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Wednesday, July 27, 2016

3 tips to minimise counterparty risk

By Andrew Whitelaw  |  Source: ACA, Trade

Key points

  • Find out as much about your customer as possible.
  • Spread your selling around a range of businesses.
  • If you are still worried about a counterparty walk away or take out insurance. 


It was revealed yesterday that Brenton Strauss of failed grain trading business Sapphire grain had charges laid against him by the Australian Securities & Investments Commission (ASIC), which could lead to a ten-year prison term. In this report we will provide some tips to minimise counterparty risk.

The Sapphire grain business collapsed in early 2013 with debts owing of around $13m, another in a long line of failures in the grain industry impacting on grower bottom lines. The Sapphire grain collapse has been an unfortunate incident, which has left many out of pocket, but hopefully these tips will provide a guideline to minimise the risk in future.

Know your customer
If you are unsure of a business, and you have been offered a great price make sure you know your customer. It is important to have a good understanding of the business that you are dealing with, and make a judgement on the level of risk when engaging with a particular counterparty. The larger companies grain trading companies such as bulk handlers have the lowest levels of counterparty risk due to their large balance sheets. We can see in table 1 that the majority of failed grain companies have been smaller operations.

There are many online credit check companies which can provide access to historical information about a company. The information is historical however if the company has a bad prior record then that will raise some red flags. It is also worthwhile performing a search on the ASIC website to determine if the directors have been involved in other failed businesses.

It is important to gain a thorough understanding of your customer. If all of this sounds like a bit too much work, then the advice would be to deal with a well-known enterprise that you have a higher degree of surety.

Spread your risk
This one should apply to all marketing of your grain both with how you market and who you market to. It is important that your eggs are not all in one basket. It is important to spread your sales around a number of buyers as in the case of a business failure, you will have reduced the volume of grain at risk*.

*Although this does not completely reduce risk, as there are potential risks of contagion such as in the case of the Convector failure which resulted in the failure of LGL commodities.

If you are still unsure after doing research into your customer it is probably time to walk away and sell elsewhere. However, if you decide to go forward i.e. if the price is too attractive then it is a necessity to look into seller’s insurance.

Seller’s insurance will give you surety that if the buyer becomes insolvent you will be protected from a major loss. These insurance policies don’t come cheap and it will eat into any premium that you achieve from dealing with a buyer who may be a higher risk.

These policies can be quite complex compared to the insurance packages a farm typically takes out, and it would be advisable to use an insurance broker to ensure that you have the right fit for your transaction.


What does this mean?

It is impossible to remove all counterparty risk; however, it is possible to minimise the risk. There will always be businesses which become insolvent, however having a strategy for selecting your counterparties will reduce the possibility of bad debts. 

On a final note: If it sounds too good to be true, then it probably is. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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