SYDNEY (Reuters) - GrainCorp Ltd, Australia’s largest listed bulk grain handler, has signed a 10-year deal with insurance broker Aon Plc to boost its earnings during times of severe drought, after taking a profit hit from prolonged dry weather.
GrainCorp’s revenues have been under pressure for the last few years after drought across Australia’s east coast cut production - limiting the bulk grain handler’s ability to earn revenues from storing the crops and exporting them.
To reduce cash flow volatility, GrainCorp said on Friday it has entered into an agreement that will see it receive extra payments in times of drought, while it will have to pay out when seasonal conditions are good.
GrainCorp shares rose nearly 5 percent in morning trade on expectations the agreement would kick in during the current year on forecasts for extended hot, dry weather across east coast growing areas.
“The contract will smooth GrainCorp’s cash flow and allow for longer term capital allocation and business planning through the cycle,” Chief Executive Mark Palmquist said in a statement.
Under the deal, GrainCorp will receive a payment of A$15 ($10.46) per tonne when grain production from Australia’s east coast winter crop falls below 15.3 million tonnes. Payments will be capped at A$80 million a year.
In times of ample production when east coast grain production tops 19.3 million tonnes, GrainCorp will have to pay AON A$15 a tonne. This will be capped at A$70 million a year.
The contact will be benchmarked against data from Australia’s chief commodity forecaster, GrainCorp said.
The data shows east coast grain production has only fallen below 15.3 million tonnes once in the past 10 years.
In contrast, winter grain production from Australia’s east coast has topped 19.3 million tonnes four times in the last decade.
But with grain production suffering this season, analysts expect the contract, which will take effect from July 1, to provide an immediate shot in the arm.
“It looks like a sensible deal where it cuts in and cuts out,” said Richard Barwick, analyst at CLSA. “It will kick in this year on current conditions.”
Shares in GrainCorp rose nearly 5% to hit a one-month high of A$8.08 a share by 0135 GMT.
Last month, the company posted a larger-than-expected half-yearly loss and also cut its dividend as severe drought withered crops.
GrainCorp said the agreement will cost less than A$10 million pre-tax each year.
Reporting by Colin Packham in Sydney; additional reporting by Aditya Soni in Bengaluru; editing by Richard Pullin