The Export Credit Guarantee Program (GSM-102) covers credit terms up to three years. The Intermediate Export Credit Guarantee Program (GSM-103) covers credit terms from three to 10 years. These two programs underwrite credit extended by the private banking sector in the U.S. to approved foreign banks using dollar-denominated, irrevocable letters of credit to pay for food and agricultural products sold to foreign buyers. These programs do not provide financing but guarantee payments due from foreign banks. Typically, 98% of the principal and a portion of the interest at an adjustable rate are covered. The GSM programs are best for exporters that are risk adverse.

The GSM-102 was established in 1980 and mandated by the 1996 Farm Bill to receive not less than $5 billion each fiscal year through 2002. GSM-103, established in 1986, is mandated to receive not less than $500 million each fiscal year through 2002.

CCC also administers the Supplier Credit Guarantee Program (SCGP), which provides short-term credits (180 days or less) directly to foreign buyers (rather than to foreign banks). These direct credits must be secured by promissory notes signed by the importers. SCGP is usually used for commodities and products that normally trade on short-term account financing, or for U.S. exporters that have established relationships with foreign importers. By taking importer risk rather than foreign bank risk, a higher default rate occurs, so the exporter is required to take a higher share of risk than under GSM programs. SCGP will only guarantee 50% of the export value with no interest coverage.

The CCC allocates credit guarantees for agricultural commodities and products according to the market potential in specific countries. Once a country or product has been approved for a credit guarantee, the CCC issues a release specifying the country or region, product(s), and amount allocated.

Interested parties, including U.S. exporters, foreign buyers, and banks, may request that CCC establish a GSM-102, GSM-103, or SCGP program for a country and/or commodity. When requesting the establishment of a credit program, it is helpful to underscore the urgency of keeping or establishing the export market with specific examples and figures. Requests should specify importing country, commodity, quantity, estimated value, shipping period, and credit period desired. Requests should be submitted as soon as possible, keeping in mind that the program operates on a U.S. fiscal year, and sent to:

Ms. Mary Chambliss, Deputy Administrator
Commodity Credit Corporation
Foreign Agricultural Service
14^th and Independence Ave., S.W.
Washington, DC 20250

No credit programs for beef, pork, lamb, meat, cattle, swine, or processed meat have yet been established by CCC in FY 1998. Programs have been established for such products as feed grains, protein meals, oilseeds, vegetable oils, wheat, and cotton.

Korea’s Ministry of Agriculture reportedly submitted a request to USDA in Seoul on December 12, 1997 for a $1.2 billion package of GSM credits covering purchases of feed grains, soybeans and wheat. It is understood that the largest amount of credit guarantees have been made for feed grains, importation of which is critical to maintain the Korean pork industry’s viability. Korea’s proposal did not contain requests for credits for meat. USMEF has submitted recommendations to CCC in Washington for credit guarantees for beef and pork purchases

PROCEDURES (EXPORTER)

After determining if CCC has coverage for a specific country or product and identifying which U.S. banks have been approved by CCC, the general steps the exporter should take before applying for GSM-102 or GSM-103 include:

• The exporter negotiates the terms of the export credit sale with the importer.

• Once a firm sale exists, the qualified exporter must apply with CCC for a payment guarantee before the date of export and pay a fee calculated on the dollar amount guaranteed. The fee is based on a schedule of rates applicable to different lengths of credit periods.

• The CCC-approved foreign bank issues a dollar-denominated, irrevocable letter of credit in favor of the U.S. exporter, ordinarily advised or confirmed by the financial institution in the U.S. agreeing to extend credit to the foreign bank. (The U.S. agricultural counselor or attaché in the importing country can provide names of approved foreign banks.)

• The exporter may negotiate an arrangement to be paid as exports occur by assigning to the U.S. financial institution the right to proceeds that may become payable under the guarantee, and later presenting required documents to that financial institution.

• If the foreign bank fails to make any payment as agreed, the exporter or assignee must submit a notice of default to the CCC. A claim for loss may also be filed, and the CCC will promptly pay claims found to be in good order. (The exporter must obtain documentation to show that the commodity arrived in the eligible country and must maintain all transaction documents for five years from the date of completion of all payments.)

The general steps exporters should take before applying for SCGP are almost identical as those listed above except that instead of working through a foreign bank and letter of credit, the importer must issue a dollar-denominated promissory note in favor of the U.S. exporter. The exporter may negotiate an arrangement to be paid, in full or in part, by assigning the right to proceeds that may become payable under CCC's guarantee to a U.S. financial institution. Under this arrangement, the exporter would also provide transaction-related documents required by the financial institution, including a copy of the export report, which must also be submitted to CCC.

PROCEDURES (IMPORTER)

The following is a list of steps for importers to make use of CCC export credit guarantee programs. These steps should not be considered as occurring in a specific chronological order; some steps may come earlier or later than indicated below.

• Find out if USDA's Commodity Credit Corporation (CCC) has announced credit guarantee coverage for the importing country and product to be imported. U.S. exporters or an importer's local bank may be able to provide this information.

• If coverage is available, contact a U.S. exporter who is eligible to obtain a CCC guarantee and willing to sell the product on satisfactory terms.

• Determine which local banks have been approved by CCC and have credit arrangements with one or more financial institutions in the United States to support transactions under the GSM-102/103 export credit guarantee programs. Obtain a preliminary commitment from one of these banks to handle the planned transaction.

• Enter into a sales contract, consistent with CCC country and commodity allocations, with the eligible U.S. exporter. The U.S. exporter will then be able to apply to CCC for a payment guarantee.

• Arrange for the CCC-approved local bank to send the financial institution in the United States an irrevocable, dollar-denominated letter of credit in favor of the U.S. exporter.

• When the U.S. financial institution confirms or advises the letter of credit to the U.S. exporter, the exporter proceeds to ship the product as agreed.

• The exporter assigns the CCC guarantee to the financial institution in the United States and presents documents generated by the export transaction for payment. The assignee financial institution pays the exporter and forwards required documents as instructed under the importer's letter of credit.

• The importer's bank settles the transaction and releases any documents to the importer as agreed.

• The importer receives the product and pays the local bank according to prior agreement. The importer's payment(s) may include principal and interest, plus fees for the letter of credit, documentation, foreign exchange, guarantee, and any other fees charged by the importer's bank.

• The importer provides entry documentation to the U.S. exporter as appropriate.

• The importer's bank pays the principal and interest as scheduled under its financing agreement with the financial institution in the United States.