Why banks don't provide financing for agri- physical trading?

Hello everyone,

Every bank that is financing commodity businesses (abn, ing, bnpp, rabo, macquire, anz, Soc Gen, natixis and other) is active in the energy sector. Some operate only in the energy sector claiming that metals and especially agri businesses are on a much lower scale, thus deals are quite small and financing required is also insignificant (this is impression I got speaking to a couple of bankers in this area).

At the same time, ADM, Bunge, Cargill and LDC operate only in agri (except Cargill also trades energy and LDC is active in metals) are the largest existing today physical traders. If the deals in agri were small then I would expect seeing oil traders as the largest ones, while agri traders to be relatively small and maybe even seeing no agri-only shops.

My two theories are the following:
1. Margin in agri markets are lower than in energy thus agri traders tend to integrate vertically into the businesses
2. (comes from the first theory) significant part of operations and assets in agri markets is held by ABCD who just have enough capital to finance themselves without pre-payment/offtake agreements with smaller producers.

I will appreciate feedback from practicing physical traders.

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Comments (5)

Sep 1, 2014 - 5:46am

Vitol and Glencore are larger than Cargill and ADM. Trafigura, Gunvor and Mercuria are larger than LDC and Bunge.

Margins in ags are pretty high actually, but softs are the only area which is really possible to trade without significant logistical assets nowadays.

The answer mostly lies in the volumes for these respective markets and how liquid the markets for the commodities are if they have to be seized as collateral. Note that some of the banks you mention do grains, oilseeds and softs financing.

Best Response
Sep 1, 2014 - 7:28am

Thanks GoodBread,

That's interesting. I had an impression that the ABCD are the largest.

Regarding the logistical assets, what I learnt is that agri traders actually invest mainly in the midstream assets, am I wrong here? Thinking out loud: if a storage terminal (elevator) owner decides to hold up oil and if he decides to hold up wheat, it will be worse for the wheat trader than for the oil trader because wheat can also lose the quality (in addition to missed arbitrage opportunity). So logically a wheat trader has more motivation to own a storage facility, as well as other midstream assets.

Regarding bank financing, I didn't they don't finance but often have a smaller preference for agri. Rabo is strong in agri.
Ok, so it is more about the fact that realization of collateral is more problematic.

Sep 1, 2014 - 12:40pm

Grains are typically dried before entering elevators (storage) and are routinely monitored for moisture to avoid quality issues--with proper care they can last indefinitely.

Sep 1, 2014 - 1:41pm

Every single bank you listed currently finances metals...though things are changing.

Keep in mind that it's not so cut and dry. Lots of factors go into what a bank will finance - where the material is located, grade of material, counterparties involved, who's asking, etc. Additionally, there are lots of forms of financing, LCs, bilats, RCFs, syndicated borrowing bases and so on. Sure, if you're loading a tanker, that might merit its own line but deals - especially in ags and metals - are not necessarily individually financed.

Sep 2, 2014 - 3:42am

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