As a promoter of the development of markets, the Rosario Board of Trade has worked alongside dairy market participants for several years now in the creation of new services for the sector. The focus of its efforts have zeroed in on the design of a framework for milk supply-purchase agreements that would foster the institutionalization of dairy markets. Among its benefits, we can cite improved access to financing for dairy farmers, a development that is already taking place with new credit lines being offered by Banco de la Nación Argentina. These loans will accept income payments derived from milk purchase agreement, which could be registered at the Rosario Board of Trade, as collateral.
Some of the services for the dairy market that the Rosario Board of Trade has developed include:
a) A framework for a cow milk supply-purchase contract that could be registered in the Rosario Board of Trade. Dairy farmers, suppliers, cooperatives, cooling, and storage centers, dairy products manufacturers, etc. would benefit from the use this contract. The contract model was developed alongside both buy and sell side participates. The contracting parts will be able to insert any changes or clauses they find necessary.
The contract will allow buyers and sellers to set the following terms:
•Amount and quality of milk, traceability, means of transport, and delivery terms.
•Length of the contract.
•Price setting and payment conditions: given that on most milk purchase agreements price is set on delivery, the contracting parts can establish a certain price reference. Examples include: i) free fixing of prices between parts, ii) adjustment according to powder milk prices (i.e. FOB prices), iii) adjustment according to price indexes published by statistical agencies, iv) cash bids made by the buyer, v) polynomial functions which include variables that affect production cost, vi) others.
•Conflict resolution: contracting parts could agree to hold any conflicts under arbitration in Rosario Board of Trade’s Arbitration Chamber. This way, buyers and sellers could solve conflicts swiftly and at a low economic cost.
•Laboratory analysis: contracting parts could agree to use the services of certain labs to analyze milk quality and solve conflicts according to Annex II of the SAGP 229-E/2016 resolution that created the Integrated System of Management of Argentine Dairy Industry (SIGLeA according to its Spanish acronym).
•Procedures in case of default and transfer of rights to payment.
b)The Rosario Board of Trade offers the services of its Grain Arbitration Chamber to act in case of conflicts that could arise from milk purchase agreements.
c)The organization offers to develop, working side by side with the dairy industry, in the development of credit instruments based on milk supply-purchase agreements.
Concerning this last point, the contracts will serve to improve dairy farmers’ risk profile, given that they will be able to offer income payments from milk purchase commitments as collateral and will be able to gain access to lower interest rates. Some of the credit instruments that could be developed are:
a)Bank credit using income payments from milk purchase contracts as collateral,
b)Bank credit with the support of reciprocal guarantee societies,
c)Asset-backed securities issued by trust funds to finance working capital and investment projects,
d)Used of deferred payment checks with support from reciprocal guarantee societies,
e)Credit from suppliers of feed and inputs through transfer of rights to income payments from milk purchase agreements.
Banco de la Nación Argentina (Bank of the Argentine Nation) is at the forefront of this process, having developed a new line of credit aimed at small and medium sized dairy producing enterprises. Terms on these loans vary according to the use of funds:
•Including infrastructure, road improvements, feed storage, purchase of machinery, treatment of effluents, power line networking, housing for employees, etc.
•Up to 10-year terms with a grace period of up to 2 years and monthly interest payments starting on the third month.
•Includes retention of cattle produced at own facilities and whose property has not been transferred.
•Up to 7-year terms with a grace period of up to 3 years and monthly interest payments starting on the third month.
•Includes feed production and storage in bales, silos, etc.
•Up to 3-year terms with a grace period of up to 1 years and monthly interest payments starting on the third month.
Grace period is included in the term of the loan for all available options, with favorable interest rates and a German amortization system.
Milk sale-purchase contracts can be used as collateral for 3-year loans, with a 50% haircut applied on the value of income payments to be made according to such agreement. Loan repayments should not exceed 20% of such adjusted value, and farmers will be able to freely use the remaining funds after capital and interest have been paid for.
The acceptance of milk sale-purchase contracts as collaterals for bank credit is an important step towards the widespread use of such instruments and should pave the way for more formal dairy markets in Argentina.