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Though agricultural commodity companies and their vendors are the main beneficiaries of such pyramid schemes, truth is you can’t blame them alone.Įqually culpable are those over-eager banks, who don’t scrutinise “paid for” stock statements or give clear corporate loans without specifying end use. They are also the same taxpayers whose money banks loan out! Even the fig leaf of farmer interests is absent because prices begin to rise after harvest pressure eases. Consumers and processors are directly hit. Off balance sheet financing allows more cash to chase the same crop, thus creating an agricultural asset bubble waiting to explode. That could even mean cornering stocks in a small town or few mandis. Companies can use their vendors’ access to cash at very low interest rates to keep building up their own positions. Vendor financing allows companies to buy more physical stocks than their wallets permit. One, the scale of such vendor financing is huge and is widespread in most agri-commodities. Unfortunately, it bites a bit deeper than that.
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The financier bank takes a risk and pays the price. As I said, death appears relatively painless. No prizes for guessing the options before the vendor financier now. They know the financier has no clue whether the sacks contains sharbati or basmati. Vendors often even offer rice to the financier, but cheat on the quality. The outcome of this skirmish depends entirely on the relationship between the big company and the financier. To add to the confusion, the company’s own bankers believe the 100t is legitimately theirs. Sometimes the company may accept the bill for payment but pay much later than the original contract.
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But the ugly moment of truth is when he discovers that the vendor has not been paid the full value by the company and/or the rice too is no longer in his possession.Īsking the company to return the vendor’s 100t is pointless because the financier has no clout. When the vendor’s own financier hears of the price crash, he naturally gets nervous. The vendor’s 100t again comes to the rescue because it helps inflate the quantity of stocks. Since its limits with its regular bankers will reduce when the value of the assets drop, the company looks around for help. Since the market price is now much lower, and the company’s credit limits can get axed. Now the company which placed the order is itself in trouble. Sharbati, for instance, has dropped from Rs 15/kg at harvest to Rs12/kg post-ban. But no one gets hurt because the rice is sold profitably, the vendor paid and his financier gets the cash back.īut suppose rice prices crash after the vendor has bought 100t. Put simply, the same rice gets financed twice. In a rising market, the company’s bankers are happy to see the increase in quantity, without enquiring too closely whether the company actually owns each sack. The vendor’s 100t are shown as the company’s own ‘paid for’ rice to get more working capital. The rice is valued on either the purchase price or market price, which ever is lower, and this fixes the company’s credit limit. Every month the company has to give a stocks statement to its own bankers with details of quantity and value of rice in its godown. It asks the vendor to move those 100 t to its own godowns without paying him a paisa. The twist comes when the large company becomes greedy. God’s in heaven, all is right with the world. While rice prices were high and rising, the company makes money from selling its own rice and the vendor’s 100t. Thus, a person who can’t pay gets another person who can’t pay to guarantee that he can pay.
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The bank gives the vendor money to buy the 100t without a personal guarantee but on the security of the physical rice plus the confidence that the bill will be paid eventually by the large company.īasically, the vendor can only repay his bank if the large exporter pays him. The vendor is introduced to a plump bank eager to give loans for agri-commodity trading. The company’s rice supplier/vendor is the apna aadmi easiest on hand. To get the extra cash, it casts around for other ways to raise money. During a bull run, all companies want to maximise profits by buying more rice or trading in rice.Īt harvest time, suppose a large rice company wants to buy 100t more paddy than what its own credit limit permits. They not only buy paddy themselves but also from several smaller traders who procure on their behalf.