straightforward lending to companies, as we will discuss later.

Traditionally, credits were indeed extended to commodity trading firms which acted as middlemen between producers and processors. Nevertheless, they are frequently privately owned and internationally oriented. From a financial perspective, they are characterized by extensive use of bank credit, high leverage, large volume and low profit margin. As the trader’s