A STRING of high profile busts in the grain industry, including Convector Grain, Sapphire Grain, LGL and OneWorld has seen some serious unpaid debts to bankers, other traders and growers.
The question for grain growers is how to manage the current risky marketplace independently.
This week, Fairfax Agricultural Media’s Gregor Heard took a look at the pros and cons of major grain grower risk management options.
Here, he outlines ways growers can spread and manage the risk.
Spreading the risk
MURTOA’S Delahunty family take counterparty risk seriously and implement a number of marketing strategies to avoid getting significantly burnt due to non-payment from the trader.
Speaking at last week’s Australian Grains Industry Conference (AGIC), Leo Delahunty, who farms with his brother and their respective families, said the family business - Templemore Partnership - had a wide spread of crop types and marketing programs.
The cropping income is split between wheat, barley, canola and pulses.
Within that, Mr Delahunty, whose farm is in the Victorian Wimmera, said some grain was stored on-farm, some went into local bulk handling sites, and some, primarily the pulses, went straight to local packers.
A key aspect of the Templemore marketing system is spreading the buyers, so there is no one single exposure that could severely damage the business.
Mr Delahunty said this was relatively easy in the more liquid cereal markets, where there is a variety of potential buyers, but said it became more difficult in the more specialised pulse markets.
“We use up to twenty-six different buyers, but on the lentil front, one year it was just two, and we had 10 per cent of our projected income with one buyer, which is a higher level than what we try and do.”
To complement this spread, Mr Delahunty said Templemore also used a range of over-the-counter marketing products, such as futures to enhance pricing.
“We’re certainly not speculating, but we just use it these products to try and get a few extra dollars for our product.”
He said they also used brokers to try and market grain, especially for the grain stored on-farm, targeted at the domestic market.
“We are comfortable storing grain on-farm for eight to ten months, we try to have the storages empty by October.”
Mr Delahunty said the partnership realised it could never avoid counterparty risk, but said along with spreading the exposure across a range of buyers, a number of simple due diligence strategies were invaluable.
“It can be as easy as just asking around about a business you are looking at selling to.
“Ask them about their credit insurance status, look around and generally get a feel for whether they are a well run business.
“If you’re unsure of the buyer, then its best just to stay away.”
Mr Delahunty said he also heeded any potential warning signs with late payment of previous contracts.
“If there are late payments, we then just don’t sell to them again, or if we are in a position where we need to we really take care with the contracts.
“We’ve done things like go for tighter payment terms at a discount, and been really specific with our contracts, always looking to use Grain Trade Australia contracts.
“In certain cases, rarely, but we have done it, the contract has been cash on delivery.”
He also said platforms such as an online trading house were a good way to minimise counterparty risk.
“No one thing works perfectly, but we think, overall, we manage to keep our risk down.”
Managing the risk
MANAGING counterparty risk in the deregulated grain market will present difficulties until there is more readily available information on the financial situation of trading companies, according to the general manager of grain management business Market Check.
Speaking at last week’s Australian Grains Industry Conference (AGIC), Tom Basnett said information regarding potential warning signs for companies in financial strife was fragmented.
“There’s no co-ordinated place you can go to in order to check if a company has been late in its payments, instead it’s a matter of people ringing around just getting word of mouth information.”
Mr Basnett said he was unsure of the solution to the problem.
“We could look at further government regulation, but you’d have to be careful there, that any possible solution doesn’t hinder competition or create unnecessary red tape.”
Malcolm Finlayson, an accountant with Finesse Solutions, said growers could mitigate risk through due diligence.
“Go through the annual reports, check that the gearing is at an acceptable rate, check their ownership structure.
“If there are any problems once a contract is signed, be in touch with the buyer, maintain a dialogue.”