Wellgrain collapse – what farmers need to know and do

What led to the Wellgrain administration is still under examination.

It is a company that had a reputation for offering slightly better prices but often paying late.

Some grain traders and farmers we have spoken to stopped trading with the company last year because of its track record on payments and concerns over creditworthiness.  

Farmers Weekly has heard from one grower who said he had to wait more than 90 days for payment on a 28-day payment contract term.

See also: Wellgrain collapse – live updates

In an administration, farmers are usually unsecured creditors and so last in line for any payout after secured creditors, usually lenders, and after preferential creditors such as employees.

Some Wellgrain creditors will have credit or bad debt insurance but these are mainly in the grain trade.

Insurers were in turn hit hard by the Bernard Matthews administration last year which left £23m owed to unsecured creditors, including many big grain trade names.

The Wellgrain administration is complicated by the large number of creditors and the need to unwrap contract issues.

These include futures positions held by the company, the status of forward commitments to the company by growers and grain held in company stores, whether on behalf of growers to sell at a later date or committed to Wellgrain but unpriced.

Plimsoll Publishing analyses performance in many sectors of business, looking at both individual companies and across business types.

It says that Wellgrain was exposed to low profit margins over the last five years. In the year to 30 June 2015, its short-term borrowing rose above £11m, almost doubling from the £5.5m of the previous year’s accounts.

The Plimsoll analysis is based on the principle of the Plimsoll line on a ship’s hull, which marks the maximum depth in the water to which the vessel may be safely loaded.

Based on the past four year’s accounts, the Plimsoll financial health rating for Wellgrain had been declining, says senior analyst David Pattison.

“Users of the Plimsoll analysis would have been aware that the financial health of Wellgrain Ltd was deteriorating.

“Gearing and liquidity charts are also part of the analysis and both of these ratios were also deteriorating, indicating that the company had been increasing borrowings and that there was less cover for creditors,” says Mr Pattison.

How many farmers are affected?

NFU member advisory service CallFirst had logged 140 members listed as calling by 10 March but says there could be a slight element of duplication in this count.

A large proportion of the calls came from East Anglia but members have also been calling in from the East Midlands and a scattering from other regions across the country, says the NFU.

What happens now?

The administrator must act in the interests of the creditors as a whole.

Even though they may be acting on behalf of one or more secured or preferential creditors, he/she must not unnecessarily harm the interests of creditors as a whole.

The general duties of the administrator include taking control of all company property, managing the company’s affairs, business and property in accordance with his/her proposals agreed by the creditors or as directed by a court.

There is a duty to perform the role as quickly and efficiently as is reasonably possible.

Within eight weeks of the appointment of administrators, a statement of affairs must be produced by the company’s directors and the administrator’s proposals must be made. The administrator must also decide whether to hold a creditors’ meeting.

There are several options for concluding an administration, ranging from sale of the business to winding it up.  

Legal questions

Does the insolvency clause in the Re the AIC Grain/Pulses contract 1/16 release growers from forward commitments to supply Wellgrain (ie contracts made before appointment of administrators)?

Paul Rooke, sector head of oilseed and grain at trade body the Agricultural Industries Confederation, says: “The insolvency clause in the AIC contract does contain the option for an innocent party to cancel or suspend or refuse to accept or make deliveries.

“Written notice has to be given to allow this to take effect, as soon as possible after you become aware of the insolvency. 

“In practice it is difficult to place a specific time on that as different parties will become aware of insolvency at different points in time.”

The question of who owns stored grain is more complex and depends on the type of contract under which it was stored or committed – growers should take individual legal advice, says the NFU.

What’s happening in the merchant trade?

Traders are being pushed for longer credit terms by the rest of the chain. A 90-day wait is not uncommon and some buyers are looking for as long as 120 days.

Price and currency volatility are familiar market features but it is access to cash and cashflow management which determine whether a business can keep going.

Speaking generally about pressures in the merchant sector, Paul Rooke, sector head of oilseed and grain at trade body the Agricultural Industries Confederation (AIC), said there had been a general trend, starting with the retailers, to lengthen payment terms, extending them to as long as 120 days.

Merchants would resist passing this on to farmers, says Mr Rooke, but it had become more of an issue recently and managing cashflow under such conditions was challenging. 

“Merchants are paying farmers on 30-day terms but if they are being paid on 120 days, there comes a point where something has to give.”

Other grain traders have been caught by this administration, as will consumers such as feed compounders and millers which had done deals for Wellgrain to supply them.

Some of them will be faced with buying in the grain from another source, and it is likely that this will be at a higher price than their deal with Wellgrain, which could cause knock-on difficulties in the trade. 

Analysis by Plimsoll shows the grain merchant sector has seen sales decline for the past three years, with profit falling by more than one-third in the past five years.

Average margins are now less than 1% and 44% of companies studied in the Plimsoll grain merchant analysis have been given a financial health rating of “caution” and “danger”.

“With margins so slim an important lesson for anybody selling grain is that they need to be clear on the financial performance of the company with whom they are doing business,” says senior analyst David Pattinson.

Unlike a typical credit rating, the Plimsoll analysis provides awareness to the changing character of a company.

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Farmers Weekly is keen to hear from Wellgrain suppliers who may have been affected.

Please get in contact with our business team: suzie.horne@rbi.co.uk/ 020 8642 4923; jez.fredenburgh@rbi.co.uk /020 8652 4920; jack.yates@rbi.co.uk / 020 8652 4933