MARKET risk management was a popular session at the recent Australian Grains Industry Conference in Melbourne, particularly reducing counter-party risk and payment terms.
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Guest speaker Leo Delahunty, from family business Templemore Partners at Murtoa, Vic, started the session with an insight into how their 5490-hectare operation used a variety of crops and grain marketing options to spread on-farm risk.
"About 72 per cent of our business is mainstream crops (wheat, barley and canola), which is easier to sell using a number of different options," he said.
"While the other 28pc is pulse crops, which are important to us, they have quality challenges and restricted marketing options compared to other grains."
Mr Delahunty said that in the past five years, they sold to about 26 companies each year - some bought multiple commodities - to prevent single-exposure risks.
"With our pulses, however, we do get nervous because there are fewer selling options," he said.
"In 2013, lentils were 21pc of our gross production. And as we only sold to two buyers, that amounted to 10.4pc of our gross production by value exposed to a particular buyer if we had sold it at the one time.
"Imagine if one of those packing houses went bust? It could hurt our profitability by 10pc.
"We also had an issue about payment with one of the packing houses, so we sat down and talked to them about it until we were satisfied that it was appropriate to sell to them.
"But 10.4pc to any organisation is a lot at any one time."
Templemore prefers to use established grain trading companies with good reputations, and aims for short settlement dates.
"If any payments are late or not made, we will not sell to that company again - that's our number-one rule," Mr Delahunty said.
"And we are wary of any bids above the market - generally they are too good to be true.
"Farmers need to apply the same rigorous due diligence on the buyers, like they would when buying equipment.
"Suppliers do it to us all the time, whether it be fuel, chemicals, machinery, so it is not unreasonable for us to ask the same of them.
"We investigate the insurance status of the trading house and their attitude to counter-party risk, by using banks or rating agencies to determine credit risk status of the buyer.
"We diarise all trades, particularly noting anything that is different to standard terms and conditions of trades and contracts that we do.
"And we ensure all contracts are on industry standard terms, such as those outlined by Grain Trade Australia."
As to payment terms, in the past 12 months, Mr Delahunty said they had varied from seven days selling through Clear Grain Exchange up to 30-day end-of-week.
"We will look to change that though," he said.
"We need to get away from the 30-day EOW delivery contracts and get down to seven to 10-day contracts.
"We should restrict the level of exposure with a company at any one period of time.
"I would be happy to give up 50c/t for that sort of security - and that is all it would cost in interest."
Alisha Fogden
Cropping editor of Stock Journal.
Cropping editor of Stock Journal.
