Surviving the risk of grain trading

09 Aug, 2014 02:00 AM
Comments
35
 
There is no one single exposure that could severely damage the business

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.”

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FarmOnline
Gregor Heard

Gregor Heard

is the national grains writer for Fairfax Agricultural Media
Date: Newest first | Oldest first

READER COMMENTS

Jock Munro
9/08/2014 5:37:21 AM

I hope that none of the growers who have forward sold canola have crops that have been wiped out by the recent frosts.
wtf
10/08/2014 11:47:19 AM

It seems to me we would not need to worry about security of payment if we were paid before we handed over title of the grain. As said many times before, we cant leave colesworth without having paid first. Its our country, why cant we set the rules. I don't see any problems finding buyers for our grain in the near future, but I do think the number of people able to pay for a ship could be listed on one hand. We need this sorted out soon, if a credit crisis was to appear, none of us want to get caught. Insurance companies could shut their doors overnite, just like banks, its happened before.
Australian Grains Matter
11/08/2014 12:05:15 PM

It is obvious that there are issues in managing counterparty risk in the industry. For growers, exchange traded risk management products such as Put contracts can be an option (no pun intended). Futures contracts are also something that can be looked at I guess. The only issue with these is that there are margin calls but looking at the extent of damage a default can cause.... its peanuts compared to when things go wrong. ASX Grain contracts do well for many growers which are fairly liquid for the grower market (not as much as some North American contracts) but at least they are Australian.
TFO
11/08/2014 12:43:35 PM

As I said in a previous post, It serves farmers right if they sell to a dodgy trader and he fails to pay. Farmers put themselves in this predicament when they let the Parliament trample the AWB Single Desk system. Maybe a few more big payment defaults will wake farmers and Governments up.
E J
11/08/2014 1:08:15 PM

Remember that when you deal in futures and swaps etc. etc. that most of the counterparties you deal with are proffessional gamblers.
Deregul8
11/08/2014 1:48:08 PM

There are risks in using a broker for futures or options. MFGlobals collapse caught a number of growers over here in WA who had either active position n the market or equity in an account ready to take a position.
sa grower
11/08/2014 5:57:31 PM

TFO What makes you think AWB was secure ? Ringfencing was simply a sales pitch. Legally, any pool participant was an unsecured creditor. Get over it. Under righting got puled 20 years ago.
peter blacket
11/08/2014 6:46:01 PM

drop me a email sometime deregul8 do a search you will track me down and agm asx are still to illiquid to function correctly
tom72
12/08/2014 5:10:09 AM

to WTF you actually can sell grain with cash prices, although sadly generally at lower values. Point of interest though how many farmers pay for their fencing, chemical and fertilizer straight away?
GFA
12/08/2014 6:19:40 AM

Are you aware D8, that your post is an admission of the irresponsibility and major flaws of the market ideologies you blindly promote?
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