The United States is the world’s largest exporter of agricultural products. U.S. agricultural exports play a vital role in building and strengthening the nation’s economy. As is the case with any cross-border transaction, international sales of agricultural products often pose financing challenges to exporters as commercial lenders may be reluctant to extend credit to foreign buyers, especially those in risky emerging markets.
One viable solution to these challenges is government-backed agricultural export financing offered by the U.S. Department of Agriculture (USDA). USDA’s Foreign Agricultural Service (FAS) operates two export finance programs that assist the commercial financing of U.S. agricultural products and goods and services:
• Export Credit Guarantee (GSM-102) Program and
• The Facility Guarantee Program (FGP).
Both programs provide guarantees of repayment issued by USDA’s Commodity Credit Corporation that may encourage commercial lenders to extend financing in countries where credit is necessary to purchase U.S. agricultural products, goods, and/or services. With USDA’s export finance programs, U.S. exporters and U.S. financial institutions can ensure that financing is available and payment is guaranteed for the export of U.S. agricultural products, goods and services, thus turning their business opportunities into real transactions.
Characteristics of USDA Export Finance Programs
Applicability: Suitable for the export of agricultural products and goods and services for agricultural-related facilities to markets where credit may be difficult to obtain.
Risk: USDA assumes almost all the risk of payment default.
Pros: Making otherwise difficult to access financing available to buyers of U.S. agricultural products and goods and services for agricultural related facilities. Payment at export upon submission of proper documents with a transparent fee structure.
Cons: Guarantee only covers non-payment by the foreign (issuing) financial institution. Financing may be subject to certain restrictions based on program regulations as well as political or economic conditions in foreign countries.
Key Points
• USDA’s export finance programs help turn sales opportunities in developing and emerging markets into real transactions for U.S. exporters of agricultural products and goods and services for agricultural related facilities.
• The GSM-102 Program is designed to support U.S. exports of agricultural commodities and products, including high value and intermediate goods, to developing and emerging markets.
• FGP is designed to facilitate financing for the goods and U.S. services that are inputs in agricultural related facilities that will likely benefit U.S. agricultural exports in emerging markets.
• Letters of credit are required in all USDA-supported export financing transactions.
Export Credit Guarantee (GSM-102) Program
Under the GSM-102 program, USDA’s Commodity Credit Corporation (CCC) provides credit guarantees to encourage commercial financing of U.S. agricultural exports, thereby assisting U.S. exporters in making sales that might not otherwise occur. USDA does not provide loans to foreign buyers but guarantees payments due from approved foreign financial institutions under letters of credit (LCs) to U.S. exporters or U.S. financial institutions. Because payment is guaranteed, U.S. exporters, or more commonly U.S. financial institutions, can offer competitive credit terms to the foreign financial institution that issued the LC for the import of U.S. food and agricultural products, benefitting the entire supply chain.
The U.S. exporter must apply for the CCC guarantee and pay a fee. As such, the exporter may factor this cost into the selling price prior to the contract negotiation process. The CCC guarantee covers up to 98 percent of the loan principal and a portion of interest for terms up to 18 months depending upon the country of the foreign financial institution. The U.S. exporter can be paid at export by assigning the CCC guarantee to an approved U.S. financial institution who in turn extends the credit to the approved foreign financial institution.
Step by Step GSM-102 Program Process
1. U.S. exporter qualifies to participate in the GSM-102 program by submitting an online application.
2. U.S. exporter negotiates a firm sales contract with the importer.
3. U.S. exporter applies for a CCC guarantee. Guarantee is issued after CCC review and receipt of guarantee fee, usually within one or two business days.
4. Importer requests the opening of a LC in favor of the U.S. exporter by a USDA-approved foreign financial institution.
5. U.S. exporter typically assigns the CCC guarantee to a USDA-approved U.S. financial institution which has agreed financing terms (consistent with the guarantee) with the foreign financial institution.
6. U.S. exporter ships the commodity and presents documents to the U.S. financial institution.
7. U.S. financial institution pays the U.S. exporter at sight and extends the agreed financing terms to the foreign financial institution.
8. Importer pays the foreign financial institution per terms established between these two parties.
9. If the foreign financial institution defaults on payments to the U.S. financial institution, the holder of the CCC guarantee files a claim with USDA.
Examples of GSM-102 Eligible U.S. Food and Agricultural Products
• Bulk commodities: Wheat, feed grains, cotton, soybeans, rice
• Intermediate products: Animal feed, cattle hides, soybean meal, flour
• High-value products: Meat, fruits, vegetables, wine, grocery products
Facility Guarantee Program (FGP)
The Facility Guarantee Program (FGP) provides payment guarantees to finance commercial exports of U.S. goods and services that will be used to improve agriculture-related facilities in emerging countries. The FGP program is designed to expand sales of U.S. food and agricultural products to emerging markets where inadequate storage, processing, or handling capacity limit trade potential.
To be eligible, USDA must determine that the transaction will likely provide downstream benefits to the expansion of U.S. agricultural exports in that market. For a nominal fee, applicants may choose to provide USDA with a Letter of Interest on a proposed transaction and will be provided preliminary feedback.
Examples of FGP Eligible Products and Services That Could Benefit U.S. Agricultural Exports
• Construction of (1) a soybean crushing facility; (2) a grain silo; and (3) cold storage facility
• Equipment or vehicle used to transport agricultural products
• Portion or component of a larger agricultural-related project
• U.S. consulting services that will likely benefit importation of U.S. agricultural products
For More Information
On behalf of USDA, FAS operates both the GSM-102 Program and the FGP. In addition to its Washington, D.C. staff, FAS has a network of 98 offices covering 175 countries to advance opportunities for U.S. agriculture around the globe. More information about FAS and USDA export finance program: https://www.fas.usda.gov/
These links updated: 4/23/18. This website has been funded in part by the U.S. Commercial Service. Copyright (c) All Rights Reserved by the District Export Council of Georgia. Image:: Fotolia_47136361_Subscription_XL .