Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Syndicate 5 (Ape Syndicate)
Yuliana Irmina 29110389
Decky Prasakti 29110391
Resti Athayani 29110402
Ronaldo Bagus Putra 29...
SUPPORTED BY
PINISI BACKPACKER HOSTEL
JL. Musaen 192/6A
BANDUNG
INDONESIA
+6222-86868610
SUPPORTED BY
PINISI RELAXATION
Jl. Halmahera no. 2 Bandung 0224240065
Jl. Kenari no. 14 Sukabumi 0266231016
SUPPORTED BY
ORANGE BUTTON
Jl. Baladewa Asri no. 14 Bandung - Indonesia
orangebutton@pinisirelaxation.com
Background
• United Grain Growers (UGG) is one of the Canada oldest grain
distributors in Canada.
• The agriculture busine...
The industry is quite volatile,
characterizes by boom and
bust cycles, and its roots in
the forces of supply and
demand in...
To reduce volatility, many
countries create policies in
Canada for wheat (barley and
oats/board gain) regulated by
Canadia...
The Canadian agriculture
industry was under
pressure from several
directions, and many
farmers disagreed with
CWB policies...
United Grain Growers
Established
in 1906
1993
restructured
itself as a
public
corporation
Issued
limited
voting
common
sha...
1955
- New Industry regulation
- Poor harvest contribution
- Railroads began consolidating routes
- Distributors can set t...
Alberta Pool
Manitoba Pool
ElevatorsTakeover UGG
Rather than suffer substantial
dilution of their existing
investment, the...
• UGG formed a strategic
alliance with Archer
Daniels Midland
Company
• UGG also formalized a partnership
with Marubeni Co...
The Willis Report
1992, shareholders successfully sued their
directors because the firm did not hedge it's
grain risk when...
On site Risk
Brainstorming
February 11, 1997, twenty UGG senior managers
and other employees met for an on site risk
brain...
Willis Attention
Willis focused its attention on the first group of
six which included :
A. commodity price risk
B. invent...
Earnings at Risk (EaR)
Which had been developed
by the financial
community, to describe
aggregate risk.
EaR expressed a "w...
CHARM
CHARM (Comprehensive Holistic All Risk Model)
generated graphical output in several formats to
highlight the various...
What to do about the weather ?
• Five of the six risk could be managed through
traditional methods.
• But about the weathe...
Six Major Risk
Risk Instance(s) Earning at Risk Possible Alternatives
Weather Impact on harvested
yields
11.5 Weather Deri...
List of Risk
Business interruption
Cargo/marine exposure
Civil disturbance
Commodity basis/ price
Competition
Consumer pre...
Willis Group Assessment
41
Risks
The Major Risks are
1 Weather
2 Environment Liability
3 Counterparty
4 Credit
5 Inventory...
The modeled yields, in turn, explained approximately 94% of the variability of UGG’s
grain handling earning. The yield dep...
Comprehensive Holistic All Risk Model
CHARM
CHARM plot showing the probability distribution of earning with and without th...
Definition: What is Value at Risk?
• Summary statistic that quantifies the exposure across many
assets/liabilities classes...
Earnings at Risk and Corporate Treasury
• Longer time horizon than traditional asset
management
• Multi-Step Monte Carlo
•...
Earnings at Risk
• Measure of earnings volatility
• Income Statement Perspective
• Used to define risk appetite
• Can help...
The Estimation of the 6 Major Risks
Risk Instance(s) Earning at Risk Possible Alternatives
Weather Impact on harvested
yie...
1. Weather
•Its effect on grain volume
would disturb the Business
2. Environmental
Liabilities
•The Toxic waste released t...
Weather Risk Exposure
ALTERNATIVE RISK
MANAGEMENT APPROACHES
1
Retention
Weather Derivatives
The Insurance Contract Idea
• First, UGG had been and planned to continue making
large investments in storage facilities (grain elevators).
• Second, ...
• Weather derivatives were a relatively new risk management tool.
• A contract could be tailored on a number of dimensions...
Illustration of a Weather Derivative
The Insurance Contract Idea
• UGG knew that the primary reason weather was important was
because weather affected UGG’s gr...
Risk Assessment to the weather problem
 Estimate probability distribution of and correlation
among losses
 Measure the e...
Environment Liabilities, Credit, Commodity,
Conterparty and Inventory Risk Exposure
2
Environment Liabilities
-Insurance
-...
Suggestion and Conclusion
We propose the use of insurance for the weather
uncertainty (option 3) due :
1. Broader Loss Cov...
United Grain Growers
Upcoming SlideShare
Loading in …5
×

United Grain Growers

8,949 views

Published on

By A.P.E. Syndicate

Published in: Economy & Finance, Business
  • Be the first to comment

United Grain Growers

  1. 1. Syndicate 5 (Ape Syndicate) Yuliana Irmina 29110389 Decky Prasakti 29110391 Resti Athayani 29110402 Ronaldo Bagus Putra 29110404 Lamya Nur Zahidah 29110406 Harry Riusxander 29110408 Wisnumurti Rahardjo 29110412
  2. 2. SUPPORTED BY PINISI BACKPACKER HOSTEL JL. Musaen 192/6A BANDUNG INDONESIA +6222-86868610
  3. 3. SUPPORTED BY PINISI RELAXATION Jl. Halmahera no. 2 Bandung 0224240065 Jl. Kenari no. 14 Sukabumi 0266231016
  4. 4. SUPPORTED BY ORANGE BUTTON Jl. Baladewa Asri no. 14 Bandung - Indonesia orangebutton@pinisirelaxation.com
  5. 5. Background • United Grain Growers (UGG) is one of the Canada oldest grain distributors in Canada. • The agriculture business was risky. Anything that affected the quantity of grain shipped had a material impact on the firm’s revenues, profits and cash flow. • UGG was still faced with the problem of how to deal with the biggest risk: the weather • UGG has to identify the principal risks of the corporation’s business and ensuring the implementation of appropriate systems to manage these risks.
  6. 6. The industry is quite volatile, characterizes by boom and bust cycles, and its roots in the forces of supply and demand in the global market Agriculture and in particular industry was one of civilization’s oldest industries Grain supplies were variable due to natural forces such as pests, disease and weather.
  7. 7. To reduce volatility, many countries create policies in Canada for wheat (barley and oats/board gain) regulated by Canadian Wheat Board (CWB) that mandated monopsony Grain distributor like UGG were important intermediateries between the farmer and the end market. Three largest distributor in 1998 were Saskatchewan Wheat Pool, Agricore, and UGG
  8. 8. The Canadian agriculture industry was under pressure from several directions, and many farmers disagreed with CWB policies and its monopsony power. In 1995, goverment repealed legislation that kept gain transportation cost fixed (and low) for many years, and reviewing other grain transpotation and distribution systems.
  9. 9. United Grain Growers Established in 1906 1993 restructured itself as a public corporation Issued limited voting common shares on Toronto Stock Exchange Strategy: To modernize its grain handling business To provide farmers with services beyond grain handling Core Division Grain Handling Merchandising Since 1993, derive about 70% of its income from grain operation UGG spent about $65 million on acquiring and building its non-grain handling business Build new HTP elevators, upgrade existing elevator, funding activities Initial Public Offering
  10. 10. 1955 - New Industry regulation - Poor harvest contribution - Railroads began consolidating routes - Distributors can set their own tariffs - Higher grain prices - Four out of the five major competitors lost money in the handling business - UGG had to take $12.5 million charge to close 93 country elevators The Industry Climate
  11. 11. Alberta Pool Manitoba Pool ElevatorsTakeover UGG Rather than suffer substantial dilution of their existing investment, the bidders withdrew their offer Two bidders merged from Agricore The Industry Climate
  12. 12. • UGG formed a strategic alliance with Archer Daniels Midland Company • UGG also formalized a partnership with Marubeni Corporation  ADM would gain “a secure grain supply for its processing operations”  UGG could “plan more efficiently for future transportation and grain handling demands, and increase market shares The Industry Climate
  13. 13. The Willis Report 1992, shareholders successfully sued their directors because the firm did not hedge it's grain risk when prices were falling Emerging interest in risk management prompted UGG to participate in a benchmarking review of best risk management practices in its Treasury department
  14. 14. On site Risk Brainstorming February 11, 1997, twenty UGG senior managers and other employees met for an on site risk brainstorming, with task : 1. to identify the risk the firm faced 2. to rank them, by polling the group, in relative importance to the firm
  15. 15. Willis Attention Willis focused its attention on the first group of six which included : A. commodity price risk B. inventory management risk C. customer and supplier counterparts risk D. account receivable and credit risk E. environmental risk F. weather risk
  16. 16. Earnings at Risk (EaR) Which had been developed by the financial community, to describe aggregate risk. EaR expressed a "worst- case" loss, set against a benchmark of expected profit, within a specified confidence or probability level.
  17. 17. CHARM CHARM (Comprehensive Holistic All Risk Model) generated graphical output in several formats to highlight the various aspect of each risk. The most general format was a probability distribution showing the probability of incurring a loss as a function of the size of the dollar loss . Cox had the information to do something to improve the firm's risk management performance and potentially reduce UGG's long term cost of risk
  18. 18. What to do about the weather ? • Five of the six risk could be managed through traditional methods. • But about the weather risk ? – No financial products that would effectively mitigate the weather risk – Innovation to mitigate : weather derivatives  pay a specified amount of money as a function of a particular weather characteristic
  19. 19. Six Major Risk Risk Instance(s) Earning at Risk Possible Alternatives Weather Impact on harvested yields 11.5 Weather Derivatives and Insurance Environment Toxic waste 2.5 Insurance and control Counterparty Failure of Supplier 4.3 Diversification/Due diligence/Contract Credit Payment Failure 1.6 Diversification/Due diligence/Contract Inventory Spoilage of Inventory, UnderStock/OverStock 2.2 Operational Control, and Insurance Commodity Price Fluctuation 11.9 Futures and Options
  20. 20. List of Risk Business interruption Cargo/marine exposure Civil disturbance Commodity basis/ price Competition Consumer preferences Contractual no- performance Credit/receivables Counterparty Directors & officers exposure Data accuracy Disease/spoilage Computer system failure Employee injury Employee liability Employee performance /fidelity environmental Foreign exchange Head office catastrophe Industrial espionage Intellectual property Interest rates Inventory Labor strike Leverage (too much or too little) Loss of key personnel Mergers and acquisition Major property exposure Pension plan performance Process compliance/execution Product liability Product performance Quebec separates from Canada R&D ventures Regulatory (CWB, transportation) Stock market crash Strategic planning Technology (choice, use of) transportation unionization weather
  21. 21. Willis Group Assessment 41 Risks The Major Risks are 1 Weather 2 Environment Liability 3 Counterparty 4 Credit 5 Inventory 6 Commodity
  22. 22. The modeled yields, in turn, explained approximately 94% of the variability of UGG’s grain handling earning. The yield depends on the rain according to the regression equation Yield=15.5+0.0577*Rain, R-squared = 43%. All-Wheat yield in Saskatchewan and the July precipitation for 1960 through 1992
  23. 23. Comprehensive Holistic All Risk Model CHARM CHARM plot showing the probability distribution of earning with and without the impact of the weather. When the weather risk is removed, the variation in EBIT is smaller, as shown by the lighter curve, though expected value is the same. The probability showing incurring a loss as a function of the size of the dollar loss.
  24. 24. Definition: What is Value at Risk? • Summary statistic that quantifies the exposure across many assets/liabilities classes to market risk. • Identifies ‘How Much’ one can loses if adverse market conditions prevail. • Captures diversification or Portfolio Effect. • Measurisk Approach – Full Monte-Carlo Valuation-based without approximations – Risk calculation based on evaluation of log changes in market instruments – Method allows modeling of entire distribution of expected profits and losses and shape of risk surface over time and tail risk Nasdaq Drop 95% VaRAsian Flu Nasdaq Drop Euro Rally
  25. 25. Earnings at Risk and Corporate Treasury • Longer time horizon than traditional asset management • Multi-Step Monte Carlo • More data needed to define covariance matrix • View of multiple time horizons (I.e. Each quarter of the fiscal year) • Quantify risk across business lines • Ability to optimize trading activities - view impact of different hedging strategies
  26. 26. Earnings at Risk • Measure of earnings volatility • Income Statement Perspective • Used to define risk appetite • Can help answer “What should be hedged?” • Focus on market moves to: – FX Rates – Interest Rates – Commodity Prices • Perspective: Basket of Exposures (“Portfolio Effect”)
  27. 27. The Estimation of the 6 Major Risks Risk Instance(s) Earning at Risk Possible Alternatives Weather Impact on harvested yields 11.5 None Environtment Liability Toxic waste 2.5 Insurance Counterparty Faliure of Supplier 4.3 Diversivicaiton/DD/Cont ract Credit Payment Failure 1.6 Diversivicaiton/DD/Cont ract Inventory Spoilage of Inventory, UnderStock/OverStock 2.2 Operational Control Commodity Price Fluctuation 11.9 Insurance/ Futures
  28. 28. 1. Weather •Its effect on grain volume would disturb the Business 2. Environmental Liabilities •The Toxic waste released to external environment could raise social risk and could raise penalty from government 3. Credit •The Failure of UGG Partner to pay their Debt to UGG would Disturb UGG Cash Flow 4. Commodity •The Fluctiation of Commodity Price could result a severe disturbance to UGG business 5. Couterparty Exposure •The Probability of UGG Suppliers (Upstream and Downstream) not to meet their contract obligation 6. Inventory •The Understock condition might result the loss of market opportunity •The Overstock inventory would result higher risk since the grain price are very fluctuative The top 6 Risk based on its severe risk
  29. 29. Weather Risk Exposure ALTERNATIVE RISK MANAGEMENT APPROACHES 1 Retention Weather Derivatives The Insurance Contract Idea
  30. 30. • First, UGG had been and planned to continue making large investments in storage facilities (grain elevators). • Second, the variability in its cash flows caused UGG to hold extra equity capital as a cushion against unexpected low cash flows in any given year. • Third, although much of UGG’s current business could be characterized as a commodity business, UGG tried to distinguish itself from competitors by creating products 7 with brand names and by providing on- going services to customers
  31. 31. • Weather derivatives were a relatively new risk management tool. • A contract could be tailored on a number of dimensions to meet the specific needs of the buyer. • For simplicity, the illustration assumes that the relationship between gross profit and the weather index is linear. Since low values of the weather index correspond to low expected profits for UGG, a derivative contract that would pay UGG money when the index is low would provide a hedge. • Hedging their weather risk with derivatives was feasible, but it suffered from several difficulties. Although Willis had performed a sophisticated analysis of the effect of weather on UGG’s gross profit, the results of this analysis had to be converted into a desired contract structure.
  32. 32. Illustration of a Weather Derivative
  33. 33. The Insurance Contract Idea • UGG knew that the primary reason weather was important was because weather affected UGG’s grain shipments. • The obvious problem with such a contract is the moral hazard problem – UGG’s pricing and service also influences its grain shipments. • One solution to this problem was to use industry-wide grain shipments as the variable that would trigger payments to UGG. • UGG also considered the possibility of integrating grain volume coverage with UGG’s other insurance co • Willis then contacted several major commercial insurers, including a division of the large reinsurer Swiss Re, called Swiss Re New Markets. Located in New York, this group structured innovative risk financing deals for commercial entities.
  34. 34. Risk Assessment to the weather problem  Estimate probability distribution of and correlation among losses  Measure the expected loss individually and in combination on ROE, EVA, EBIT  Changes in weather was ranked the highest source of risk  Grain volume and lagged crop yields highly positively correlated  Relationship between weather and gross profit  Weather >>> Crop Yields >>>> Grain Volume >>>> Gross Profit
  35. 35. Environment Liabilities, Credit, Commodity, Conterparty and Inventory Risk Exposure 2 Environment Liabilities -Insurance - Increase Control 3 Credit - Diversivication of parnership to avoid depedency with limited number of partners - Be more selective to choose partner 4 Commodity -Futures - Options 5 Counterpart - Diversivication of parnership to avoid depedency with limited number of partners - Be more selective to choose partner 6 Inventory -Increase Control - Insurance
  36. 36. Suggestion and Conclusion We propose the use of insurance for the weather uncertainty (option 3) due : 1. Broader Loss Coverage, not only weather risk 2. The premium of insurance cost can be reduced 3. Company would much more safe

×