GrainCorp crop insurance punt paying $58m after dud year

GrainCorp banks on $58m insurance boost to drought-hit revenue

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Chairman, Braham Bradley, with the GrainCorp board, addressing Wednesday's annual general meeting in Sydney.

Chairman, Braham Bradley, with the GrainCorp board, addressing Wednesday's annual general meeting in Sydney.

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GrainCorp's decision to spend about $6m on a crop production contract last year means European-based insurance giant, Aon, now owes it $57.9m.

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Despite a mostly dismal harvest and a sharp fall in grain storage and export activity in eastern Australia, GrainCorp set to reap almost $58 million in "crop production" payments to make up for its harvest shortfall.

The grain storage, handling and marketing company's 2019 decision to spend about $6m on an insurance-like premium means the European-based insurance giant, Aon, is expected to pay out $57.9m.

About 90 per cent of the claim is likely to be paid in March, giving GrainCorp some handy cash flow after a season in which silo receivals have so far totalled just 3.7m tonnes, down from 8.8m tonnes in 2017-18, and 15m in 2016-17.

GrainCorp's claim to the insurer is based on a total winter crop of 11.44m tonnes for Queensland, NSW and Victoria, as estimated this week by the Australian Bureau of Agriculture and Resources Economics,

Two years before the three states produced a 28.2m tonne harvest.

The premium cost of about $6m a year is a relatively modest price for protection which could pay us up to $80m in a bad year, - Graham Bradley, GrainCorp

The novel 10-year crop production contract, locked in last June, pays out to GrainCorp if the combined eastern states winter crop yield slips below 15.3m tonnes.

Alternatively, in a bumper year when the crop estimate breaks 19.3m tonnes, GrainCorp will pay out $15 for each extra tonne, to a maximum of $70m.

If the same contract had been in place for the past 30 years GrainCorp would have received compensation payments of $74m six times, plus a further seven pay outs ranging between $20m and $73m.

Payouts would have totalled about $650m.

Conversely, the big grain logistics and processing business would have only outlayed sums ranging from from $12m to $76m from its own coffers to its insurers in five seasons.

Its biggest payments would have applied in the whopper harvest years of 2010-11 and 2016-17.

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AON's White Rock Insurance, which developed the production contract specifically for the Australian environment, will top up this year's harvest payment when ABARES updates its crop estimate figures in June.

"The premium cost of about $6m a year is a relatively modest price for protection which could pay us up to $80m in a bad year," GrainCorp chairman, Graham Bradley, told this week's annual general meeting.

Smoothing cash flow

Chief executive officer, Mark Palmquist said the value of the crop production contract was truly evident "in a tough season like this", or the past financial year, which saw GrainCorp sink to a $113m statutory loss.

"It will be important over the longer term in helping to smooth out GrainCorp's cash flows through the cycle," he said.

The "crop insurance" style product enabled longer term capital allocation and business planning.

Mr Palmquist said the company's substantial decline in earnings in 2018-19 had reflected an already significant impact on grain production from the worsening drought which led to low grain storage earnings, weaker utilisation of rail contracts and poorer export earnings, contributing significantly to the $113m loss.

Exports via GrainCorp's eight port terminals totalled just 300,000t - down from 7.2m tonnes in 2016-17.

"For the second year running there was minimal exportable surplus in eastern Australia as the domestic market secured supplies," he said.

Meaningful rain across much of the eastern seaboard has been a very welcome boost to the farming sector broadly - Mak Palmquist, GrainCorp

However, the drought had generated the unusual opportunity to import more than two million tonnes of grain for livestock from South Australia, Western Australia last financial year and also grain from overseas in the current season.

"Improving utilisation of our ports, whether it is through the importation of commodities or the export of non-grain products, like woodchips, is important for our business," Mr Palmquist said.

Oilseed options lift

This summer's slightly stronger canola harvest, primarily from Victoria, had helped the oilseed processing division which copped tight crush margins and high freight costs after the 2018-19 harvest when canola seed had to be transported longer distances to crushing plants.

"We've seen a good improvement in crush margins compared to last year and expect this to continue through 2020," he said.

"Having a bigger canola supply helps, but we have also seen an improvement in oil and meal values which have both helped."

GrainCrop chief executive officer, Mark Palmquist and chairman, Graham Bradley.

GrainCrop chief executive officer, Mark Palmquist and chairman, Graham Bradley.

Prospects were also improving, slightly, in the sorghum market, which now looked like seeing a late crop of up to 300,000t from southern Queensland and northern NSW, some of which may be available for export to China, if the coronavirus scare did not disrupt buyer activities.

"Meaningful rain across much of the eastern seaboard has been a very welcome boost to the farming sector broadly," he said.

"It's too early to call a break in the drought, but it's an encouraging sign after the prolonged dry spell we have just experienced."

Meanwhile GrainCorp's new rail contracts with other freight operators had also substantially reduced its fixed costs since the start of the new financial year and improved operational flexibility, while the combination of the company's oilseed processing and grains logistics and marketing businesses had created a more efficient, integrated business.

Storage network improves

Chairman, Mr Bradley said GrainCorp continued to improve the efficiency of its gainbelt storage network in eastern Australia "through targeted investment and improved supply chain processes".

"A key objective has been to improve our ability to manage year-by-year grain production volatility," he told the AGM.

"Extreme variability in seasonal conditions requires GrainCorp to continually adapt our operations in order to serve our grower customers profitably.

"We have done this by streamlining our country receival and storage network, investing to improve efficiency at key sites, cutting fixed costs and negotiating more flexible transport contracts."

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