When the market is in a downturn, like it currently is, there’s always a lot of talk about risk. Are you managing your risk well enough? Most traders and market analysts suggest futures and options to manage risk. While they are great tools, there’s one kind of risk your marketing advisor can’t help you manage-counterparty risk.
What is counterparty risk? This morning on “AgDay” Tommy Grisafi of Advance Trading explained counter party risk with a housing industry example. He says a few years ago a lot of construction companies bought lumber to build houses and told the lumberyard, I’ll pay you when I sell the house. Unfortunately those houses were foreclosed on and the lumberyard never got paid. Grisafi says he’s seeing that same scenario start to play out in agriculture and you need to be aware of it.
“We’re seeing some of that same risk hit the ag community,” he told “AgDay” host Clinton Griffiths.
Watch the full Agribusiness Segment on “AgDay” Below:
Grisafi says counterparty risk plays out in agriculture when someone says “Ya I’ll buy seed” or “I’ll buy fertilizer” and promises to pay you when they sell their crop. Then sometimes the numbers don’t work out or the guy says he’s got the grain in the bin and will pay his bill when he sells it.
“60 or 90 days later you wonder if you’re going to get your money,” he says.
He advises businesses like custom sprayers, grain elevators, and chemical companies to make sound business practices during this time.
“Ya you’re able to borrow money at a very low interest rate,” he says, “but if you’re not going to get that money the rate is insignificant.”
This kind of situation is most likely to happen with neighbors, friends, and family that you’ve known for a long time Grisafi says.
“What if a guy you’ve known for 20 years in the ag community and he’s always good for it, what if one day he’s not good for it?” he asks. “What do you do then?”
Grisafi’s warning: “Don’t let someone else’s financial problems become your financial problems.”