香港中文大学：United Grain Growers Enterprise Risk Management：A Case Study

ed Grain Growers Enterprise Risk Management. A Case Stud More about erm CasErmWebsitehttp://www.casact.org/arealerml SOA CERA Credential http://ww.ceranalyst.org/overview.asp RIMS ERM Center http://www.rims.org/resources/erm/pages/default.aspx Wikipedia: http:/en.wikipediaorg/wiki/enterpriseRiskManagement

1 United Grain Growers Enterprise Risk Management: A Case Study More about ERM CAS ERM website: http://www.casact.org/area/erm/ SOA CERA Credential: http://www.ceranalyst.org/overview.asp RIMS ERM Center: http://www.rims.org/resources/ERM/Pages/default.aspx Wikipedia: http://en.wikipedia.org/wiki/Enterprise_Risk_Management

Enterprise Risk Management Traditional approach Manage each type of risk separately(silo approach) a Enterprise risk management approach Manage all risks in a unified framework Focus more on overall firm risk Some firms have established a new position chief risk officer

2 Enterprise Risk Management ◼ Traditional approach: Manage each type of risk separately (silo approach) ◼ Enterprise risk management approach: ◼ Manage all risks in a unified framework Focus more on overall firm risk Some firms have established a new position: chief risk officer

Enterprise Risk Management Arguments for ERM ) Process provides managers with a better understanding of the firm's risks Many of the reasons for managing risk suggest looking at an aggregate performance measure(e.g, cash flows) Arguments against ERM )Too costly to implement

3 Enterprise Risk Management ◼ Arguments for ERM: Process provides managers with a better understanding of the firm’s risks Many of the reasons for managing risk suggest looking at an aggregate performance measure (e.g., cash flows) ◼ Arguments against ERM Too costly to implement

United Grain Growers case a UGG was one of the first to use erm ■ Background on UGG >Operates in western canada Provides services to farmers Governance structure: Members and Shareholders )Main business: grain handling )Capital expenditure program: replace old grain SIlOS Recently increased financial leverage

4 United Grain Growers Case ◼ UGG was one of the first to use ERM ◼ Background on UGG: Operates in western Canada Provides services to farmers Governance structure: Members and Shareholders Main business: grain handling Capital expenditure program: replace old grain silos Recently increased financial leverage

UGGs Business Segments Operates in western Canada Livestock Services Grain Feed mills Crop Handling Production ALarm Services Marketing Production Planning Fertilizer Country Terminal End -herbicides Elevator Elevator Users Seed Communications

5 UGG’s Business Segments Crop Production Services -Fertilizer -herbicides -Seed Livestock Services - Feed Mills Communications Grain Handling A Farm -Marketing -Production -Planning Country Elevator Terminal Elevator End Users Operates in western Canada

EBIT for UGG's Business Segments (rig 4y Grain Handling proceeds Highly volatile, Why? EBIT 35,000 30000 Grain Handling $25,000 Crop Production g920.000 Services $15,000 Livestock 6$10.000 Services 5,000 -* Business Communications s60019 1990 199219941996 1998 Year

6 EBIT for UGG’s Business Segments (Fig.4) EBIT $(5,000) $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 1988 1990 1992 1994 1996 1998 Y ear C$ (in thousands) Grain Handling Crop Production Services Livestock Services Business Communications Grain Handling proceeds Highly volatile, Why?

The erm process Formed a rm committee CEO, RM, CFO, Treasurer, Manager of Audit Services brainstorming session )Willis analysts, RM committee, other employees dentified 47 main risks Six risks were chosen for further investigation Environmental liability Effects of weather on grain volume Counter-party risk ) Credit risk Commodity price and basis risk )Inventory risk

7 The ERM Process Formed a RM Committee CEO, RM, CFO, Treasurer, Manager of Audit Services Brainstorming session Willis analysts, RM committee, other employees Identified 47 main risks Six risks were chosen for further investigation: Environmental liability Effects of weather on grain volume Counter-party risk Credit risk Commodity price and basis risk Inventory risk

Frequency of Losses from Counterparty R 074 Example of 0o0 0 Number of Losse 13 Analysis of Severity of Losses from Counterparty Risk each of the Loss Severity 0002,000,000 6000,000 4,000000 8.000,000 Six Risks: Figure 27. 3 Total Losses from Counterparty Risk Counterparty 025 Total Annt Risk 000 0.00875,0001,750,0002625,0003,500,000 Figure 27. 3D EBIT with and without Counterparty Risk 015 00015000.00 45.000.00 30.000.00 60.000.00 With Counterparty Risk Without Counterparty Risk

8 Example of Analysis of each of the Six Risks: Counterparty Risk

Focus on Weather risk a Ken Risko (statistician ) Michelle Bradley (actuary from Willis risk Solutions, found weather was most important source of risk Weather Crop yields(Table 5) )UGGs grain shipments(Table 1) >UGGs gross profit (Table 3)

9 Focus on Weather Risk ◼ Ken Risko (statistician) & Michelle Bradley (actuary) from Willis Risk Solutions, found weather was most important source of risk Weather Crop yields (Table 5) UGG’s grain shipments (Table 1) UGG’s gross profit (Table 3)

Weather Crop Yields (Table 5) Results of Regression Analysis of Crop Yields(bushel per acre)and Weather Conditions in Three Canadian Provinces using data from 1960-1992 Temperature is measured in degrees Fahrenheit and precipitation in inches. The time trend variable equals ( year-1960); thus, for the year 2000 the time trend equals 40 Dependent variable Explanatory Variables Crop Yield for Time Avg. June Province Crop Intercept Trend Precip. R Alberta Wheat 59.88 0.33 076 2.70 0.68 t-stat: 4.49 6.19 3.19 2.63 Manitoba Wheat Coef 79.34 0.42 0.98 1.00 0.65 t-stat 5.70 5.94 -4.38 0.95 Saskatchewan Wheat Coe 55 0.19 0.69 4.80 0.61 t-stat 4.02 3.01 4.44 Alberta Oats Coef 43.53 0.69 0.17 4.70 0.72 t-stat: 1.89 7.59 0.41 2.71 Manitoba Oats Coef 121.02 0.65 150 5.30 0.64 t-stat 4.89 5.16 377 2.96 Saskatchewan Oats Coef: 74.07 0.24 0.76 9.30 0.56 t-stat 293 1.91 1.82 4.70

10 Weather ➔ Crop Yields (Table 5) Results of Regression Analysis of Crop Yields (bushel per acre) and Weather Conditions in Three Canadian Provinces using data from 1960-1992; Temperature is measured in degrees Fahrenheit and precipitation in inches. The time trend variable equals (year-1960); thus, for the year 2000 the time trend equals 40