GrainCorp, the giant Australian agribusiness, has secured a 10-year risk transfer arrangement that will protect it against the impacts of grain production variability, particularly from drought.
The company one of the world’s largest agricultural businesses specialised in grain and other commodity receivership, storage and transportation.
Given its areas of specialism, GrainCorp holds significant exposure to crop production volumes and any fluctuation in them, putting weather risk, especially from drought, as a key concern.
GrainCorp said that it has secured a layer of protection against this risk, executing a 10 year agreement designed to help it manage risks associated with the volatility of eastern Australian winter grain production.
We’re told the underlying contract is a derivative designed to help smooth earnings and cash flow for GrainCorp and mitigate the impacts of severe droughts, or other weather exposures that could significantly reduce grain production, with a strike on both the downside and upside of the exposure.
GrainCorp CEO Mark Palmquist explained that the new risk transfer agreement is a positive development for the firm, saying, “The Contract will smooth GrainCorp’s cash flow and allow for longer term capital allocation and business planning through the cycle.”
Helping GrainCorp in this transaction was insurance and reinsurance brokerage Aon’s subsidiary White Rock Insurance (SAC) Ltd., a Bermuda domiciled Class 3 and Class C insurer and segregated accounts company.
White Rock provides protected cell facilities that are used for risk transfer transactions. Managed by Aon Insurance Managers, the White Rock Group has been expanding its remit and reach around the world and in this case we understand helped a large reinsurance firm to execute this arrangement with GrainCorp.
The transaction is effective from GrainCorp’s 2019-20 financial year and for the 10-year term a fixed payment of AU $15 per tonne will be made when the strike price is hit for the underlying contract.
This can happen for each tonne of east coast Australia winter crop production in any given year that falls below an agreed lower production threshold of 15.3 million tonnes, up to a maximum of AU $80 million per year.
Conversely, if production is above an agreed upper production threshold of 19.3 million tonnes GrainCorp will pay the AU $15 per tonne, up to an annual maximum of AU $70 million.
The contract is subject to an aggregate net limit of payments over the 10-year term of AU $270 million, in either payment direction.
Excluding any payments made where production is above the agreed upper threshold, GrainCorp said that this contract will have a total pre-tax annual cost of less than AU $10 million, including the associated financing costs.
As we had written recently, GrainCorp had been in discussions with market experts Allianz and ILS fund manager Nephila Capital previously about a weather linked mechanism to hedge out some of its grain production volume risks.
This transaction doesn’t involve either party we understand, just a large re/insurance market that provided the capacity for the transaction.
Aon’s White Rock sat in the middle of the deal as a facilitator with one of its cells, interfacing directly to the insured GrainCorp and helping the re/insurer to access this risk more directly.
It’s possible that the re/insurer behind the deal could be sharing some of the risk with other parties, but we cannot be certain.
The transaction is particularly innovative as it features a 10-year term, helping to secure revenues for GrainCorp over a long period, while reducing the firms exposure to weather risks, particularly drought.
Interestingly, the Sydney Morning Herald reported today that had GrainCorp had this weather derivative type arrangement in place for the last financial year, GrainCorp could have received around AU $80 million in payments from the deal.
“I wish I would have been announcing the derivative at this time last year,” the newspaper quotes GrainCorp’s CEO as saying.
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