How to Manage Financial Risk

“The last thing you want is for a grain elevator to meet margin calls on grain that hasn’t been delivered, and it doesn’t have an enforceable contract,” Miller explains. To mitigate this risk, it is recommended that all contracts be annually subjecting to legal counsel review to evaluate the enforceability of the contacts.

In addition, as more elevators are getting involved in the export business, the banks are going to want assurances that once the grain is delivered offshore, the recipients are reliable and will pay for these shipments.

“Wherever they’re selling grain, they need to know who they’re doing business with to make sure they’re getting paid,” Miller notes.

In the wake of MF Global, banks are looking at brokerage firms and financial institutions with heightened scrutiny. The lender will want to know the institutions handling hedging transactions, the broker and futures clearing merchants.

“[Lenders] will ask about the quality of the reports a company receives from a broker,” Miller says. “This last year it was an integrity issue — the haves and the have nots. If you were doing business with a broker who cleared through MF Global, your company likely had to write off those losses and put it behind them.”

Counterparty risk doesn’t stop with producers or brokerage firms — your lender also falls into this category. If your credit needs are nearing the bank’s lending limit — and you are likely to surpass it — be prepared to work with a new lender either through syndication or by transferring all accounts to a larger institution. Grain borrowers are encouraged to reach out and informally vet new banks they may work with in the future. Then, if the time comes, it will have formed firm opinions on which bank it is comfortable working with to meet its needs.

Hund elaborates: “Ask to see [the bank’s] balance sheet. Ask how it did on the stress test — because the [Office of the Comptroller of the Currency] is now asking banks to go through these exercises regarding the strength of their balance sheet. I think it is perfectly appropriate to ask for a bank’s public rating if it is a publicly rated bank. What are its lending policies? What percentage of its portfolio is made up of [the grain] industry? If you’re the only grain elevator a bank has, is it going to have the ability to understand the movements in the market that [a bank] with many grain clients would have? It’s OK for customers to ask for banks to demonstrate its strength.”

A potential banking partner will also want to learn about the company, in addition to the risk management policy; the prompt and thorough surrender of the grain elevator’s financials will be beneficial in moving the process along smoothly. [Read Prove Your Position to view a list of the components of a quality financial package.]

While grain businesses can’t possibly avoid all risks, it can identify the ones that could have the greatest impact on its business and set systems in place to deal with a range of circumstances. By being able to prove the company is prepared for the worst and is diligent in monitoring its finances, its relationship with its lender will remain strong and it will be confident in supplying the funds to aid in making the business thrive.