REGINA – Grain trading is becoming a risky business, and farmers are paying for it.
The head of agribusiness and food for Rabobank International says trends such as privatization, globalization and increased emphasis on quality all make the grain industry a riskier place to do business.
“The main drivers in the industry … have not made the industry less risky,” Megens told a meeting of world grain leaders.
“In fact, quite the opposite.”
In an interview later, he said that additional risk carries costs with it, and in many instances those costs will come out of the grain farmer’s pocket.
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“Someone has to pay the risk, and that gets passed back,” he said after speaking to the annual conference of the International Grains Council.
Rabobank, a co-operative bank based in The Netherlands, is one of the world leaders in providing financial services to the agribusiness and food industries.
During a panel discussion on financing the world’s growing demand for grain, Megens said most of the changes occurring in the the world grain industry have worked to increase risk:
- Privatization – The number of smaller and less experienced buyers and sellers of grain has increased, a result of privatization and the change in ownership and structure of many former state trading enterprises. Those STEs often carried with them government guarantees of payment and foreign currency risks, something not generally available to the smaller players that have replaced them.
- Globalization – The number of countries involved in the grain trade is increasing. Some of the large importers are in a transitional or developmental stage and lack foreign currency. Many of them also have no local commodity exchanges on which to manage price risk.
- Less bulk – The large bulk commodity shipments of the past are being replaced by sales of smaller volumes of specific quality grain. In addition, biotechnology is resulting in a wave of new grain products. Transactions between buyers and sellers are becoming more complex, with increased risks associated with quality and transportation. Price risk also increases because quality-based premiums fluctuate with changes in supply and demand.
- New trading systems – Identity preservation systems have increased quality and transport risks, while the growth in e-commerce introduces new risks, including identifying the other party, authorizing payments and guaranteeing performance.
- Diversification – In some regions, traders are becoming larger and more diversified. As they become involved in a wider variety of business ventures, it becomes more difficult for financiers to assess risk.
However, Megens added that the finance industry has responded to the increased risk by devising new risk management tools and expertise, and taking advantage of such things as improved access to information, better communications and new methods of mathematical analysis.
Capital markets have become more important, as new participants look to extend their traditional business to include risk financing. This activity increases the liquidity of financial markets, he said.
Lenders are also working more closely with the agribusiness sector to devise risk management tools specific to the industry.
Greg Arason, chief executive officer of the Canadian Wheat Board, said that while he concurs with Megens that there is increased financial risk in the grain industry these days, it hasn’t affected the board’s ability to do business.
“Certainly there are customer risks and country risks,” he said, adding that while the board works closely with various lending and economic development agencies to minimize risk, it does assume a minimal degree of risk.
“But in our view, it’s not an impediment to trade.”
