You know all about risk. You’re in the dairy business. But do you know about counterparty risk? That’s the chance that the party on the other end of a contract will not perform as expected.
Volatile markets mean you need to pay closer attention to counterparty risk, says Barbara Dartt, family business and management consultant with Lookout Ridge Consulting (formerly Salisbury Management Services).
Generally, this risk falls into three categories: risk of payment default or delivery default, risk the contract will have no value or risk that deferred payments will not get paid.
Examples of counterparty risk for livestock producers include:
You contract with a farmer to raise your livestock and suddenly that farmer is evicted and sells your stock to pay the rent.
You contract for silage or other feed from a local farmer who fails to harvest the crops at the appropriate time or isn’t able to harvest the crops at all.
So, what should you do? Recognizing and controlling the risk is essential to the survival of your business, say experts. It is important to understand this is a process not a set of check boxes to be crossed off one time. Assessing counterparty risk is ongoing and you need to remain vigilant. Price volatility, length of time between contract date and shipment, or time between payment and delivery are factors that can increase the risk to you, she adds.
That means you must practice due-diligence, including keeping your ear to the ground regarding any information on your main business partners.