COUNTER  PARTY  RISK  MANAGEMENT:  -­‐  a  producers  perspec,ve    

LEO DELAHUNTY – TEMPLEMORE PARTNERS

Counter party risk management – a producer’s perspective I want to touch on: • Context - What types of grain we grow. • Our exposure to various grain types. • Where does our harvested grain go? • Contract execution issues. • Our approach to marketing. • Considerations & “rules” we use when selling

• Future options with marketing.

Context Family Grain Farming at Murtoa in the Wimmera Growing • 1980ha Wheat • 1150ha Barley (mainly feed) • 930ha Canola • 1020ha Lentils • 200ha Faba Beans • 60ha Vetch (for on farm use) • With 150ha fallow • TOTAL – 5490ha

Levels of exposure Budgeted gross income by crop type

• Wheat - 35% • Barley (mainly feed) - 22% • Canola - 15% = Total 72% • Lentils - 25% • Faba Beans - 3% = Total 28%

Harvest Destination - Storage On Farm Storage – 30% of average production 1.  For “off spec” grain 2.  Grain without a ready & competitive market at

harvest. 3.  Grains for direct supply 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. They are instructed on our attitude to counter party risk.

• OTC products are used to enhance, or underpin 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 • 30 day EOW – encouraging signs of change. • Occasional cash on delivery or pre payments.

Selling Considerations • Deal with established grain trading businesses • 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 late or not made.

• Be very wary of any bids above the market. •  If unsure about a buyer, then stay away. •  If no other option then negotiate payment up front or other suitable terms.

Selling Considerations • Establish the insurance status of trading house and their attitudes to counterparty risk.

• Use banks or ratings agencies to determine credit risk status.

• Diarise all 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).

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 5 years – table shows • Have used 14 to 26 different companies/yr.

•  Is that increasing or spreading risk?

• Look at ave % gross inc. exposure/buyer/crop type. • Level of nervousness always greater in pulse sector.

• Due mainly to limited selling options and value of crop 2009 2010 2011 2012 2013

% Gross Exposure % Gross Exposure % Gross Exposure % Gross Exposure % Gross ExposureBuyers Income /Buyer Buyers Income /Buyer Buyers Income /Buyer Buyers Income /Buyer Buyers Income /Buyer

Wheat 12 42% 3.5 9 44% 4.9 8 34% 4.3 6 37% 6.2 5 34% 6.7Barley 5 24% 4.7 8 14% 1.7 6 19% 3.1 4 29% 7.3 8 13% 1.6Canola 2 13% 6.3 6 23% 3.9 4 27% 6.6 2 14% 7.1 4 20% 5.0Lentils 3 15% 4.9 4 13% 3.4 2 15% 7.4 3 14% 4.6 2 21% 10.4

Faba Beans 2 1% 0.6 4 2% 0.5 1 1% 1.4 2 5% 2.5 3 11% 3.6Chick Peas 2 2% 1.1 2 3% 1.7 1 5% 4.6 1 0% 0.4 1 2% 2.0

Hay 1 4% 3.7 0% 0% 0% 0%Total Traders 20 100% 26 100% 17 100% 14 100% 20 100%

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 – on farm CULTURE

We need to: • work on our marketing culture – it is in our hands. •  adhere to rules and develop and follow processes through to

the end – easy to say it is ok. •  focus on tighter payment terms

•  from 30 days EOW to 7 days EOW (cost 50c/t?) •  restrict the level of exposure with a company at any one

period of time •  look more to CLEAR and equivalents.

The future – on farm CULTURE

• Challenge our brokers that they understand, agree, communicate and apply our rules.

•  Trade references and credit assessment • Develop, review and have confidence in appropriate on farm

Risk Policies • Develop a robust farm Mark to Market report – we must

know our production/marketing balance at all times and understand how it tracks with budget.

• Know our buyer, do our due diligence– Seller beware! • Apply the same rigorous discipline as if buying equipment.

The future – Industry CULTURE •  The industry needs to get together to address the issues of

trading credibility and contract performance. •  Title transferred after payment made. It happens with other

Ag Industries. • CLEAR or equivalent to operate @ farm gate. • Counter Party Insurance – buyer or industry level? • We need a greater understanding and education of counter

party marketing risks (both ways). • Codes of Conduct favoured over a regulatory approach to

improve contract performance. • Beware of unintended consequences of more regulation.

Counter Party Risk Management Improvement is our Challenge

COUNTER  PARTY  RISK  MANAGEMENT:  -­‐  a  producers  perspec,ve    

Thankyou