East coast grain handler GrainCorp has outlined the terms of a ten-year insurance deal to smooth out its annual revenue figures and shield it from severe drought conditions like those seen during the most recent winter crop.
GrainCorp on June 7 outlined the details of a new risk management agreement with White Rock Insurance, a subsidiary of Aon plc.
From FY20, GrainCorp will receive $15 from White Rock for every tonne its winter crop falls below a threshold of 15.3 million tonnes, up to an annual maximum of $80 million.
However, if GrainCorp’s winter crop exceeds an upper production threshold of 19.3 million tonnes, it would instead pay White Rock $15 per excess tonne, up to an annual maximum of $70 million.
In addition, the deal states that neither party would have to pay the other more than $270 million net, over the full ten-year term.
“The contract will smooth GrainCorp’s cash flow and allow for longer term capital allocation and business planning through the cycle,” GrainCorp CEO Mark Palmquist said.
Had the deal been in place, GrainCorp would have received a full $80 million payment from White Rock during the most recent 2018/19 grain crop, which was heavily impacted by drought.
However, the grain handler would have had to pay White Rock a full $70 million payment in both 2010/11 and 2016/17, years with strong harvests, along with $35 million in 2011/12 and $13 million in 2012/13.
The risk-balancing move comes after a takeover bid from Long Term Asset Partners fell through last month. That bid was largely based around a model whereby grain production would be underwritten by Allianz, making GrainCorp a more appealing asset for financial partners.