In recent weeks Lempriere Grain went into administration, taking with it debts of $18.8 million. This is not the first grain company to fold and will not be the last.
We felt like it was an opportune time to revisit counterparty risk in light of recent industry rumours of a number of grain traders at risk.
By examining the reported insolvencies over the past two decades we can see the scale of potential impact.
The total loss since 2000 has been $155 million, which is a small impact on the overall industry.
To give this more perspective, the country has produced a combined total of 619 million tonnes of canola, wheat and barley during the same period. The insolvencies, therefore, equate to around 25c/mt.
The issue is small to the overall industry, but is a huge burden to the individual farming businesses impacted by the insolvency when they have unpaid grain contracts.
There are several propositions being put forward to the industry as solutions, from compulsory levies to blockchain, however, in the meantime, It is worth outlining some individual strategies and red flags to be aware of.
Choose your partners
The grain industry in Australia has the benefit of a great degree of competition, however, a cursory glance through this list shows they are all relatively small players. Although selling to a major multinational provides added security by their large balance sheets, it only minimises the risk. Attempt as much due diligence as possible on any sellers who you may consider risky.
Paying well above the market
It is better to receive a lower price but be paid. In many instances, traders have been paying substantially higher than market levels, then gone bust. In a recent example, a company was offering $25/mt higher than all other participants in the marketplace, subsequently, they went bust.
Spread your risk
It is important your eggs are not all in one basket. Spread your sales around several buyers as in the case of a business failure, you will have reduced the volume of grain at risk.
There are several selling opportunities which provide some protection when dealing with unknown counterparties.
Brokers with counterparty insurance
There are brokers who have counterparty coverage over the sales they broker. This will typically provide coverage of a percentage of any loss.
The Clear Grain system provides protection as title is not transferred to the buyer until payment is made. This provides a high level of protection for grain traded through the bulk handling system and some private storages.
Graincorp has introduced an online physical grain sales platform called Crop Connect. This provides growers with the ability to sell grain held within the Graincorp storage system to the trade, and the ability to set a secure payment where title is retained until funds are received.
Counterparty insurance gives you surety that if the buyer becomes insolvent you will be protected from a major loss.
The quicker you are paid, the lower your risk to insolvency. In recent years, payment terms have decreased with many of the major traders moving to less than five days.
- Andrew Whitelaw, Mecardo