Agricultural Equipment Financing via Barter Exchange by Selina Markham

Ormita Commerce Network www.ormita.de

Interest Free Agricultural Equipment Finance

Ormita Commerce Network Barter â&#x20AC;˘ Countertrade â&#x20AC;˘ Mutual Credit www.governmentbarter.com

Interest Free Agricultural Equipment Finance The Ormita Commerce Network provides an innovative market-based financial solution that enables key players in the agricultural services sector - equipment, machinery and chemical manufacturers - to collaborate with farmers to create sustainable financing models without the need for interest-bearing cash loans or vendor financing. Ormita is recognised as the world’s leading agricultural barter-exchange and reciprocal trade oriented financial services provider, employing highly skilled and enthusiastic individuals from a diverse range of professional disciplines. For over 12 years our team has been helping agricultural service providers and their clients meet their financial goals through the creative use of barter. We do this by applying innovative processes, market intelligence and fresh thinking. In everything we do, we are committed to creating value for our clients by: • Working collaboratively with them

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• Developing a deep understanding of their needs and aspirations

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• Providing tailor-made solutions Core Values

• Being accessible and responsible

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We combine unparalleled industry experience to deliver results that enable our clients to compete and expand in new markets, as well as expand on existing untapped opportunities. Our service is underpinned by an emphasis on knowledge, research, experience and professionalism.

Who Needs This Solution?

Managing Counterparty Risk

Farmers needing financing for essential equipment, machinery or chemicals

• Allows access to captive markets

Suppliers looking for creative alternatives to locate and finance new sales in challenging economical or political environments Governments looking to stimulate the adoption of new technologies and practices; while reducing trade deficit risks lenders Anyone looking to access new markets

s ou ent u in m nt ve o C pro Im

• Reduces foreign exchange risks • Helps bypass currency convertibility issues • Eliminates interest volatility • No need for vendor financing • Cleans up bad debt situations • Strengthens business relationships

Beyond traditional lending: financing through barter Traditional equipment finance lenders, as well as banks, use the Five Cs to evaluate loan applications: Character, Credit, Cash Flow, Capacity and Collateral. However, while banks look at small-to-medium size companies from a Fortune 500 perspective, Ormita sees applicants from a small business perspective, which highlights a sixth C: Common Sense.

Common Sense Finance Every decision to purchase and every decision to grant barter financing is made using common sense. Where traditional finance houses look at existing sales and assets; Ormita provides funding for capital purchases based on idle capacity, excess stocks, lost opportunities and future sales potential.

Monetising Excess Capacity When repaying in barter, a farmer is able to create liquidity from excess production, B-grade products or underutilised production capacity - without affecting their existing cash sales channels.

Maximising Returns for Buyers and Sellers Ormita provides buyers and sellers access to a secondary marketplace where non-cash transactions do not need to be bilateral.

Ormita is committed to financing farmers and smallholders Ormita’s agricultural finance initiative equips farmers with the tools they need to maximise harvest yields and improve productivity. The criteria for providing barter-based finance is based on a combination of the following: 1. The availability of existing (warehoused/stored) commodities which may be bartered as either full or partial payment for essential equipment, machinery and chemicals. 2. The existence of over-production of “A” or “B” grade stocks which traditionally would be either liquidated for less than market value (or destroyed). Depending on the commodity, certain B grade stocks may be bartered to endusers as a component in food production, general consumption or feed for livestock. e.g. Leaf damaged, wilted, blemished, rusted, under/over sized produce, incorrectly proportioned or other cosmetic issues. This may be existing and/or future stocks. 3. The ability to create excess production from existing tools and capacities. Provided there is existing capacity to produce additional crops or raise new livestock, financing on barter may be available on the basis of future production capabilities. In such instances Ormita may require additional financial guarantees. e.g. A Farmer may have historically chosen to leave certain fields fallow because there has been no immediate demand for any crops able to be grown there. Based on an agreed contract with an Ormita client the grower will then start growing to meet that demand. 4. The market potential (demand) for the agricultural commodities offered on barter. In a barter network this demand traditionally comes from “end-users” of grains, fruits, vegetables and meats. e.g. Food manufacturers, hospitals, schools, government enterprises, factory cities, restaurant chains, catering companies, hotels etc. 5. The track record of the management of the farm

A buyer can purchase from ‘Party A’ and repay by selling goods to ‘Party B’. We work with clients to maximise the value of any sale by placing their stocks, inventories or assets with new clients in markets which will guarantee the greatest returns. When compared to liquidating or destroying excess production, barter is a preferential option for many farmers.

• How long has the farm been operating? • What is their track record? • How have they faced challenges in the past? 6. Access to co-financing from other sources Ormita can potentially finance transactions which may attract partial government funding or subsidies but where the farmer has been unable to secure adequate funding for the balance of the investment. Please note that this is not a comprehensive list of our criteria for funding.

Understanding the Barter Process The Barter Clearinghouse Ormita operates its own closed marketplace where goods and services are contracted for purchase or sale at an agreed price for delivery at a specified date. These purchases and sales, much must be made through an Ormita broker, are made under strict terms and conditions of specially tailored supply contracts.

How Prices are Determined Typically barter prices are equivalent to the prevailing cash market price - although there may be some exceptions. Through bypassing certain aspects of the traditional supply chain, Ormita is sometimes able to obtain a “better than market price” for sellers of agricultural commodities. Such situations occur when Ormita is able to trade certain food items directly to end-users - such as food processors, restaurants or catering companies. In these instances we may be able to achieve “closer to retail” market pricing for the agricultural goods. Ultimately however, pricing of goods and services is arrived at through the interaction between buyers and sellers with Ormita acting as the record keeper of the transactions. Trades are recorded in the local currency of the buyer and seller, with currency conversion based on an agreed exchange rate.

Insurance against Non-Delivery to Buyer For a fee, Ormita can arrange insurance against risks association with storage, transport, non-delivery or other types failures by suppliers to complete various transactions. For machinery, equipment and chemical suppliers, a comprehensive non-payment insurance against the financial default following non-delivery of the contractually due goods or services is usually available. To implement an insurance policy under these terms there must be a contractual obligation to pay damages or repay an advance payment upon non-delivery by the supplier. Policy tenors are in general up to five years depending upon amongst other things the country of risk and the creditworthiness of the counterparty. However, in certain circumstances policy terms can be obtained for transactions of seven to ten years. In most cases this insurance is not necessary as Ormita can often arrange the back-to-back delivery of goods from the supplier to the farmer; from the farmer to a third party; and from third party’s back to the original supplier.

Repayment on Barter There are various options for repayment of goods acquired from suppliers on a barter basis. a. Repayment based on existing stocks / surpluses

This may be warehoused commodities, excess production or blemished stocks b. Repayment based on future delivery of produce / livestock

• Delivery in the future all at once (on a known date). • Delivery in the future over a fixed time period.

- For a price contracted today. - For a floating price (market equivalent price).

The Multilateral Barter Process INITIAL COMMUNICATION

Preliminary understanding of farmers procurement needs Specifications, lead time, quantity etc…

Exploration of possible repayment mechanisms via barter Existing or future stocks, potential distribution of bartered goods, restrictions on certain sale outlets, quality control etc…

DETAILED DUE DILLIGENCE

Analyse market

Analyse farmers financing needs

Review enabling and regulatory environment for local sale or export of agricultural commodity offered in repayment

Analyse risks

Develop preliminary commercial plan

NEGOTIATION

Opening three-party discussions with various suppliers whose products potentially meet the farmers requirements.

Confirmation of order from farmer e.g. delivery dates, contractual terms and price

Confirmation of suppliers needs on barter from elsewhere in the network.

FINALISE CONTRACT

Supplier enters into sales contract with farmer.

Farmer enters into barter repayment contract with Ormita.

PERFORMANCE OF CONTRACT 1.

Ormita enters finalises barter spend plan with supplier

Supplier is paid via the Ormita trade system and uses those credits to offset existing budgeted expenses.

Insurance on contracts arranged

Transportation of goods by supplier to farmer.

Particularly relevant if export/import required

Transportation of goods to the supplier.

CONTRACT REVIEW

Lower Opportunity Cost for Suppliers

Benefits of Barter

Finding new cash-paying customers often involves and investment in sales, marketing and rigorous counterparty assessment. Ormita provides suppliers with direct access to new customers as well as a collateralised form of (immediate) payment; thereby reducing search and information costs, bargaining and decision costs, policing and enforcement costs. Some of the benefits to our suppliers are as follows: • There may be a lack of immediate opportunities to sell for cash in certain markets. • Foreign currency exchange controls may mean repatriation of cash income from certain markets is difficult or otherwise impossible. • Barter may be used to stimulate incremental sales to existing customers who could not otherwise finance all of their needs. • In many countries preferential treatment is given to tender responses which have some barter component; even where the barter component is negligible in comparison to the overall transaction size. The Ormita marketplace is comprised of more than 220,000 businesses spanning 54 countries and affords suppliers the ability to access “off market” and “non traditional” clients without additional marketing costs. Suppliers willing to engage in barter are able to penetrate new markets and expand sales potential in existing markets.

Newly Manufactured Goods

Surplus Inventory

Example of Interest Saved

Example of Revenue Increase Liquidation Liquidation Sale Sale Profit Profit

Profit

Marketing Cost

Legal & Collection

Marketing Cost

Profit

Sunk Overheads

Sales Order Fulfilment Cost

Existing Sales

Sales Order Fulfilment Cost

Barter Sale

Revenue ($)

Cost of Financing

Profit From Full Sale Price Depreciation

Sunk Cost

Cash Liquidation

Sunk Cost

Barter Sale

Preservation of Cash for Buyer & Seller

Benefits of Barter

During difficult economic times farmers may face high finance costs. Conversely, equipment and agricultural supply sellers may face slow movement of products in those same markets- leading to lost opportunities and growing surpluses. For both farmer and supplier this may increase the likelihood of downsizing and/or the reduction of inventory holdings. The Ormita barter solution improves liquidity by allowing farmers to self-finance essential supplies. Repayments are not made in cash; but with existing or future production. Agricultural equipment, machinery and chemical suppliers, in turn, are able to utilise trade credits to offset many of their fixed operational costs of their businesses (offsetting real cash expenses) Other benefits are as follows: • Farmers in certain countries may otherwise have a higher cost (or no access at all) to trade finance. In such instances bartering of commodities may be the only alternative solution to traditional finance • Preserves hard currency. • Reduces the risk of currency volatility (for both buyer and seller). • Bypasses currency convertibility issues (for both buyer and seller).

Financial challenges facing farmers Market price fluctuations Increasing costs for essential supplies

Currency convertibility

Lack of surplus cash

Farmer

Increasing requirements for energy and water efficiency

High cost of interest

Lack of financing mechanisms Competition

Managing Payment Risk

Benefits of Barter

The Ormita solution offers a unique (and immediate) form of collateralisation for suppliers. • Depending how a transaction is structured, barter can serve the function of collateralisation either in the form of: a. Trade credits accrued by the supplier (appearing as an asset on the suppliers balance sheet); or b. Goods immediately delivered to the supplier.

• Eliminates forward supply price risks which may be caused by exchange and/or interest rate volatility. Hedging currency risks through barter rather than traditional financial instruments may be desirable because purchasing financial instruments requires an upfront cash payment and thus drains liquidity. • Traditional financial instruments cannot always hedge real exposures effectively because financial value changes with nominal exchange rates, not real exchange rates, and is based on interest earnings not inflation. A correctly structured barter transaction can help solve the real price problem. • Suppliers acquire an actual security interest in goods to be delivered; either directly from the farmer or indirectly in the form of barter trade credits and/or a back-to-back contract with arrange of different suppliers in the Ormita network. • Maximises returns for the seller and buyer – no need to sell stocks at liquidation prices in order to finance a purchase or make a sale.

Risk Level for Suppliers Extreme

Seller must finance part or all of sale

Liquidate stock at a discount

Medium High

Sales numbers lower than forecasted

No financing by seller required C.O.D. terms only

Sell all stocks for maximum price; supply meets or exceeds demand

Traditional Sales Channels

Barter Sales Channel

No financing by seller required C.O.D. terms only

Benefits of Barter

Reduces the Cost of Borrowing

For certain countries, the cost of finance is often a barrier to procuring certain goods and services. Particularly troublesome are those markets with high cost of finance coupled with interest and/or currency exchange rate volatility. • Repayments cost less than cash (capital plus interest vs. the cost to produce goods and supply them in repayment). • Barter offers a guaranteed way to repay borrowings whereas traditional bank finance requires repayment but does not guarantee the farmer a matching sale of their agricultural products in return. • Accrued barter trade credits represent a legitimate balance-sheet asset and may be used as evidence of financial viability for future cash borrowings.

Savings for Farmer

Example of Interest Saved Borrowed amount $ Interest Repayment Period Total Cost of Interest $

Cash Barter 250,000 $ 250,000 5% 0% 5 N/A 62,500 $ -

Total amount saved using barter: $62,500

Savings for Farmer

Example of Interest + Principal Saved Cash Barter Borrowed amount $ 250,000 $ 250,000 Interest 5% 0% Repayment Period 5 N/A Total Cost of Interest $ 62,500 $ Total Cost of Repay $ 312,500 $50,000* Total amount saved using barter: $262,500 (*Assumes a $50,000 cost for growing, picking and packing extra produce for sale on barter inclusive of any service fees to Ormita)

Loan Repayment Comparison

Interest

Principal

Cost to create new sale

Traditional Finance

A Viable Alternative to Risky Vendor Financing

Benefits of Barter

Suppliers traditionally carry some form of financial risk when dealing with traditional buyers. This risk is often in the form of payment terms (e.g. 30 days), providing potential for purchasers to default or delay their payment obligations. Ormita helps to eliminate this risk by providing immediate payment to the supplier in the form of barter credits which can then be used to offset existing fixed expenses. • Slow payers increase suppliers operating costs. • Late payments cause a dilemma for suppliers who often wish to maintain good relationships with their customers but may also be adversely affected by the disruption created in their own cash flow. • Collection of bad debts are time consuming, can be expensive, and require specific knowledge of related practices and laws. • Ormita provides a mechanism to clean up most bad debt situations where a cash repayment would otherwise be difficult to achieve or where judgements difficult to enforce. • Accrued barter trade credits represent a legitimate balance-sheet asset and may be used as evidence of financial viability for future cash borrowings.

Traditional Balance Sheet Assets Cash at bank Fixed assets Stock Receivables

Liabilities Borrowings Depreciation cost Warehousing cost Exchange rate risks Provision for bad debt Payables

Barter Balance Sheet Assets Cash at bank Barter at bank Fixed assets Stock Receivables

Liabilities Borrowings Payables

Benefits of Barter

Provides Suppliers an Immediate Form of Payment

In areas where supplier finance is risky, barter provides an essential alternative for two fundamental reasons: • Ensures immediate inflow of a tangible balance sheet asset which can then be immediately used to offset existing cash expenses. • Avoids bad debt; as the supplier is paid immediately in the form of barter trade credits. There are no receivables in barter transactions - payment is immediate.

Ormita’s multi-channel barter sales management programme allows agricultural suppliers and farmers to: • Rapidly generate significant and immediate revenues in multiple countries and markets. • Focus marketing and pricing approaches for various target segments. • Boost customer loyalty and leverage brand equity through controlled channel management. • Take limited and calculated risk for developing new sales channel. • Explore newer markets with minimal change in existing business processes and structures. • Integrate partner and supplier channel within your marketing strategy. • Offer product and services catalogue to match customer expectations and market trends. • Become more resilient and responsive to business environment.

“Businesses often have excess capacity in their own goods, services or infrastructure, even more so when the financial cycle slows and credit tightens. Business people find that using capacity to source needed goods and services is an attractive alternative proposition to conventional sales and credit if it can increase sales, ease cash flow or reduce reliance on conventional credit.” “Capacity Trade and Credit: Emerging Architectures for Commerce and Money”. City of London Corporation, ESRC, UKTI, BIS joint Report. City of London Corporation. December 2011.

The Ormita Commerce Network Nearly every business faces the problem of cash flow management. Issues that contribute to the need for cash flow management include highly competitive markets where constant advertising is a mandate, increasing business expenditures to attract consumer attention, planned or unplanned downtime, perishable inventory and the necessity of discounting inventory. Ormita is essentially a secondary market that allows businesses to overcome these issues by allowing sales and purchases of essential goods and services using barter instead of existing cash. The Ormita trade platform helps to remove the limitations that traditionally were a part of any barter transaction, such as the need for an equal dollar value, the mutual need between any two companies for each other’s product or service, and the time it can take to coordinate the transaction. The Ormita business barter solution is designed to: •

Increase sales and market penetration.

•

Generate new income and working capital directly from existing capacity.

•

Enhance corporate cash management by allowing a business to reduce its borrowing and trade finance risks.

•

Offset many of the costs of doing business,

•

Receive optimum value for goods and services.

•

Improve shareholder value and overall profitability.

Key Performance Metrics Trustworthy - Founded in 1999. - Financially sound. - Backed by individuals with global reputations. - More than 70 years of combined industry experience. - Experienced shareholder base.

Global Reach - Offices in 21 countries. - Representatives in 36 countries. - Customers in 54 countries. - More than $3.4 billion USD in trade per annum.

Recognised by the UK Government as the largest noncash trade platform in the world.

The Facts about Barter Barter is the process of exchanging products, goods or services, for other products, goods or services. It is a simple method of transaction where little to no money is used. In today’s world, it exists parallel to the monetary system. Historically barter operated instead of money as the primary method of exchange. This also occurred throughout history in times of monetary crisis, when a currency was unstable, or devalued by hyperinflation or recession. Nowadays, however, barter is a major force in the economic world, becoming a much more systematic and structured system of commerce. Ormita works directly with Government Ministries, State Owned Enterprises, Fortune 500 Companies, Stock Exchange Listed Companies and a handful of carefully selected private corporations in 54 countries.

Multilateral Barter A trade or barter exchange provides a trading platform and bookkeeping system for its members or clients to provide barter opportunities. The member companies buy and sell products and services to each other using an internal currency known as “barter” or “trade dollars”. Participants in barter earn trade credits (instead of cash) when they sell and these credits are deposited into their account. They then have the ability to purchase goods and services from other participants using their trade credits. In multilateral barter, trades do not need to be direct. Instead three, four, five and six-way transactions are possible. Transactions can also take place at different times so no single supplier needs to “swap” their product or service immediately but can do so over a period of time. In these instances the value of the deal is recorded centrally and the process managed by a commerce network or barter exchange organisation.

Ormita Commerce Network www.ormita.de

www.governmentbarter.com www.barterforequity.com www.barterforadvertising.com www.mutualcreditlibrary.com

Agriculture Sector Solutions Team Ormita Commerce Network Limited 1704. 27 Hillier Street Central. Hong Kong Tel: +852 5808 2722 Fax: +852 3017 5509 Email: info@ormita.com

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This brochure provides general information only. The information contained herein was current and based on available information when we went to press and is subject to change at any time without prior notice. The content of this brochure in no way represents an offer to conclude a contract. ÂŠ 2009 Ormita Commerce Network Limited. Last updated February 2013