10 Timing and dates of fixed price forward contracts Situation whereby, fixed price contracts are only attractive to processors during seasons when supply is limited. Provide sufficient benefits of forward supply for processors/exporters and incentives for producers for year-round contracts. Processors/exporters secure back-back contracts with their customers Promote value chain relationships for all year-round supply with producer groups Encourage the development of finance products based on forward contracts Stretch, 2015 11 Inability for processor/exporter to take delivery of forward contracted sheep on specified dates. Situation whereby the processor/exporter due any number of factors including but not limited to; insufficient procurement planning, processing plant operational challenges including staff availability, cash flow, machinery/ship breakdowns, animal and health compliance challenges, sourcing of stock at lower prices on spot and alternative markets, disruption or cancellation or product specification changes of orders to end customers. Contract clauses to cater for these circumstances. Inclusion of roll over of contract provision subject to agreement Dispute resolution and arbitration process Force Majeure clauses in contract design Industry Source 12 Payment risk by counter party due to insolvency, legal action or financial cash flow challenges. Situation whereby, the parties to the contract may not receive payment as and when due. This could be due to contract disputes, financial events, counter party insolvency Credit insurance Credit check, banker opinion Counter party due diligence checklist Dispute resolution and arbitration Industry Source 13 Having effective independent and objective contract dispute resolution and arbitration process. Situation whereby, the contracting parties may have disputes or challenges surrounding their contractual agreements due many factors. Effective contract and agreement design, rules and documentation will assist in managing this issue. An independent dispute resolution and arbitration service will assist to mitigate this issue if they arise. Examples, include, Grain Trade Australia and Australian Disputes Centre Grain Trade Australia Stretch, 2015 Industry Source 14 Lower cash prices if increased forward contracts are used. The theory that cash prices would be impacted negatively due to the removal of a buyer (demand) from the spot market Need to consider that supply has also been removed from the spot market. Focus on profit margin not on price. Focus on longer term alignment benefits for producer, processor and customer. Forward contracts would/ should never be 100% of the market. Emmett, 1992 Industry Source
Easily see which loads are un-nominated. Destination site information. Freight charges information and calculations. Links to marketers pricing information. Estimate crops for coming harvest to enable site planning. Check quality information. Uniformly and consistently classified through Wheat Quality Australia (AQW) and Grain Trade Australia (GTA). Traded through global and domestic standard derivative markets by financial institutions and professional service firms that operate under strict financial market regulations. Marketing options through an extensive network of grain marketing organisations and platforms. For example, Clear Grain, Grain Brokers Australia, Agridigital. Effectively and objectively monitored and researched due to the large range of market information and price discovery sources to assist price transparency. Examples include, Daily Grain, Profarmer, MarketAg. Financed as a distinct commodity due to the ability of wheat to be centrally stored, insured and specified. Dispute Resolution and Arbitration Process GTA has a formal and fully developed dispute resolution and arbitration service for the grains industry. Price Discovery and Transparency The global wheat trade is characterised by strong price discovery, transparency and availability of risk management tools offered by financial institutions through the function of active, centrally cleared and standardised derivative markets trading on central exchanges like CBOT and the Australian Stock Exchange (ASX). Sources: Australian Horticulture For this case study the focus within the horticulture industry is vegetables. Marketing options and supply chain arrangements including forward contracts in the horticultural industry vary significantly depending on the product type, end target markets; either domestic or export, retail supermarket, food service sector or wholesale. Key Learnings Direct producer to processor-market relationships facilitate longer term forward contracts. Forward contracts require retail supermarket and or food service companies as end customer. Producers must meet high quality specification standards. Supply volumes are tightly regulated by the processor. Producers required to have strong farm quality assurance and food safety standards. No agents or middlemen involved in direct forward contracts.