Barter: the second oldest profession?

Richard Willsher reports on how bartering or reciprocal trade is a state of mind as well as a real exchange of value

When medical student and later-to-be boss of Occidental Petroleum, the late Dr Armand Hammer, was travelling in Russia in 1918, he saw people dying of starvation while their warehouses were packed with valuable minerals and furs. Meanwhile, back in the US, a bumper harvest had caused the price of grain to fall to less than a dollar per bushel. Farmers were burning their produce rather than pay the cost of bringing it to market. Hammer organised shipments of grain, saving the starving populace of the Urals and, in exchange, every returning vessel was loaded with the furs, platinum and other products for which there was a ready market in America.

This is the stuff of business legend and of classic barter. The trading of goods for goods. A meeting of needs. Russia’s Bolsheviks without the money to pay, and faced with the political imperative to feed their people. But it is rare that there is such a neat so-called “double coincidence of needs”. While ordinary folk may exchange potatoes and carrots across their garden fences with trust and goodwill, the major issues in barter are establishing a value for the exchanged goods by reference to a common medium of exchange, like money for example.

Yet this does not detract from the logic of using goods to purchase goods. Taking goods in lieu of payment is widely used in a variety of contexts. For example, banks that specialise in lending against gold mining operations have traditionally agreed to take deliveries of gold to repay their loans. With a well-developed global market in gold against which to benchmark the commodity, they can easily establish a value for the gold they receive, hedge the value of future shipments and accurately calculate when their loans will be repaid. This is usually referred to as “buy back”.

In other cases, a poor country that produces agricultural products, for example, can arrange for the proceeds of its sales to be held in escrow and the funds used to buy the goods they need which they could otherwise not afford to buy. The possibilities for using such structures are endless, but barter is also a growing business in the modern Western corporate world, though its business model has changed.

“Reciprocal” or “corporate” trade now accounts for billions of dollars of sales every year, according to the International Reciprocal Trade Association (IRTA). It cites the World Trade Organisation’s figure of 15% of world trade - $8.43bn - as being “conducted on a non-cash basis”. IRTA’s own industry survey reckons that $8.25bn was traded via reciprocal trading companies in 2004. Altogether, they say that there are about 700 trade exchanges and barter companies across the Americas, Australasia, Europe and the Middle East that arrange deals and enable people to trade in goods and services.

One of these is Active International, a New York-based company with operations in 16 countries. It buys as principal a variety of what it calls “underperforming assets” such as unsold goods, returns, real estate or capital goods. It pays for these with “trade credits” or cash, or a mixture of the two, which can be used to purchase other goods or services that Active has located. Active addresses both of the key difficulties that traditional barter poses. The first is in finding a counterparty that the supplier on the other side of a barter operation might want to trade with. The second is establishing an index of value for the goods or services that are for sale. But Active stresses that this is not barter but rather a means to trade using value locked into underperforming assets.

Another business model is operated by Bartercard. Its members, who pay a fee to join the firm’s system, supply their goods and services to other members. So, for example, an accountant might supply hours of service to a manufacturing firm. In return the provider receives credit of “trade pounds” banked, as it were, with Bartercard. These can then be used to purchase other goods and services - say, printed stationery, cleaning services or computer hardware.

This, then, is the role of corporate trading firms. While Active tends to address larger scale services and acts as principal, Bartercard offers a club-like exchange whose members can identify and trade with each other. Both firms provide a tool to businesses that may help them realise gains on otherwise under-utilised assets. Another key advantage is that those assets need not be sold at bargain basement prices. They can still command their full wholesale price - or, indeed, another price - though, as with any other goods or services, they will need to be priced to sell.

Trade exchanges provide services to businesses of all shapes and sizes, but they can be particularly helpful for fledgling companies that may have needs, such as office space, computers, accountancy services, but may not have the available cash to pay for them until they manage to generate more income. And so bartering their products or services against the things that they need to get going can be an appealing way forward.

It takes a certain frame of mind to spot trading opportunities, but they exist and corporate trading organisations say that more and more companies, large and small, are catching on to the possibilities that bartering offers. So when a small Russian TV station wanted to buy new broadcasting equipment, and it didn’t have the money to do so, it decided to barter. It acquired the equipment from a UK electrical engineering firm, paying with advertising airtime. The UK firm sold this for cash to American providers of consumer goods, such as soft drinks and fast food, who wanted to advertise their products to Russian consumers. The circle was complete. It just took imagination, vision, well-drawn documentation, and some careful timing to make sure that the scheme turned out successfully for all parties.

Richard Willsher is a financial and business writer with a background in investment banking.