Risk posed to Graincorp (ASX:GNC) share price following ACCC verdict

The GrainCorp Ltd (ASX: GNC) share price is likely under the watchful eyes of shareholders today. This is due to the conclusion of the warehousing agreement investigation.

At the time of writing, the GrainCorp share price has dipped 0.3% to $4.71 per share.

A fairer deal for farmers

An investigation was conducted by the Australian Competition and Consumer Commission (ACCC) yesterday. Consequently, it was found that  19 terms in the company’s Grain Warehousing Agreement were unfair under Australian Consumer Law.

GrainCorp acts as an intermediatory between grain growers and grain buyers. Therefore, the company uses an agreement to protect all parties. However, the ACCC determined facets of this agreement to favour GrainCorp over its farming suppliers in protections.

In particular, a concerning term in the agreement capped the company’s liability to grain growers at $100,000. This was applicable even if the loss was a consequence of GrainCorp’s negligence or omissions.

ACCC Deputy Chair Mick Keogh made the following comment regarding the limiting term:

We believe the term which limited GrainCorp’s liability created a significant imbalance between the rights and obligations of growers and GrainCorp, and had the potential to cause significant financial detriment to growers without being reasonably necessary to protect GrainCorp’s legitimate interests.

GrainCorp has committed to amending these 19 various terms in the 2021/2022 warehousing agreement. This includes removing limited liability on losses attributable to gross negligence, fraud, criminal conduct, or wilful misconduct by GrainCorp. Additionally, all other instances of liability for losses will be increased to $200,000.

Risky business for GrainCorp and its share price

Although the amendments are likely to the delight of many Australian farmers, fundamentally it puts the risk back on GrainCorp.

Along with the change in limited liability terms, the following changes will be included:

• Providing growers with sufficient time to make necessary arrangements should they not want to continue the arrangement into the new season.
• Addressing concerns about GrainCorp having the unilateral right to renew or amend the terms of the agreement.
• Removing limitations on GrainCorp’s obligations to perform certain services GrainCorp was contracted to provide under the Grain Warehousing Agreement.
• Removing terms that allowed GrainCorp to deny reasonable requests by growers to inspect grain stored with GrainCorp
• Eliminating terms that provided GrainCorp with a broad discretion to vary the goods or services it provided to growers.

The changes increase the risk to GrainCorp’s bottom line in the event of negligence. In essence, the amendment could result in a double whammy to the company. If an incident were to occur, GrainCorp would lose out on revenue. Additionally, GrainCorp would be required to cover the saleable value to farmers.

Rains outweighing risks

Despite the added risk for GrainCorp, the share price has fared the revelations reasonably well. Potentially shareholders are more bullish on the company due to the continued above-average rainfall.

While Major #Flooding is occurring in #Sydney‘s west it’s also important to be aware this is a large & widespread event. Western #NSW will see increased #rain from Monday & many areas will see more rain on Tuesday. Check regularly for updates https://t.co/sNdzpEYEQ1 @NSWSES pic.twitter.com/uEQpjjSlAc

— Bureau of Meteorology, New South Wales (@BOM_NSW) March 21, 2021

https://platform.twitter.com/widgets.js

The La Niña weather event being experienced in Australia is providing optimal conditions for Australian farmers while hampering it in the Northern Hemisphere. As a consequence, prices for commodities such as grain remain elevated. This explains the over 42% gain in the GrainCorp share price in the past 12 months.

More reading

• Will Aussie agricultural commodity prices see another record-breaking year?

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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