"Perfect storm" looms ... time to tune up your insurance: as new financial problems loom for the tea and coffee industry, Ted Rekerdres discusses how merchants can prepare their businesses.

At sea, sailors dread the confluence of three weather fronts--the so-called "perfect storm." A reality show of one of natures' tremendous events--the perfect storm is truly impressive, unless of course if you are caught in the middle.

Enormous waves are the main feature. Called "rogue waves" they can top 100 ft, with each foot exerting the power of 11 tons per sq/ft. With a capacity to move at over 60 mph, these single waves can scrape the entire topside off 6,000 TEU container ships, roll the largest fishing craft a full 360[degrees] and disappear small craft entirely.

The wind driven sea swells appear, combine and move unexpectedly in various directions. Sometimes they may cancel each other--just as often they multiply.

Lately, high tech ocean sensor buoys and special ocean-watching radars on GPS satellites are beginning to assist navigators with early warning of troubling formations for cargo on certain trade routes.

But sadly besides marine insurance, when all else fails, the only recourse left is the ancient sailors' prayer: ... "Oh hear us when we call to thee ... for those in peril on the sea."

So at the end of the day, your long-suffering marine insurers have a solid interest that trans-oceanic ventures begin fully seaworthy in the first place.

Advance Warning!

The time has come to batten down all hatches in front of a three system financial "perfect storm"--just now forming over the horizon.

Driven by the sub-prime mess, the latest tally of bank capital lost on three continents has exceeded $35 billion. Separate and larger equity drains to brokers and other financiers are now tolling.

By comparison, the losses during Katrina and September 11th drained about $40 billion each. But news of a third front just checked in: unstoppable rises in oil, now just shy of $100/barrel. The cost of such an oil shock will be at least as bad as the sub-prime mess.

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In 1987, emanating from different financial stresses, that era's financial storm drove a huge and fast capital outflow.

Many merchants had to scramble just to distinguish themselves and secure--with the remaining commodity lenders--their lifeblood lines of credit.

Commodity insurers and bankers had no choice but to cut their lines and/or shed clients to meet their now eroded capital-risk ratios. Many familiar names such as INA, Orion, GRE, Atlantic-Mutual, the Home, Bankers Trust, Continental Bank and NCNB, simply disappeared.

Now, 20 years later with new financial storms forming, how can tea and coffee merchants be better prepared and correctly document their earnings to banks?

Fortunately, there should still be time to activate a matched set of often-overlooked watertight doors available from marine insurers: the bank letter and bank loss payable endorsement.

When correctly set, your lender will see that merchant collateral is protected against "all risks" of physical loss from the moment of financial interest attachment. In effect, a loss to collateral represents a pay-down to the bank line.

Set Watertight door #1: Your marine insurer issues a "bank letter" attesting to the attachment of your coverage from the moment the coffee or cocoa becomes your property or legally at your risk anywhere in the world and covering continuously through warehouses, conveyances and vessels to discharge and delivery to consignee, consignment and/or until payment.

As can be seen the feature of omnibus attachment of coverage is key.

Set Watertight door #2:

The equally venerable "bank loss payable endorsement" protects collateral by assigning payment rights directly to the bank with the additional critical caveat that:

This insurance, as to the interest of the bank, shall not be rescinded, impaired nor invalidated by any act or neglect of the named insured, nor by failure to comply with any of policy terms or condition over which the bank has no control.

There are less robust versions of the above, but anything less than the above will be seen for what it is ... simply less.

Because times were easy and memories short, some lenders became complacent about the good practices and pre-requisites traditionally used to bulwark merchant collateral and enhance the creditworthiness of the merchant.

Carefully examine your bank covenants, if both of the above water-tight 'doors' have not been recently addressed, now might just be the time to stake out a more favorable and better regarded place with your banker!

Moving too slow to be distinguished from other merchants avidly competing for the inevitably smaller pool of credit--might be like ship driving with your radar turned off.

Ted Rekerdres is president of Rekerdres and Sons Insurance, located in Dallas, Texas. He can be reached at [e-mail] for full versions of the sailor's prayer and the banker documents.