"An assessment of the Potential Benefits of the SCGP to U.S. Fruit and Vegetable Exporters", by Paul Patterson and Daphne McKenzieTopic: The Supplier Credit Guarantee Program
"An assessment of the Potential Benefits of the SCGP to U.S. Fruit and Vegetable Exporters", by Paul Patterson and Daphne McKenzie
Topic: The Supplier Credit Guarantee Program
"Market Watch.....Table Grapes", by Richard Adu-Asamoah
Topic: Short-Term Outlook for U.S. Table Grapes Market
An Assessment of the Potential Benefits of the SCGP to U.S. Fruit and Vegetable Exporters
by Paul Patterson Ph.D. and Daphne McKenzie
The USDA's newest export assistance program, the Supplier Credit Guarantee Program, was put into action on August 30, 1996. Under this new program, the USDA's Commodity Credit Corporation acts as a guarantor on short term loans made through promissory notes which support agricultural product sales. Like the GSM 102/103 programs, the SCGP is intended to encourage sales in markets where credit is necessary and not easily obtained through commercial channels. The SCGP differs from the GSM programs in that the borrowers are not required to establish a letter of credit with their bank and the credit is extended directly by the exporting firm. In the event that a buyer defaults, the USDA's Commodity Credit Corporation compensates the exporter for a portion of the outstanding principal. Securing a letter of credit can be a costly and time consuming activity. Therefore, the SCGP is expected to offer greater flexibility to exporters. However, it is also entails greater risk of borrower default. The regulations governing the SCGP were discussed in more detail in the October issue of this newsletter.
The first initiative under the SCGP authorized coverage for $20 million in sales to Mexico during fiscal year 1996, which ended September 30. A total $20,000 in sales were registered under this initiative. Subsequently, the USDA authorized coverage for $10 million in sales to Guatemala and $50 million in sales to Mexico during fiscal year 1997. No registrations have been made yet under these initiatives.
The SCGP is currently operating under interim rules which were defined in a July 1 USDA announcement. The USDA is seeking additional comments on the program rules until December 30, 1996.
The program was first announced on July 19, 1995 and the USDA accepted comments until September 18, 1995. In an effort to assist the United Fresh Fruit and Vegetable Association in responding to the current call for comments, the National Food and Agricultural Policy Project in conjunction with United, has undertaken a study on the potential benefits of the SCGP for U.S. fruit and vegetable exporters. This study was conducted through the use of a survey of exporters and by analyzing the expected outcomes from alternative hypothetical export transactions.
A total of 211 surveys were mailed to U.S. fruit and vegetable exporters on October 28. As of December 3, 63 useable surveys had been received by NFAPP. The responding firms were typically larger firms with gross sales in excess of $25 million with approximately 25 percent obtained from exporting. Most had more than 10 years of experience in export markets. A program that would aid firms in managing buyer default risk would appear to be useful to this sector, where most sales occur under open account and lines of credit are often extended to buyers. However, most firms (57.1%) indicated that they were not aware of the SCGP. Firms indicated greater awareness of the USDA's Market Access Program (61.7%) and Trade Leads Program (75.0%).
During the first comment period on this program, concerns were raised over the level of coverage provided and the program fees. Currently, the program's coverage or payment guarantee is limited to 50 percent of the export value defined on either a free on board (fob), or cargo and freight (c&f) basis, depending on the program announcement. This level compares to the usual 98 percent level on a c&f basis under the GSM programs. Most of the survey respondents (62.3%) indicated that the SCPG's 50 percent coverage guarantee was not adequate. The survey respondents suggested that coverage of 70 to 100 percent with an average of 83.3 percent would be required at a minimum to interest them in using the program.
The survey respondents did not express a clear consensus on the level of the fee required to use the program. Currently, the program requires participants to pay $0.95 per $100 dollars of covered value to register sales under the SCGP. By comparison, the GSM programs typically require a fee of $0.67 per $100. Approximately 42% indicated that the SCGP fee was reasonable, 20% indicated that it was too high, and 38% indicated that they were uncertain. It should be noted that if the coverage on the value of exports were to increase, the total fee paid would increase, as well. So, the fee rate may still become an issue of concern.
The USDA justified the higher fee and lower coverage level as a means of encouraging exporters to follow prudent financial practices in extending coverage. The risk of a buyer defaulting are perceived to be higher under the SCGP than under the GSM programs, since the loan is extended directly by the firm through a promissory note. The coverage level is a logical means of encouraging these practices. However, the programs fees should be tied to the costs of the government services associated with the administering the program, rather than being used as a rationing or disciplining tool.
There was also not a clear consensus among the survey respondents on the benefit of not having to tie the loan to a letter of credit. This may reflect the low usage of letters of credit and the GSM programs in the past in this sector. On balance, the survey respondents indicated that they expected the SCGP to be neutral or perhaps somewhat helpful in encouraging export sales. Still, 66.7% of the firms indicated that they might use the program.
The potential benefit of the program to exporters as a risk management tool was analyzed using a series of hypothetical export transactions. These transactions were evaluated based on their expected value to the exporter. An expected value is a weighted average of payoffs or returns under alternative outcomes, where the weights correspond to the probability of each outcome. When making sales to new buyers or markets under the SCGP, two outcomes are possible, either the importer defaults on the promissory note or the importer does not. The returns in each case differ and are also influenced by factors like the program coverage, the program fees, transportation costs, export margins, and credit terms. Given a certain probability that a buyer will default on the promissory note, the expected value indicates the average return the exporter will realize, including transactions where defaults occur. For example, if the default probability is equal to five percent, then the exporter would expect the buyer to default on one out of every 20 transactions. The expected value would be the average of all 20 transactions, including any defaults. If the expected value of the net returns is positive, then the exporter should consider using the SCGP to enter new markets.
Determining the probability of a foreign buyer defaulting is a difficult matter that has not been addressed in previous research. Therefore, a range of probabilities were analyzed to determine the expected value of the transactions. In addition, the following assumptions were made in constructing the hypothetical export transactions: (1) the fob shipment value is $100,000, (2) the rate of return on sales is 10% of the fob value, (3) the coverage fee is $0.95 per $100 covered value, (4) credit is extended for only 30 days, (5) the interest rate is 7%, (6) transportation costs were allowed to vary between 20 to 40% of the c&f value, and (7) the program coverage was applied to either the fob value or the c&f value.
Given these assumptions and applying the current program provisions with coverage limited to 50% of the export value, it was found that firms could increase their net returns on average by using the program to make new sales, provided that the probability of the buyer defaulting on the note was less than 13%. If the program's export value coverage was increased to 83%, then exporters could increase their net returns by using the program in cases where the probability of buyer default is less than 29%.
The higher level of program coverage allows firms to consider riskier buyers in terms of the probability of default. The minimum coverage level suggested by the survey participants would indicate that firms perceive the risk of buyer default as being higher than 13%. Should, the program continue to be administered at the current 50% coverage level, firm use of the program is likely to be fairly low. Increasing the program coverage to 83% may increase usage. However, it also exposes the USDA to making more default payments, which are direct government expenditures and would add to the current federal budget deficit. How these potential additional government payments weigh against the potential benefits of increased export sales and the earnings generated by these sales is an issue that needs further analysis.
Two actions are required on this program. One, more effort to inform firms about the program is required. Obviously, the program can not assist in expanding sales if firms are unaware of it. Two, further consideration on the value of exports allowed under the program is needed. This should include analysis on the costs and benefits of increasing the coverage. Such an analysis would be aided by analysis on methods for determining the probability of default.
Market Watch......Table Grapes
Short-term Outlook for U.S. Table
Grapes Market
by Richard Adu-Asamoah
Tight November Supply Improves Prices:
California's Thompson seedless grapes harvest season ended in November. Higher supplies of Ruby and Crimson seedless grapes are expected through December. Reasonable quantities will be available for the Christmas holidays, and prices will remain strong (Figure 1).
Volumes of Thompson seedless grapes were less than expected in November, with relatively low storage figures as compared to 1995. As of October 31, total storage supply was about 5 million boxes (21 lb. lugs) compared to 12 million during the same month in 1995. Good quality, and a lighter supply have made this year's grapes very easy to market. The market situation was not good for grower/shippers in July because supply was higher than expected. Towards the end of July, and during the early Red seedless crop, prices were low due to exceptionally heavy supplies from the principal growing regions of California and Mexico. Free on board (fob) prices for Flames and Thompsons dropped from an average of $16.50 per box in June to less than $10.00 per box by the end of July. Through November, however, the tight supply improved prices, and allowed shippers to enjoy some of the highest prices since 1995.
With California grape supplies so light, imports from Chile have dominated the U.S. market, since early December. Prices of imported Chilean grapes are expected to follow past trends. They have started out high (as a consequence of the lingering price effects of November's tight supply in the U.S.), and will fall as supply improves. This year, however, it is expected that the price of Chilean grapes may stay high from December through May, 1997 when the California crop starts. Two reasons support this view. First, there is little overlap of the Chilean and California harvest seasons. The second reason is that the Chilean crop is still struggling through a four-year drought, which has seriously reduced production. The 1996/97 Chilean export of grapes to North America (arriving at U.S. sea ports ) is estimated at about 33 million boxes. This is about 2% less than last year's volume, and about 4% less than the 1994/95 season's export deliveries at U.S. ports (Figure 2). Prices for Chilean grapes will stay between $32 and $35 per carton (18 lbs.) for medium Perlettes, through December. Thompson seedless price may be $39-$46 per carton, while Flames are expected to command $27-$32 per carton.
Outlook for Early 1997.
If current trends continue, California's first crop in May 1997 will enjoy good prices for seedless grapes. Demand is expected to remain strong through May 1997, and California seedless prices will benefit from higher than normal prices for seedless and seeded varieties from Chile. Early May 1997 harvests of California grapes (Central and Southern San Joaquin Valley District, CA, and Kern District, CA) are expected to be robust. This does not mean, however, that price will suddenly fall in June or July 1997. Demands on table grape varieties for wine, juice, and raisin production , as well as exports, should reduce shipments to the domestic fresh market considerably. Average prices for California Thompson seedless may stay between $36 and $40 per box through June 1997.
Between 1989/90 and 1995/96 U.S. exports of fresh grapes grew at an average annual rate of 3.7%. Recent market trends suggest that 1996/97 exports may be about 510 million pounds, about 4.2% higher than the 1995/96 export volume of 490 million pounds. Emerging markets (Asia and Latin America), new varieties for export (e.g. Red Globe), and continued effort to seek export growth (Brazil, Vietnam, Russia, Cambodia) are some of the reasons for increasing exports in 1996/97.
