SYDNEY, AUSTRALIA — GrainCorp Ltd. on June 7 confirmed it has entered into a 10-year agreement to manage the risk associated with the volatility of eastern Australian winter grain production. By entering the contract, GrainCorp said it hopes to reduce cash flow volatility, particularly during periods of severe drought.

As part of the contract, a fixed payment of A$15 per tonne will be made for each tonne of winter grain in any given year that meets the following criteria:

• Below an agreed lower production threshold of 15.3 million tonnes: GrainCorp receives the production payment, subject to an annual maximum of A$80 million;

• Above an agreed upper production threshold of 19.3 million tonnes: GrainCorp pays the production payment, subject to an annual maximum of A$70 million; and

• In all cases, subject to an aggregate net limit of production payments to either GrainCorp or the contract counterparty of A$270 million over the 10-year term.

GrainCorp said the total pre-tax annual cost of the contract, excluding the production payments, is expected to be less than A$10 million.

“The contract will smooth GrainCorp’s cash flow and allow for longer term capital allocation and business planning through the cycle,” said Mark Palmquist, chief executive officer of GrainCorp.

Underlying EBITDA at GrainCorp Ltd. totaled A$27 million in the first half of fiscal 2019, down from A$119 million in the same period a year ago, dragged down by severe drought conditions in eastern Australian and grain flows that have been disrupted by grain trade conditions.

The company sustained a net loss after tax of A$48 million, which compared with a net profit after tax of A$36 million in the same period a year ago.