COUNTER PARTY RISK
MANAGEMENT:
- a producers perspective
LEO DELAHUNTY – TEMPLEMORE PARTNERS
Counter party risk management –
a producer’s perspective
I want to touch on:
• Levels of exposure that we see between
grain types produced at home.
• Where does our harvested grain go?
• Contract execution issues.
• How we approached marketing in the recent
past.
• Considerations when making a sale and
“rules” that we operate by
• Future options with marketing
Levels of exposure
Budgeted gross income by crop type
• 1480ha Wheat (31%)
• 1000ha Barley (mainly feed) (20%)
• 840ha Canola (25%)
= Total 76%
• Lentils (16%)
• Faba Beans (8%)
= Total (24%)
Harvest Destination - Storage
On Farm Storage – 35% of average production
• Is used first for “off spec” grain or grain that doesn’t
have a ready & competitive market at harvest.
• Then look at grains that can be supplied directly to
domestic end users.
Warehousing
• The mainstream export grains (wheat, canola and
barley) are warehoused with the major grain
handling companies.
• Use of limited warehousing with packing houses.
How do we sell grain?
• Wheat, barley and canola is generally delivered
into warehouse with grain handling companies.
• If stored on farm then it is usually sold into the
domestic market.
• Pricing period often greater than 12 mths.
• Selling of physical contracts – up to 12 mths.
• Delivery period 8 to 10 mths (Dec to Oct).
• Often we use brokers and they are instructed on
our attitude to counter party risk.
• We use OTC products to enhance pricing rather
than relying totally on cash pricing.
Payment terms
Over the last 12 mths have varied from
• Selling through CLEAR.
• Payment 7 days after contract with title
transfer after payment received.
• Some 7, 9, 14 and 26 day EOW payment terms
• Dominant 30 day EOW payment terms
• Occasional cash on delivery or pre payments
Selling Considerations
• Look for established grain trading businesses
• Try to establish a maximum exposure at any one
time with a buyer.
• Look to have settlement dates as short as possible.
• Don’t continue to sell to anyone if payments are
made after the contract date and be wary of any
bids above the market.
• If unsure about a buyer, then stay away. If there is
no other option then negotiate payment up front or
other suitable terms.
Selling Considerations
• Establish the insurance status of trading house
and their attitudes on how they manage
counterparty risk.
• Use banks or ratings agencies to determine credit
risk status.
• Diarise trades – particularly anything that is
different to standard terms and conditions.
• Company reputation is important and a great
indicator.
• Ensure that all contracts are on industry standard
terms (GTA, AOF).
Packing Houses
Understand their attitude to risk
• Do they “back to back” their sales?
• What is their payment history like?
• Do they have credit insurance?
• How do they present themselves?
• Tidy, clean, organised?
• Obvious health and safety procedures.
• A well run business?
Templemore Sales History
Total sales over the last 5 years – table shows
• Have used 14 to 26 different companies/yr.
• Is that increasing or spreading risk?
• Ratio indicates ave % gross income/buyer/crop type.
• Level of nervousness always greater in pulse sector.
• Due mainly to limited selling options and value of crop
2010
2009
Wheat
Barley
Canola
Lentils
Faba Beans
Chick Peas
Hay
Total Traders
Buyers
12
5
2
3
2
2
1
20
% Gross
Income
42%
24%
13%
15%
1%
2%
4%
100%
Ratio Buyers
3.5
9
4.7
8
6.3
6
4.9
4
0.6
4
1.1
2
3.7
26
2011
% Gross
Income
44%
14%
23%
13%
2%
3%
0%
100%
Ratio Buyers
4.9
8
1.7
6
3.9
4
3.4
2
0.5
1
1.7
1
17
2012
% Gross
Income
34%
19%
27%
15%
1%
5%
0%
100%
Ratio Buyers
4.3
6
3.1
4
6.6
2
3
7.4
1.4
2
4.6
1
14
2013
% Gross
Income
37%
29%
14%
14%
5%
0%
0%
100%
Ratio Buyers
6.2
5
7.3
8
7.1
4
4.6
2
2.5
3
0.4
1
20
% Gross
Income
34%
13%
20%
21%
11%
2%
0%
100%
Ratio
6.7
1.6
5.0
10.4
3.6
2.0
Counter Party Risk issues
CONTRACTS
• How will the contract be executed?
• Warehouse transfer?
• Delivery ex farm?
• To Packing House, feed mill, port, bulk handling company
• Is the delivery period appropriate?
• Is our grain comfortably within the quality specs of
contract?
• If yes, then fine.
• If not, what fall back options would we have?
• What will the counter party’s attitude to variation likely to be?
• Can we be confident of payment and on time?
The future
• Title transferred after payment made. It happens with
other Ag Industries.
• A higher level of trades with the likes of CLEAR.
• CLEAR equivalent to operate @ farm gate.
• Tighter payment terms
• From 30 day EOW to 7 days EOW (cost 50c/t?)
• Trade references and credit assessment.
• Farmers need to restrict their level of exposure with a
company at any one period of time.
• Farmers need confidence of appropriate Risk Policies.
• Know your buyer – Seller beware!
• Counter Party Insurance –buyer or industry level?
The future
• The industry needs to get together to address the
issues of trading credibility and contract
performance.
• We need to look at what happens in other
industries. Eg.Wool title transfer after payment.
• There needs to be a greater understanding of
counter party marketing risks (both ways).
• We must avoid a regulatory approach to enhanced
contract performance but rather stronger codes of
conduct.
IMPROVEMENTS MUST BE MADE
COUNTER PARTY RISK
MANAGEMENT:
- a producers perspective
Thankyou