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.
- Administrators appointed on 2 March 2017
- A sizeable regional merchant, established by Douglas Spinney in 2003
- Turnover of £86m in most recent accounts (to 30 June 2015), profit before tax on ordinary activities of £214,896 and net assets of £2.7m
- On a turnover basis, Wellgrain is about one-fifth the size of national merchant Gleadell Agriculture, but smaller than nearby co-op Fengrain, which turned over just over £100m in the year to 21 July 2016.
- Its trading core is East Anglia but it also dealt with growers and grain buyers and processors in many other counties
- Many farmers are among the 286 creditors owed £15m, and the amount owed is likely to rise
- NatWest and RBS Invoice Financing are the only secured creditors, giving them first call on any cash from the administration
- Most farmers will be unsecured creditors – there is a real risk that they will receive nothing or only a few pence for every pound they are owed
- Some farmers are owed £100,000
- The company’s next annual accounts are due to be filed by 30 March 2017
- Wholly owned by parent company, Driftwell Investments, which is not in administration
- Driftwell had a turnover of £93.154m in the year to 30 June 2015
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?
- Rabi 0808 281 9490
- The Farming Community Network 03000 111 999
- The Samaritans 116 123
- You Are Not Alone 0300 323 0400
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.
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.
What can farmers do to protect themselves from customers in financial difficulty?
- Know your customer – do your homework – they may be profitable, but good access to cash is more important to sellers
- Check who owns the company and how it is financed
- Watch out for changes in business practice – eg later payment than usual, increasing quibbles over quality
- Trade rumours are not always correct but talk to other merchants as well as growers – several decided to stop trading with Wellgrain last year
- Check out the most recent accounts available for £1 at Companies House, or ask the company itself for a copy. These will be of limited use but will give an indication of changes in profitability and net worth. It is the cash position that is important
- Late filing of accounts can be a warning sign – Companies House can sanction and even wind up a company for late filing
- Credit checks are of limited use, indicating what the company is “good for”, but without knowledge of how much is already outstanding
- If you are concerned, negotiate early payment, taking a discount to account for the cost of money. This should not be a problem for a business with good access to cash and many merchants will trade in this way
- Check out the cost of credit insurance, which pays out 80-85% on an insured bad debt risk – a poor risk will cost more to insure and can flag up problems
Farmers Weekly is keen to hear from Wellgrain suppliers who may have been affected.