COUNTER PARTY RISK MANAGEMENT: - a producers perspective LEO DELAHUNTY TEMPLEMORE PARTNERS

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 2009 2010 2011 2012 2013 % Gross % Gross % Gross % Gross % Gross Buyers Income Ratio Buyers Income Ratio Buyers Income Ratio Buyers Income Ratio Buyers Income Ratio Wheat 12 42% 3.5 9 44% 4.9 8 34% 4.3 6 37% 6.2 5 34% 6.7 Barley 5 24% 4.7 8 14% 1.7 6 19% 3.1 4 29% 7.3 8 13% 1.6 Canola 2 13% 6.3 6 23% 3.9 4 27% 6.6 2 14% 7.1 4 20% 5.0 Lentils 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% 3.6 Chick 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 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