Start Ups and Entrepreneurship

Rice Industry, Payment Problems and Financial TransformationPresentation at Ministry of Finance

12/23/2016Rice Industry, Payments and Financial Transformation1

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My First ImpressionsProblems in theRiceIndustry (As perceived by me January 2016)1.Tardy payments to farmers and non-payment by millers.2. Unreliable pricing, claims of unfair prices3. Volatile localmarketprices4. GBTI payment solution proposed by John Tracy (2015, Factoring of invoices of Farmers)5. RiceStabilization Board proposed by President Granger (Jan.15th2016)There is room for a more efficient solution that (a) helps to modernize the financialmarketsin Guyana (b) that does not require that the Government put up its own money (at least not the majority of the costs) (c) that utilizes excess liquidity (funds not in the banks) in a more transparent way (d) that promotes risk taking and risk sharing (e) that might get support from International Agencies like World Bank, IMF, CARICOM, IADB and others etc etc. What is it? The development ofricefuturesmarket. It will be the first in Guyana and in the Caribbean for that matter. Lloyd12/23/2016Rice Industry Payment Problems and Transformation2

Realization and AwarenessProblems cannot be solved in a vacuum. Therefore I enlisted a team of other PhD researchers experienced in the rice industry as lenders and as researchers and we would look at the problem more broadly.The other team members are Dr. Wilbert Bascom, Former CEO at GNCBDr. Patricia Meyenisse, PhD Ohio State (Ag. Econ)Dr. Venus Rucheai, PhD Ohio State (Econ.)My background is in banking and academia. I worked at GNCB and was in charge of the International Division. I hold a PhD Ohio State in Economics12/23/2016Rice Industry Payment Problems and Transformation3

Rice Production is GrowingActual Production has recovered since the collapse during the 1990s.Projected rates of production are much below actual amounts harvested.The recent rate of under-forecast has averaged from 29.8 % in 2013 to more recently an 11.4% in 2015. I have no numbers for 2016 but I hear that the forecasts is for an even higher output..12/23/2016Rice Industry Payment Problems and Transformation4

Rice Industry, Prices Have Modestly RecoveredWorld rice prices have fallen from a recent high of $612.43 in May 2012 to a recent low of $354.35 in December 2015.They have recovered to a recent price of $408.91 in May 2016.This is a 33.32 % decline from the peak price.So globally rice and other commodity prices have been in decline. I understand that we were getting higher prices under the accord with Venezuela.12/23/2016Rice Industry Payment Problems and Transformation5

Rice Production, Target and Actual in Metric TonnesProduction2013201420152016Targeted412,000500,000600,000Actual535,000635,000687,784?% deviation29.8%27.0%11.4%

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State of the Rice IndustryAll factors considered the industry is in relatively good shape.Areas of concern are the relatively low global prices and the failures in the local payment systems.The failures have caught the eyes of the local banking industry and our President.12/23/2016Rice Industry Payment Problems and Transformation7

Payment IssuesLate payments. Some payments are delayed by more than one crop year. In some instances, farmers are in the middle of harvesting their crops and still do not know what prices they will be paid for their cropsPrices paid to farmers vary widely by region and by mills within those regions.Farmers are promised one price and many times are paid another price if they are ever paid.In some cases they are asked to pack the paddy bags more compactly so that more paddy is contained.12/23/2016Rice Industry Payment Problems and Transformation8

Payment issues Packed paddy bags can range from 150-180 lbs. Since farmers are paid by the bag this is a major problem.Farmers deliver paddy to millers and generally are not paid on the spot.Farmers sometimes borrow from banks to purchase inputs for their crops.Farmers also complain about the low prices offered to them by the millers.The millers also have their own payment problems. They have borrowed lots of money from banks to invest in drying , storage, milling and polishing facilities and need to have a return on their operations to repay the banks12/23/2016Rice Industry Payment Problems and Transformation9

Payment IssuesBoth farmers and millers generally owe money to banks.Farmers are owed money by millers and in turn are owed by farmers.Millers are owed by farmers (rarely) if they offer farmers cash advances. They generally owe both farmers and banks.Farmers are generally seen to be in a more vulnerable position than millers as a group.12/23/2016Rice Industry Payment Problems and Transformation10

Motivation and InterestsWe all are searching for ways to give back to our communities. Most of the team are of Caribbean heritage.We are self-funded.We are apolitical and only want what is best for Guyana and the Caribbean.Even my Jamaican counterpart agrees that the ultimate goal of a futures market makes more sense if it were located in Guyana.12/23/2016Rice Industry Payment Problems and Transformation11

Proposed solutions- Local PressFactoring of their invoices. This involves the farmers taking their invoice to a factor and discounting the proceeds.Presumably this would be done on a non-recourse basis.It imposes some burden on farmers but is better than not being paid at all.The factoring approach tackles the time delay problem in getting paid but still relies on a type of banking.12/23/2016Rice Industry Payment Problems and Transformation12

Factoring Solution (II)The factoring solution also depends on banks.It potentially resolves the problem by deepening the involvement of banks in the rice industry.The set of factoring fees that the banks charge if reasonable would be helpful but this still means that the banking industry is exposed to the rice industry.As a matter of fact if comparisons were to be based on rates charged by local banks on real estate loans, this could be problematic.12/23/2016Rice Industry Payment Problems and Transformation13

Proposed solutions-Local PressEstablishment of a Rice Stabilization Board.Stabilization boards in general have had a chequered history.They try to smooth prices of products and the incomes generated by producers of those products over some cycle.Essentially they buy and store products when prices are low and release them back onto the markets when prices are tending to rise. Stabilization boards can become insolvent if there are extended periods of low commodity prices.

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Rice Stabilization Board..(II)Stabilization boards are as strong as the capital that is behind them.The life time of a stabilization board is therefore directly linked to the amount of capital that it has and to the price of the commodity being stabilized.Stabilization boards do not exist in a vacuum and are dependent on what is going on in the market at large.Guyana is a small producer and has to take the world market price as given. Commodity prices are in a secular decline and this is true of rice as well.12/23/2016Rice Industry Payment Problems and Transformation15

Rice Stabilization Board (III)This particular solution requires infusion of funds by the government.It will still expose farmers to risks as the government cannot control the level of the cycle of low commodity prices.It is also problematic in that there is a currently shortage of funds at the national level.It is not a private sector/public sector solution which is the preferred way forward.12/23/2016Rice Industry Payment Problems and Transformation16

New Ways ForwardIdeally one would want some approaches that did not rely on primarily on bank involvement and did not require the cash strapped government to put up funds to back buffer stock fund.So Factoring and Stabilization Boards are not the answer to the problem.In any event they do not solve all the risks faced by farmers. For instance there is as far as I am aware no crop insurance so farmers are exposed to the full range of risks.

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New Ways Forward (II)Those risks include floods, droughts , fire, outbreaks of disease in fields all of which can lead to partial or complete loss of harvests. (These are output risks).In addition, output can come at inopportune times. High domestic production is typically associated with low local market prices. Conversely low domestic production and high local market prices go hand in hand up to a certain point.. (These are price risks)In modern economies, crop insurance has been developed to ameliorate these types of production risks.12/23/2016Rice Industry Payment Problems and Transformation18

New Ways Forward (III)In addition private sector initiatives like the development of futures market help transfer risks from farmers to people who want to bear risk for a profit.So farmers can hedge risk more efficiently if there were markets to sell their products ahead of time (before the crops are harvested).If such markets existed, in conjunction with crop insurance, there would be price certainty at the time of the sale of their harvests.Banks as we have seen from the crisis in 2007-2008 have high failure rates. There was not a single failure of a futures market in that crisis period!12/23/2016Rice Industry Payment Problems and Transformation19

New Ways Forward (IV)How do we get to the stage where we can provide our farmers with that level of protection enjoyed by farmers in developed economies?We can start small. Establishment of local payment government-run centers for delivery and storage of rice production. Once delivered the farmers are issued certificates of ownership which are negotiable.Ensure that they are fairly paid once their crops are harvested at set national prices (with minor local area variation that is agreed and announced ahead of time)Rigidly enforce standardization across paddy varieties ,wetness and grade and pay according to the established scale.This steps takes the millers out of the financing loop and ensures immediacy of paymentThis has been successfully done in Ethiopia for crops like cotton and corn.

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New Ways Forward (V)

If there is a national will Ethiopia has shown that several steps to ensure farmer security of income and prices can be simultaneously undertaken. We are not of course as large as Ethiopia but we are nevertheless, less challenged in terms of per capita income. If they could bring certainty of payments to their farmers then so can we.12/23/2016Rice Industry Payment Problems and Transformation21

Futures Market DreamsHaving a futures markets would enable the transfer of farmers price risks to speculators and the essential payment problems would be solved immediately. The risk transfer function is primary but not the only feature. There would also be price discovery and the ability to forecast prices for the broader economy. Such a development would help to create new skills in Guyana, reduce the dependence on banks, help to utilize excess funds outside of the banking system and prompt a wider development of the financial system in Guyana. 12/23/2016Rice Industry Payment Problems and Transformation22

Futures Markets Dreams (II)Facilitate the creation (or improvement) of new (existing) skills in many areas, inspection, grading, quality control, delivery, product standardization, storage, money management, trading systems, capital controls, marking to market, margining, funds transfer etc etc.. all to international standards. Futures market are less capital intensive than banking.Once the rice futures market is established there will be knock on effects in many other areas like oil, currencies and gold for instance.12/23/2016Rice Industry Payment Problems and Transformation23

Futures Market DreamsMy idea would initially require little by way of government funds and would hope to draw support from banks, insurance companies, rich Guyanese investors/speculators, Caribbean investors etc. Ideally it would initially be a Public/Private Venture with government stakes being dominant possibly. Monies that would have been allocated to a Rice Stabilization Board could be channeled to developing a Rice Futures Market. It would lead to creation of many more jobs in Georgetown also.12/23/2016Rice Industry Payment Problems and Transformation24

Futures Market DreamsWorkers would have to be trained in all of these new areas of course.Luckily University of Guyana is planning the creation of a School of Business and Entrepreneurship.All needed courses could be developed and taught at our own institution. We will be the first in the Caribbean to have a futures market.So there will be synergistic benefits among Government, academia and the private sectors.12/23/2016Rice Industry Payment Problems and Transformation25

Futures Market DreamsThank you for affording me this opportunity!

Lloyd P. Blenman, PhDProfessor of Finance12/23/2016Rice Industry Payment Problems and Transformation26

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