What is structured commodity finance?

Structured commodity finance (SCF) as covered by Trade Finance is split into three main commodity groups: metals & miningenergy, and soft commodities (agricultural crops).

SCF is a financing technique utilised by a number of different companies, primarily producers,trading houses and lenders. Commodity producers stand to benefit from SCF by receiving financing to ensure cash flow is available for maximum output with the intention of repaying the loan once exports begin. Trading houses employ SCF largely as a means of risk mitigation to reduce their exposure to a single country or commodity; SCF allows them to mitigate any supply, demand or price shocks. Lenders seek out opportunities to help assist commodity producers in accessing new markets and customers, this also benefits them through gaining interest on the loan.

SCF provides liquidity management and risk mitigation for the production, purchase and sale of commodities and materials. This is done by isolating assets, which have relatively predictable cash flow attached to them through pricing prediction, from the corporate borrower and using them to mitigate risk and secure credit from a lender. A corporate therefore borrows against a commodity’s expected worth.

Soft Commodities

Hard Commodities

If all proceeds to plan then the lender is reimbursed through the sale of the assets. If not then the lender has recourse to some or all of the assets. Volatility in commodity prices can make SCF a tricky business. Lenders charge interest any funds disbursed as well as fees for arranging the transaction. SCF funding techniques include pre-export finance, countertradebarter, and inventory finance.

These solutions can be applied across part or all of the commodity trade value chain: from producer to distributor to processor, and the physical traders who buy and deliver commodities. As a financing technique based on performance risk, it is particularly well-suited for emerging markets considered as higher risk environments.