OPINION: THE issue of how grain pools operate and the governance arrangements around them has been on the agenda in the grain industry for many years.
Recently, ASIC ruled that it did not see a need for additional regulation of grain pools. This doesn’t mean there is not a lot of activity in this space and so it’s timely to look at some of the issues.
Continued demand from growers for alternative ways to price grain, combined with support from the ACCC for industry self-regulation, led to major grain companies, grower associations, industry analysts and risk management advisors to get together along with Grain Trade Australia. The objective was to take a renewed look at the GTA Operating Standards for Pool Providers – the industry self-regulation guidelines for pools.
I was fortunate enough to chair this process and it’s in this capacity which I make comments in this article. I am a passionate campaigner for improving transparency in our market place and in doing so, increasing customer satisfaction through setting clearer expectations.
We believe we have arrived at a new healthy level of self-regulation aimed to promote customer satisfaction through transparency while not restricting future product innovation.
- Charlie Brown, AWB (Cargill)
The process has taken around 15 months from start to finish, involving more than 25 hours of meetings with an average of eight participants, meaning nearly 200 people hours of work. We believe we have arrived at a new healthy level of self-regulation aimed to promote customer satisfaction through transparency while not restricting future product innovation.
A major focal point has been estimated pool returns. If an initial EPR was, as is largely believed by many growers, a projection of the finalised return, and ended up being exactly correct, then the committee believes this would be more luck than good skill.
The Australian grain market is one of the very few markets in the world where a supposed ‘projected final return’ is supplied to a participant at time of commitment. The main reason for this is simply that grain growers have been accustomed to seeing this number.
More (or all) other global markets with similar managed investment/selling programs at time of contracting supply information about past performance, the product risks, the management team, the market outlook and finally a product mark-to-market valuation – the combination of which the customer then bases their decision on whether to invest or not. Examples of this are superannuation funds, hedge funds and managed investment schemes.
We are attempting to take the Australian grain Industry down a similar path and we believe the recently approved amendments to the GTA Operating Standards for Pool Providers should put us in good stead.
So in the near future, you will start to see changes in the Australian grain Industry around how pools are talked about.
- Prior to contracting, a pool product disclosure document will be made available for all pools managed by a GTA member company;
- There will be consistent reference terms used within this document with all ‘product terms’ will be defined;
- EPRs must all be published at Track level (FIS in WA).
- EPRs will be updated a minimum of monthly.
- Announced EPRs should always be within 5 per cent of the mark-to-market valuation of the pool.
- At finalisation the history of each pools EPRs must be publicly available.
- Within six months of finalisation an audit report must be publicly available.
The above are the highlights of what has been a major overhaul largely focused on customer understanding at time of contracting and seeking to ensure the interests of pool participants should always be the first priority of the pool operators. Pool operators are interested in repeat and long term business.
After a huge production year with low prices we now are well into a smaller production year with higher prices, but diversified marketing remains valuable and complete clarity of the risks of products being used to diversify is probably more important than simply diversifying itself.
