Question

Assume you are the owner of a very large soybean farm in Argentina, a country located in South-Eastern South America. Soybean is a commodity which is traded globally. 70% of all soybeans are used as chicken and pig feed. It has been widely recognised as a very efficient source of protein and energy. Another use for soybeans is splitting (or crushing) it up into soybean meal and soybean oil – 80% becomes the meal and 20% the oil. Much soybeans are grown in South America (~31% of world total in Brazil, ~18% in Argentina), and demandfor the soybean, soybean meal and soybean oil is growing very fast in Asia (especially China). One day, you received an unexpected and peculiar call from Zambia (a landlocked nation in Africa). The person over the line identified himself as a procurement officer of Livingstone International. He spoke fluent Spanish and asked if you can sell him two shipments of unprocessed soybeans. His request is large enough to clear out 80% of your annual harvest. The issue is you have never sold on the international front as you have always sold your harvest to the domestic merchants. Question 1 As the owner of the soybean farm in Argentina, you have never sold on the international front. 1. Research and briefly explain all the possible risks involved if your soybean farm is expanding into global trade. [Hint: Please organise all your research materials into FIVE (5) categories of risks. It is expected to be between 1 and 2 pages for this question.]

Note: financial risk, credit risk, country risk, etc.

Answer 1

For any business owner, it is highly positive news if he gets an opportunity for international business expansion. There is no doubt that international business expansion always comes with lots of profitable business outcomes but at the same time, we have to be prepared for some unforeseen risks associated with such international demand-supply business opportunity.

I, as owner of Soybean farm in Argentina….

Let’s take up case of my own Soybean farm in Argentina. Until today, I have always supplied all my Soybean produce in domestic market. I did not seriously think of any such international business opportunity from an international market. But this African trader, he has ordered almost 80% of my annual production of Soybean. This could be a huge profitable relation for my business.

Also, as a business owner, I know very well that such immediate international business expansion do have certain risks involved. Let’s see what those risks are...

1. Credit Risk :

This is a big risk involved when you deal in international business markets. Until today, I had to deal with domestic traders and I knew them personally and their business history. Even in case of payment default, I could manage to convince them and get my payments.

But in this Zambian trader’s case, I don’t know them personally and not even about their business histories with other players in the market.

• It may be possible that they accept the consignment and then delay our payments for long enough time.
• They may also refuse to give full payment on advance considering our first business transaction.

2. Intellectual Property Risk:

This could also be possible that this Zambian trader have some proxy players in background who might claim intellectual property rights (IPR) on my Soybean produce and then file suit in intellectual property rights arbitration. This could also become nightmare for me while dealing with overseas player for resolving IPR disputes considering international boundary and international laws complexities.

3. Volatile Currency Exchange Risk :

Dealing within the domestic market, has never threatened my business irrespective of what is happening in international currency exchange markets.

But in the case of Zambia trader, he is based in African continent and my business is set up in Argentina. What if we agreed on A FIXED EXCHANGE RATE at the start and then after few days before export, market fell down to a drastically low level. This could potentially put my business in financial burden in the event of loss in profit margin.

4. Supply Risk/ Shipping Risk :

In the event of domestic supply, I had various options for transporting goods safely with knowing all the routs and ways and any possible risk.

But in the case of Zambia, I will have to dependent on the sea rout. This poses various risks in supply of Soybean such as, sea pirates, accident in sea, damage, theft, seizure by authorities in sea rout, looting and vandalism etc.

5. Geopolitical Risks :

Such risk comes in an unexpected time in most of the international cases. There could be various challenges in this aspect such as,

• Change of Government in Zambia which might put ban on all imports
• New Trade policy restricting trade from Argentina
• Ban on the imports of Soybean.
• Unexpected Trade wars between Argentina and Zambia before/during exchange of goods/payments.

Thus, these are some risks associated with international business expansion. We should plan in advance before signing any such deal with an international business player.

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