Commodity Loans

Inflationary times often create an incentive for market participants to substitute barter transactions for cash transactions. Commodity loans calling for payment in kind instead of a cash payment guarantee for the lender that the same purchasing power he gave up in making the loan will be restored to him when repayment is made.
Out of fear that the market value of the commodity may increase at the time of repayment, the Sages prohibited commodity loans in kind (se'ah be'se'ah). Such a transaction violates the rabbinic extension of ribit law, called avak ribit. The prohibited agreement places the creditor at a disadvantage: Should the commodity appreciate at the time of repayment, the debt may not be discharged by means of payment in kind. Instead, a cash payment is required, with the debtor's obligation set equal to the value the commodity had at the time the loan was entered into. Depreciation of the commodity, on the other hand, disallows a cash payment. Here, payment must be made in kind.

Legitimacy is, however, given to a commodity loan when repayment is to be made in cash based on the market value of the commodities at the time the loan was entered into. Since the commodity serves here merely as the medium of the loan and the debtor's obligation is fixed in cash, the possible appreciation in the value of the commodity at the time of repayment is immaterial.

Since the se'ah bese'ah transaction is prohibited only by dint of avak ribit law, the Sages suspended their interdict under certain conditions.
One qualifying circumstance occurs when the debtor is in possession of the commodity he borrows at the time the loan was entered into (yesh lo). To illustrate, suppose the loan consisted of a ton of wheat and the debtor had this amount of wheat in his possession at the time he entered into the or loan. Given the above correspondence, the amount of wheat the borrower has is regarded as if it were given immediately to the lender as payment at the time the loan was entered into. Any appreciation of the commodity subsequent to the loan is therefore regarded as having occurred while the commodity was in the domain of the lender.
The yesh lo point of leniency in se'ah bese'ah law extends even to the instance where the amount of the commodity in the debtor's possession at the time of the loan amounts to only a small portion of the commodity loan. Since the se'ah bese'ah interdict is only prohibited by dint of avak ribit law, the yesh lo loophole is valid even when its rationale is not entirely applicable.

When a (4)se'ah bese'ah transaction is legitimized by means of the yesh lo mechanism, both parties must be aware that the debtor has some amount of the loan commodity at the time the transaction was entered into and that this circumstance is what halachically validates their agreement. Nevertheless, ignoranace on the part of the parties of these facts does not disallow the debtor to return the loan commodity, even if it appreciated in value.

Under the yesh lo circumstance the transaction may call for the commodity to be repaid at such time when it is expected to appreciate in value. This clause, according to R. Shabbetai b. Meir ha-Kohen , is valid even when the contract disallows early payment.

Another circumstance that may suspend the se'ah bese'ah interdict obtains when the commodity involved trades at a definite market price (yaza ha-sha'ar). With repayment in kind possible at any time, the borrower is regarded as being capable of discharging his debt by making the requisite commodity purchase before it appreciates above its value at the time of the loan. Rambam et alia legitimize the above mechanism even when the borrower lacks the necessary cash to make the commodity purchase. Though lacking cash the borrower is regarded as capable of securing the necessary commodity purchase by means of establishing a line of credit.