So what happened?

On January 17, 2023, Lakeside Produce filed for bankruptcy in the Superior Court of Justice of Ontario, Canada with Ernst & Young as administrator. The loss amounted to $188 million Canadian dollars with an asset amount of $3.5 million Canadian dollars, and Mexican farmers had a total exposure around 77 million in unrecoverable pesos. This begs a few questions we must ask in 2024 and 2025...

Which company is next to go bankrupt and who will be affected... is it possible to investigate these ideas, reach a reasonable degree of certainty, and prepare accordingly?

The short answer is, yes!

The North American Trade Landscape

Trade between Mexico and the United States is a vital artery within the North American economies. In 2022, Mexico surpassed China as the United States' top trading partner for the first time in 20 years. In 2023, Mexico exported $475.6 billion to the United States, 5% more than it did in 2022. This trend can be attributed to American companies diversifying their supply chains because of political and economic instability between the United States and China.

(https://oec.world/en/profile/bilateral-country/mex/partner/usa)

(https://asia.nikkei.com/Economy/Trade/Mexico-replaces-China-as-top-exporter-to-U.S.-in-2023)

The main products that Mexico exported to the United States were computers ($36.8B), automobiles ($34.1B), and motor vehicles; parts and accessories ($31.8 B). In the last 27 years, Mexico's exports to the United States have increased at an annualized rate of 7.17%, from $65.1 billion in 1995 to $421 billion in 2022.

(https://oec.world/en/profile/bilateral-country/mex/partner/usa)

International trade, especially between interconnected economies like Mexico and the United States, is exposed to a wide range of financial and operational risks. Among financial risks, exporters must manage exchange rate volatility, interest rate fluctuations, and buyer credit risk. These risks are especially prevalent in scenarios where macroeconomic factors can abruptly alter a customer’s ability to pay. Operationally, companies face logistical challenges such as supply chain disruptions and changing trade regulations. Both challenges can significantly impact a company’s ability to fulfill contracts and maintain profit margins.

Furthermore, economic and political instability in any of the countries involved can have profound consequences. For example, the COVID-19 pandemic not only impacted business operations globally but also introduced a layer of economic uncertainty that affected demand and capital flows.

(https://www.producebluebook.com/2024/03/06/a-leamington-hothouse-bankruptcy-a-case-study-part-1/)

The bankruptcy of Lakeside Produce illustrated how an adverse economic event can escalate rapidly and affect the entire value chain. Producers, distributors, and exporters without mitigation tools such as credit insurance faced significant losses. In the case of Lakeside, Mexican exporters lost $4.161 million, or 73 million Mexican pesos, representing about 5% of the annual budget allocated to agricultural activities in a state like Guanajuato.

(https://www.elsoldeleon.com.mx/local/aumenta-2-mil-mdp-presupuesto-para-el-campo-en-2023-9361537.html)

Among other factors that led to Lakeside Produce's bankruptcy are a few that stick out:

• The impact of COVID-19. Public health measures and abrupt decline in demand from foodservice channels due to temporary closures directly affected sales and operations of the company.
• Problems with Rugose virus. The emergence of Rugose virus in 2020 resulted in significant crop losses and increased input costs to cover contracts due to higher open market prices.
• Supply chain challenges and elevated costs. Supply chain disruptions and increased transportation and energy costs continued in 2021 and 2022, further eroding the company's profit margins. Lakeside was unable to pass on these costs to its customers due to market competition which resulted in continued margin compression.
• Debt overhang and illiquidity. The company faced increasing liquidity constraints as it reached the limits of its borrowing capacity. Despite financial restructuring measures and capital injections such as an additional $8.5 million credit in 2022, the company was unable to reverse its negative financial trajectory.

(https://documentcentre.ey.com/api/Document/download?docId=36827&language=EN)

The credit alert system of credit insurers, is an essential tool for sellers (exporters) seeking to mitigate financial risks in international transactions. The system continuously monitors the buyer’s financial solvency and sends real-time notifications when changes are detected that could affect the buyer’s ability to meet their payment obligations. This system is characterized by its ability to integrate with daily business operations, offering detailed and personalized analyses according to the specific needs of each company. The benefits of trade credit alerts are significant: they allow businesses to make informed and proactive decisions, reducing credit risk exposure and improving accounts receivable management. Additionally, credit alerts strengthen market confidence by ensuring that trading decisions are based on the most up-to-date assessment of credit risk.

Finally, on January 17, 2023, Lakeside Produce filed for bankruptcy, leaving liabilities of $187 million USD and assets of $3.5 million USD.

(https://www.producebluebook.com/2024/03/06/a-leamington-hothouse-bankruptcy-a-case-study-part-1/)

Why Trade Credit Insurance?

Credit insurance offers fundamental benefits for companies operating in the field of international trade such as protection against non-payments. This type of insurance protects businesses against financial loss in the event that a customer is unable to meet their payment obligations. This is crucial for maintaining financial and operational stability.

Additionally, credit insurance significantly improves a company's ability to obtain financing. By securing accounts receivable with insurance, companies can present these invoices as a more attractive collateral to banks and credit institutions. This is especially valuable in times of economic uncertainty when maintaining a healthy cash flow and access to financial resources is vital to business continuity and expansion.

The Lakeside case underscores the importance of robust risk management and the need for effective contingency strategies to address unexpected challenges. It also highlights the risks inherent to the reliance on a limited number of crops and the need for diversification in product lines and markets to mitigate similar impacts in the future.

In summary, Lakeside Produce Inc.'s bankruptcy was the result of a perfect storm of operational and financial challenges exacerbated by a global crisis and liquidity constraints, underscoring the fragility of highly leveraged companies in times of global economic uncertainty.

These risks underline the importance of strategic risk management where credit insurance plays a crucial role in offering a financial safety net. This type of insurance not only protects against direct defaults but can also help stabilize operations by ensuring that the cash flows necessary to maintain production and logistics are not interrupted by unforeseen economic or political events. Additionally, credit alerts from various entities offer a valuable tool to anticipate and act on changes in a client’s creditworthiness, allowing proactive adjustments that can avoid further losses.

In Conclusion

The Lakeside Produce case serves as a stark reminder of the complexities and risks involved in international trade. While trade between Mexico and the United States remains a critical component of the global economy, it is fraught with financial and operational challenges that require vigilant risk management. Companies must leverage tools such as credit insurance and risk monitoring systems to safeguard against potential losses. By understanding and implementing robust risk management strategies, businesses can navigate the uncertainties of international trade to ensure long-term stability and growth.

At Supply Pay, one of the products we offer to exporter clients are credit alerts with the ability to pull information from two of the largest credit insurers in the world. This helps mitigate the risk of insolvency with overseas buyers, planning sales flows and maximum exposure per customer. Customer diversification plays an essential role in international trade. Reach out to us if you want to obtain this type of information! These tools can help you mitigate your exporting risks significantly.