To help ebb these losses, GrainGrowers has developed a guide to help growers manage counterparty risk. Counterparty risks arise from the buyer, or other party, failing to meet their contractual obligations.
This could include becoming insolvent and failing to pay the agreed price for grain, refusing to take delivery of grain, or to meet other obligations within the time frame required under contract.
Unexpected price movements in the grain market are another risk for growers.
They can manage this risk by shifting it to – or sharing it with – others through cash or forward contracts, participating in futures and options markets, or pooling and insurance.
According to GrainGrowers, insurance only offers effective protection if the insurer is solvent, while cash or forward contracts only mitigate risk to the extent that the contract is enforceable and the buyer is able to pay.
GrainGrowers said a range of Australian traders – including LGL, One World, Convector, Sapphire, Midwest Milling and Meenban Stockfeed – have become insolvent.
Reducing counterparty risk in grain contracts is a practical guide to managing counterparty risks for grain producers dealing with traders or buyers.
While the guide is for Australian growers, some points may be of interest to New Zealand producers. It includes information on:
- negotiating contracts
- terms and conditions
- ownership and passing of title
- personal property securities register (PPSR)
- payment terms and timings
- due diligence
- insurance, and
- dispute resolution.
When negotiating contracts, the guide advises growers to be clear about their intentions, obtain terms and conditions prior to any agreement and diarise negotiations.
Review all terms and conditions and remember terms can be negotiated. Ensure that all parties initial all deletions and receive copies of the final agreement.
The guide urges growers to include a clause for recovery of funds or grain if the contract is breached.
Growers should register their interests on the PPSR. Ensure no other party has interest in your grain and be aware sellers still have a security interest in goods that become an unidentifiable part of a larger product or mass.
Payment terms should be short. Always stipulate a payment day and include a clause for interest payable beyond the due date.
Include a clause in the contract whereby the seller is not obliged to deliver grain to a buyer with a debt already outstanding to that grower.
Conduct a due diligence investigation with each counterparty you wish to enter into contract with. Growers should monitor the performance of the counterparty throughout the contract period.
Seller’s insurance can limit the impact of buyer insolvency. Consider using third-party experts to review terms and conditions and selling grain to multiple buyers to spread risk.
Trading up
Industry body GrainGrowers has indicated that many Australian grain producers feel the trading environment needs improvement.
GrainGrowers will soon address issues of: the potential need to license grain buyers, introduction of buyers insurance and the Grain Trade Australia arbitration process.
