United Grain Growers: Enterprise Risk Management and Weather Risk

By Harrington, Scott; Niehaus, Greg | Risk Management and Insurance Review, Fall 2003 | Go to article overview

United Grain Growers: Enterprise Risk Management and Weather Risk


Harrington, Scott, Niehaus, Greg, Risk Management and Insurance Review


ABSTRACT

In August of 1999, Mike McAndless, the risk manager of United Grain Growers (UGG), was preparing for a meeting with the firm's chief financial officer, Peter Cox. Mike and Peter had spent considerable time over the past three years with representatives of the Willis Group Ltd., a large international insurance broker, identifying and measuring UGG's major sources of risk. The risk assessment process indicated that, although UGG hedged most of its currency and commodity price risk and purchased insurance against property and liability losses, the firm's earnings still exhibited substantial volatility. This volatility was, in large part, due to the weather. Mike and Peter had to decide whether to retain the risk or shift it to another party using one of two innovative contractual arrangements: weather derivatives or a new type of insurance contract.

INTRODUCTION

This is a case study designed to be used in a risk management class to illustrate enterprise risk management. This case does not reveal United Grain Grower's (UGG) decisions. Instead, the case ends with seven questions for students to answer.

COMPANY BACKGROUND

Based in Winnipeg, Manitoba, UGG provides commercial services to farmers and markets agricultural products worldwide. It was founded in 1906 as a farmer-owned cooperative, and became a publicly traded company on the Toronto and Winnipeg stock exchanges in 1993. Figure 1 provides information on UGG's stock price since going public.

Although UGG is a public company, it retains some of its farmer cooperative roots. The company has both members and shareholders. At the time of the initial public offering, the members of the cooperative (farmers) automatically became members of the new organization, and they also received limited voting common shares (thus making them both members and shareholders of the new organization). An individual, who is not currently a member, can apply for membership if the individual does a minimum amount of business with the company. The initial public offering, as well as subsequent equity offerings, allowed nonmembers to become shareholders.

Although a member is not entitled to share in any profit or distribution by the company (unless the member is also a shareholder), members have control rights. Of the 15 people on UGG's board of directors, 12 must be "members" who are elected by delegates representing members from various geographical regions.

Business Segments

UGG is comprised of four main business segments: Grain Handling Services, Crop Production Services, Livestock Services, and Business Communications. As illustrated in Figure 2 and discussed below, UGG's four business units help farmers plan, produce, and market their products.

Western Canada is a major producer and exporter of wheat, barley, canola, and other grains and oilseeds. The role of UGG's Grain Handling Services unit (comprised of Farm Sales and Services, Marketing and Transportation Services, and Terminal Services divisions) is to identify sources of grain and oilseeds and deliver them to exporters and to domestic end users, such as food processors. A farmer's production of grain and oilseeds usually is transported to a country elevator, where the product is weighed, graded, blended, purchased, and stored. From the elevator, the product is shipped to a domestic consumer (e.g., a mill) or to an export terminal.

UGG historically owned hundreds of relatively small "country" elevators, which the firm has been replacing with a smaller number of large, high throughput, more efficient elevators. The map of western Canada in Figure 3 identifies the locations of UGG's main elevators and export terminals.

The farming industry in Canada is regulated by several government agencies. The Canadian Wheat Board (CWB) markets human consumable grains on behalf of farmers. About 85 percent of the wheat and 45 percent of the barley produced in Canada is sold through the CWB. …

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