GrainCorp will spend almost $100 million buying itself peace of mind and cash flow reliability for the next decade after locking in a crop risk management contract with a global insurance giant.
The deal provides a guaranteed income buffer against poor harvests when dry seasons undermine grain yields.
Farmers are also set to benefit from GrainCorp's ability to make long term plans to deliver better, more consistent investment and service.
In what is considered an international first, the big grain marketer, processor and logistics company will be paid up to $80 million in dry seasons when the NSW, Queensland and Victorian winter crop yield slips below 15.3m tonnes.
If the cereal, canola and pulse harvest bounces above 19.3m tonnes, White Rock Insurance will be paid as much as $70m by GrainCorp.
Even if we have to pay out to the provider in a good season, that's a great problem to have
"It's an absolute game changer," said chief executive officer, Mark Palmquist, confirming the company's foreshadowed derivative-style swap deal was now nailed down with the Bermuda-based insurance subsidiary of London financial services giant, Aon.
"It's definitely a win for us.
"Even if we have to pay out to the provider in a good season, that's a great problem to have - it means it's a big crop year, and we get lots of grain business in big years."
With a guaranteed smooth cash flow, regardless of how erratic the east coast grain crop's fortunes were, he said GrainCorp could confidently plan long-term business strategies without worrying about weathering income slumps just when expenditure was needed.
"In low crop years we have generally cut our spending," Mr Palmquist said.
"But those are really the years when we should be doing things across the network as a lot of our operations shut down and provide us time and opportunity for construction or additional maintenance.
Good for farmers
"Growers can have much more confidence in our financial stability, and our ability to proceed with projects, rather than seeing our agenda stopping and starting with the weather.
"At a time when business has been a real struggle for some grain sector operators - we've seen foreclosures and companies exiting - we can now commit to long-term strategies and capital spending which will absolutely benefit growers."
The first stage of the specially tailored risk management contract kicks into life next week as the initial estimates of the 2019-20 crop's area and potential volumes are released by national commodities forecaster, the Australian Bureau of Agricultural and Resources Economics and Sciences (ABARES).
The deal with White Rock will see GrainCorp pay annual fees of less than $10m to secure payments in bad years.
GrainCorp will then receive $15/t on the gap between the total east coast harvest yield and the contract's agreed minimum of 15.3m tonnes (to a maximum of $80m).
In a bumper year, GrainCorp will pay out $15 for each tonne above 19.3m tonnes, to a maximum of $70m.
A total $270m cap on each side's payments will protect the costs from a complete blow out.
Confirmation of the deal follows GrainCorp reporting a $59m loss for the six months to March 31 after handling its smallest harvest in a decade during summer.
If the new risk coverage had been in place last year the grain company would have easily qualified for its maximum $80m insurance reward, although during Australia's record 2016-17 harvest season it would have paid $70m to White Rock.
Long time coming
Mr Palmquist said GrainCorp began initially looking at some form of weather or crop tonnage insurance protection for its balance sheet back in 2015.
Talks with major providers had considered various options before ramping up when the company began its asset portfolio review last year.
"We took a while to nail down the model we were comfortable with - a number of players and risk management models were considered.
At the same time, the concept of a derivative style cover over the grain crop was also a key part of the structure behind the Long-Term Asset Partners $2.4 billion takeover proposal, announced late last year.
LTAP eventually abandoned its bid ambitions last month after GrainCorp said it was selling its domestic bulk liquid terminal sites and spinning off the successful malt division on the Australian Securities Exchange by year's end.
We'd have to look very hard at what the result would be from any other asset sales
Mr Palmquist said progress towards the MaltCo demerger was on track and would remain the primary focus of remaining action associated with the portfolio review.
"We'd have to look very hard at what the result would be from any other asset sales," he said.
"It's not just the value of what we sell which has to be considered, it's what legacy you have in what would be left behind. It has to be sound."
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