Here's why the Graincorp share price is on watch today

The Graincorp Ltd (ASX: GNC) share price is on watch following an update on its crop production contract with White Rock Insurance.

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There has been minimal impact on GrainCorp Ltd (ASX: GNC)'s share price so far today following an update on its crop production contract. At the time of writing, Graincorp shares are trading at $8.54, down very slightly by 0.12%.

GrainCorp is involved in grain storage and logistics, marketing and grain processing. The company focuses on wheat, barley and canola and supplies its products to domestic and international customers.

What did GrainCorp announce?

GrainCorp announced today that it expects to receive a production payment from White Rock Insurance (SAC) Ltd. This payment falls under a 10-year crop production contract with White Rock Insurance, announced back in June 2019.

GrainCorp expects to receive a total gross payment of approximately $57.9 million in FY20, subject to the completion of a successful submission to White Rock Insurance.

Graincorp expects that by March 2020, 90% of the total gross payment should be received. The balance is due to be paid in the second half of FY20. This payment will be subject to a final calculation based on the updated June 2020 Australian Bureau of Agricultural and Resource Economics and Sciences total winter crop production estimate.

The crop production contract came into effect in FY20 and is designed to manage the risk associated with the volatility of eastern Australian winter grain production, and to help smooth GrainCorp's cash flows across harvests.

Recap on GrainCorp's planned demerger

Back on 6 February, GrainCorp announced that the Federal Court of Australia had approved the dispatch of its demerger scheme booklet in relation to the proposed demerger of GrainCorp's international malt business.

If the demerger is implemented, eligible GrainCorp shareholders will receive one ordinary share in United Malt Group Limited for each ordinary share in GrainCorp UMG, which is currently a wholly-owned subsidiary of GrainCorp.

After the Demerger, United Malt will continue to be the world's 4th largest independent commercial maltster, with malting houses in Canada, the United States, Australia and the United Kingdom.  

Upon implementation of the demerger, United Malt's balance sheet is expected to support a strong, investment grade capital structure, with a policy of maintaining a ratio of net debt to EBITDA of 2 to 2.5 times.

Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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