International food shipments grinding to a halt due to credit crisis

[HamdenRice]

<Thanks to MasrasT in the Economy Forum for the heads up. I've tried to explain the credit aspect below.>

The Financial Post of Canada is reporting that international food shipments are grinding to a halt as a result of the credit crisis:

http://www.financialpost.com/story.html?id=866310

Grain shipments stalled in credit drought

John Greenwood, Financial Post
Published: Tuesday, October 07, 2008

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

...

The Baltic Dry Goods Index, the main measure of shipping rates, is down 74% from its high back in May when trade with China was still strong.

...

While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

<end quote>

So, here's why credit is absolutely essential to international shipping, including food shipments. International shipping relies on "letters of credit." A letter of credit is a bit like an international money order, but for very large sums, and that are crafted for the particular transaction.

It is a letter from a bank on behalf of a client (usually an importer/buyer) to an overseas seller. The letter says that I, bank, will pay you, seller, $500,000 (or whatever the amount is), if you present to me (bank) the right documents.

That document is often a "bill of lading." A bill of lading is a piece of paper that a shipper gives to the seller concerning the goods being shipped -- kind of like a receipt from the ship owner. So for example, if the seller is selling 10,000 tons of rice to Goa, India, when the rice is loaded at the port of departure, the seller receives the bill of lading and can now present the letter of credit to the buyer's bank, along with the bill of lading (proving the rice has been shipped from port). The bank must then pay the money because the agent presented the letter of credit and the right document -- the bill of lading. (It's actually a bit more complicated with the banks doing much of the trading of the bills of lading and letters of credit.)

If no one trusts the credit worthiness of banks, then no seller will accept a letter of credit. Moreover, if banks are not lending, then they are not writing letters of credit, which are often funded by the bank making a loan to the buyer.

The shipment of food, oil, manufactured goods, etc., is grinding to a halt as the credit crisis continues.

[SammyWinstonJack]

1. ...

:kick:

[RollWithIt]

2. Another nail in the coffin of the "Let it all collapse" people....

People don't understand how credit affects everything in their lives.

[pnwmom]

3. They have a new chant now. "See, the sky is falling ANYWAY!

What good did the bailout do?"

They don't understand that it will be weeks before the plan can be put into place.

[whatchamacallit]

6. In a few weeks will you change it to "a few months"?... n/t

[pnwmom]

9. It took years to get us into this mess. It will probably take years before

we get out.

The aim of the rescue was to ameliorate the effects, and to serve as a kind of stop-gap while new regulations and structures are put into place. It was never expected to be instant magic.

[whatchamacallit]

13. You're right in your assessment, but

I stand by the characterization of the bailout as "good money after bad".

[HamdenRice]

4. Puullleeez. It's all just one big casino that doesn't affect me

:sarcasm:

[conspirator]

5. What's wrong with growing food locally? That's what people will do when (not if) it collapses nt

[RollWithIt]

7. Not everyone lives in the country.... millions live in urban areas...

Where they gonna grow their food? On the roof? Who gets the corner spot roofside for the tomatoes?

[HamdenRice]

8. Argentina is good at growing beef. Brazil is good at growing corn

So Argentina grows more beef than it needs and Brazil grows more corn than it needs and they trade them.

When Brazil tries to grow its own beef (not having been endowed with the Pampas, but instead with the rain forest), you get slash and burn of the rain forest for pastures that last only a few years.

Eating locally when possible is a good idea, but taken to extremes can be as destructive as factory farming.

[pnwmom]

11. Depends on where you live. n/t

[Fresh_Start]

10. I thought they all had a 5 year supply of dehydrated food

hidden in a cave with their guns and ammo

[HamdenRice]

15. The ones with the guns and amo are different from the ones

who say they'll just grow their own organic produce.

But iirc, one DUer did justify being against the bailout by saying there were lots of squirrels and other critters in his rural area and he would eat just fine, and if he could then so could everyone else.

[Hannah Bell]

17. huh? the *bailout* PASSED. Where's the salvation?

[kenny blankenship]

12. damn, I was determined to wake up optimistic today. But now you do this.

today it's shipping. but soon it could be trucking.

People think food shows up in supermarkets maybe because they grow it out back or something. Or maybe the food's always there just because they are nice people who need to eat everyday. But food distribution is a business that is subject to the same credit conditions that shipping and other businesses are subject to. Let the banks close and you will not be able to buy food at your local Abundomart for long. People don't buy groceries with cash anymore and they don't know their supermarket manager well enough that they can buy stuff on credit. There will only be greenbacks for exchange, no checks or debit cards and no credit. But there isn't enough green paper to go around for all the customers. In prosecuting the War On Drugs our government has done all it can to discourage the use of cash short of making paper money illegal. And higher up the distribution chain nothing is paid for with cash money, so all that machinery will seize up in no time.

They probably couldn't declare a banking holiday in the event of a run, like in the 1930s, even if they needed to. People would run out of food in three days and they don't all have cash on hand to continue to buy whatever stock remains at their stupormarkets. Neighborhood grocers who might extend credit to known customers don't exist anymore. Compared to the U.S. in the "primitive" 1930s, 21st century social order would snap like a dry reed.

[HamdenRice]

14. Very true. Most retailers that purchase, food and clothing wholesale, rely on credit

The typical supermarket or clothing store does not take its savings and go out and buy inventory; it borrows the money, buys the inventory and tries to sell it quickly enough to make a profit after paying interest.

Not only don't the consumers need credit and electronic banking to have the money to buy the food on the shelves; the stores need credit to buy and ship the food to the shelves.

[HamdenRice]

16. shameless self kick nt

[Theres-a]

18. K & R nt

[upi402]

19. If it's bad enough maybe we'll make our own steel too

and who knows... textiles, electronics, sport shoes - everything Clinton sailed offshore with NAFTA.

Confiscate the ill-gotten gains. The day is gonna come for sure. The worm is going to turn, and it's pissed this time. We'll cancel our cable, cell phones, and stop with the $150 sports tickets. Then we'll be paying uncomfortable attention. And we HATE paying attention.