Grain pools: Managing the risks

12 Jan, 2015 01:00 AM
Growers needed to do their homework in terms of looking at the pool providers’ company structure

WHEN committing tonnages to pools, farmers are handing over a valuable asset and should put as much time into their due diligence as they would when making financial decisions.

That is the opinion of senior analyst at Proarmer Nathan Cattle, whose organisation has put out a report into pools in the Australian grains industry, their performance and the pros and cons of using the products in today’s environment.

“Essentially, when a grower commits tonnes, they are relying on the pool manager’s expertise to market their grain, so your grain, which is your money, is being managed by someone else,” he said.

“With this in mind, it is prudent to question the amount of risk involved.

“This could involve asking what level of price protection will be taken on at harvest time and at different stages afterwards.

“Growers also need to know how they sit in terms of counterparty risk within the pool.

“When you transfer grain to a pool you become an unsecured creditor for the life of the pool, and carry credit risk until the pool is finalised, which can be up to a year.”

He said growers needed to do their homework in terms of looking at the pool providers’ company structure and past performance.

“It is not a clear guide as to how a pool will perform in the coming year, but a look at how pools performed in the past is clearly worthwhile.

“The important thing is not to compare pools against other pool products, which all have their different strategies, but rather benchmark it against what it said it would do.

“If the pool manager did what he said at the start and the pool finished below other products, it is not the fault of the management, rather the wrong strategy for that year.”

According to Mr Cattle, a pleasing trend coinciding with the Grain Trade Australia (GTA) code of practice was more transparency on behalf of pool operators in regards to costs.

“There is certainly more detail of how pool operators want to run their pool and that helps growers make informed decisions.”

Pools in the modern world

The Profarmer report found the use of pools has decreased since deregulation in 2008, but also said pools remain an important marketing tool, especially in the export-focused states of Western Australia and South Australia.

Mr Cattle said pools could take around 25 per cent of the crop in some years in the two western states.

However, on the east coast, where farmers have a strong domestic market competing for grain throughout the year, that figure can fall to virtually zero in many seasons.

Mr Cattle said while deliveries to pools had fallen, there was now a vast array of different pool products from a wide range of businesses.

“There is a lot more competition for a smaller pie.”

Contrary to many reports which have foreseen the death of the pool in favour of a cash or forward contract only marketing strategy, he said pools would have a fit in some growers’ selling system, but added they have to be clear about why they were using a specific pool product.

“Farmers need to ask themselves what outcome they are seeking and what exposure to the market down the track they want,” he said.

“They also need to think of the fact their other option, taking cash, has a certain outcome and frees up funds much earlier.

“In a nutshell, the question is fairly simple, do they want exposure to the post-harvest market, and if so, pools can be one way of doing this.”

Mr Cattle said there would be years where pools were not necessary for many growers.

“Once they have established a good, profitable price based on their cost of production, if that price is on offer in the cash market then you probably wouldn’t pool much at all, unless you were very confident of further upside the following year.”

But when growers do decide to pool grain, he said the variety of choices available now meant there was likely to be a pool product structured to suit the specific needs of individual growers.

The major factor when committing grain was the price management structure.

“There’s also the basic risk considerations, is a pool a high risk, high reward offering or is it more conservative,” he said.

“Is it 100 per cent hedged, sold over a consistent timeframe, like sales made on the fifteenth of every month, or does it simply rely on the pool manager’s expertise?”

Mr Cattle said growers needed to enter a pool because of its management rather than its finance options, such as the ability to get a larger harvest loan.

“A grower should not be committing to a pool because they can get a higher amount of their estimated pool return as a loan, the primary consideration is what amount of risk you want your grain exposed to.”

In terms of pricing signals, he said pool participants needed to use estimated pool returns (EPRs) as a rough guide only.

“At this stage there is minimal accountability in terms of EPRs, some pools are being more transparent with this and there is the Grain Trade Australia pools code of conduct, but it is still very much an estimate and should be treated as such.”

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Jock Munro
12/01/2015 4:17:42 AM

Pools post deregulation are dubious to say the least - really only merchants and other middlemen working hard to extract more money out of growers.
Active Grain Marketing
12/01/2015 6:10:00 AM

Jock, judging from that insightful pearl of wisdom that you have so kindly offered us above, one could only assume that all pools must have the same ownership structure and post consistently low returns. However, if one was to actually do some research, or read the Profarmer report, they would quite quickly find that this is not the case. Please stop tarring everybody for deregulation and smarter grain marketing with the same brush. We are not all bad, mate.
New Gen Farmer
12/01/2015 7:16:53 AM

Jock, as recent times have shown people with extremist views unable to move into modern society are of great concern. As Active Grain Marketing says you need to think and research your comments more carefully. A simple extreme view applied to every grain marketing situation is unhelpful and frankly, a bit weird.
Bushie Bill
12/01/2015 7:59:31 AM

Also, NGF, it is fundamentally wrong, but that has never deterred dear old Jock, our living dinosaur.
Philip Downie
12/01/2015 9:14:19 AM

I suppose the same would apply to the extreme views on AWB, expressed here quite often without any research. Reminds me of Goose/Gander. Plus traders seem to have form, of late.
Jock Munro
12/01/2015 12:04:46 PM

Thank you all for your kind words. What do you merchants intend to do about the decline in quality and relative value of the Australian wheat crop post deregulation and where do you pool providers dump the grain that you purchase?
12/01/2015 1:23:41 PM

Munro is continuing to reveal himself as an obsessed fool unable to recognise reality. By the nature of his questions he is trying to make a point. But where is the evidence to back up his allegations. Downie, if there had been a legal class action by poolers or royal commission into AWB Ltd management of pools in early 2000s then these views you complain about would not appear quite as extreme as you say. But its all academic now. Todays arrangements are brilliantly successful.
12/01/2015 2:03:02 PM

what a fascinating insight into Human nature it is to see people attacking another with an opposing view and labelling them "extremist" for holding that view, this is grain politics we're talking about here , not religious ideology. Some of you blokes remind me of the nodding dogs that stand behind the politicians on TV, they haven't got a clue what's going on only that they know they have to nod. I think Jock is right on the money re "modern "pools, firstly if the system is sooo.. good, why pools?, second if AWB was gouging us through pooling why wouldn't the same apply now?
12/01/2015 5:19:26 PM

mark2, pooling is in decline . Growers are choosing not to. The reason why pool managers are not gouging us now is self evident. Because they operate in a competitive environment where various pool and cash options are available . Growers have choice- there's the discipline. A pool manager can make a mistake which the AWB did. But we will never know how often and how much by. We can now make that judgement by comparison. The AWB had a captive audience and under law, to export our wheat, we could not go elsewhere. Now we can and it's brilliant.
12/01/2015 6:19:40 PM

I think it is quite obvious that Jock Munro will never accept anything other than the return of the single desk. Jock and the minority of growers who want a return to the single desk need to move on and accept the change. Its been seven years. There is no way of returning to the single desk days. Life is short, enjoy it rather than being a sole activist for a long gone system.
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