Only You Can Avoid Counterparty Risk

December 1, 2015 01:16 PM
 
Only You Can Avoid Counterparty Risk

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.

 

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Comments

 
Spell Check

PullMyFinger
Chappell, NE
12/2/2015 12:42 AM
 

  If your "marketing advisor" is recommending futures and options it's time for him to get a real job.

 
 
Jim
Goshen, IN
12/1/2015 06:20 PM
 

  Limiting the risk sounds just wonderful. I got out of Purdue in 78 just in time to see the big washout in the 80's. Universities and the ag industry urged farmers to plant fencerow to fencerow and stay 30 Percent or more in debt . We were told it would all work out well! My dad who lived through the depression said BS we aren' t doing that here! Consequently i am one of the last men standing in my township. All kinds of ultimately financial pressure made for a major houseclening a couple times since then. Now the one upsmanship promoted by different sources has created an ultimately similar storm on the horizon barring a disaster driving commodities up. Scenarios driving land prices could change dramatically as global economics change. The IMF has just accepted the yuan to be in the basket of preferred currencies sometime in 2016. It is one of the only currencies backed by gold as nearly all including the USD are fiat. Impossible to fortell the impact of this and serious global economic geopolitical events. I could go on all night. The point is it is time to get out of the deep water and stay out till some of the current events play out. Events considered very big in the past are happening monthly or more often. Closeness of these events historically indicates big things coming. My 99 year old dad said 29 hapened so fast and noone had anything and times were tough all the way through the 30's to WW2. People did not talk about getting by but about even staying alive. Dad said many died for all kinds of reasons do to the financial dabucle. Do your best to be solvent as possible.

 
 
Hans
Langdon, ND
12/1/2015 07:05 PM
 

  I have to agree completely with jim from goshen indiana....my dad said the same thing about the dirty 30's....lots of people died because lack of money....Dad lived completely on what came out of the barn, milk,eggs, beef, chickens etc. in 1936 they planted a bushel an acre and harvested 3 it was so hot and dry! A drought that long would wreck the country now

 
 

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