Riskmanagement

1.6.5.1

An important part of the strategic objectives and adequate management of ForFarmers is recognising opportunities and taking risks, or rather risk management. The risk management system is a precondition for the realisation of our strategic objectives and provides for compliance with corporate governance requirements. In addition, an adequate monitoring system enables the Board of Directors to determine the degree that the organisation is ‘in control’.

Through an active monitoring system of risk management ForFarmers aims to create a high level of awareness in terms of risk control. This system has been entrenched in the organisation, from the Board of Directors, under supervision of Supervisory Board, to all departments. This includes the tone at the top, the hard control measures and the soft controls and everybody contributes to the identification of risks and opportunities, including the associated control measures. A team managed by the Group Control Department provides the governance, risk & compliance workshops and facilitates periodic self-assessments.


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Risk acceptance with regard to the most important risks

In general, ForFarmers observes a careful approach when it comes to accepting risks. The risk acceptance differs by sub-category of risks. When realising our strategic objectives the organisation accepts the associated risks up to a certain level. For some categories ForFarmers defined a low risk level. For instance, when it considers the health and safety of our employees and other interested parties or food safety.

In 2015 ForFarmers prepared further analysis of the risks and the relevant control measures. The current risk profile was compared to the risk profile desired by the organisation. Action plans were prepared for the 21 most important risks to the extent that there is a difference between the desired and the current risk profile. The realisation of the implementation of action plans shows that when opportunities are taken the control of the risks is in line with the level of risk acceptance within the organisation.

The desired level of risk acceptance for ForFarmers for the various categories of risks was established as follows:

1.6.5.2


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1.6.5.3

Below the level of risk acceptance for each sub-category of objectives and the respective considerations are outlined.

Strategic objectives

When realising the growth objective as part of the strategy and further expansion of the (international) activities, major investments will need to be made.

ForFarmers has an average to high risk acceptance in this respect in order to realise its business and strategic objectives. When pursuing strategic business objectives there are two specific areas where ForFarmers applies a very low to low risk acceptance:

  • Reputation: the company's reputation is crucial to the confidence that our customers, suppliers and society have in ForFarmers.
  • Sustainability: ForFarmers is committed to sustainable resources, the environment, energy efficiency, animal health and welfare, people, society and reduction of waste. A very low to low risk acceptance level also applies here. When controlling these risks ForFarmers applies commercial sustainability’ as a guiding principle. This means that each and every initiative must be commercially feasible in terms of sustainability, both to our customers and to ForFarmers.

Operational objectives

Due to the size of the company and the high volatility of certain raw material prices risks with regard to purchasing have increased in the last couple of years. As a consequence, ForFarmers is confronted with a number of risks when realising its operational objectives.

With regard to the purchasing function, a low to average risk acceptance level applies to ForFarmers.

With regard to differences in quality of products and/or services that are purchased ForFarmers applies a very low risk acceptance level. As a result of competition and the high volatility of certain raw material prices, controlling the risks with regard to the purchasing of raw materials is an important factor.
That is why ForFarmers aims to control purchasing risks. In this respect, risk boundaries were defined on the basis of the ‘value at risk’ principle that apply to the organisation as a whole, translated for the various Business Units, for the purchasing of raw materials.

Financial objectives

ForFarmers has a very low to low risk acceptance level for risks that may have a considerable effect on the financial results and the reliability of the financial information of ForFarmers. Currency positions with regard to raw materials are hedged by ForFarmers. Currency risks of assets abroad are partly hedged through funding with borrowed capital in the same currency. The original acquisition investment in BOCM PAULS is not hedged. ForFarmers is partly funded by means of interest-bearing debts, which brings about an interest risk. Developments on the interest and currency markets are followed carefully by the Corporate Governance & Compliance Team and risks are, if so required, hedged by means of swaps and other financial instruments. ForFarmers must always be able to meet its financial obligations. This is guaranteed through a solid equity and liquidity position.

Compliance

ForFarmers has a very low acceptance level for risks that may affect compliance with legislation and regulations, regardless of the fact whether they are related to the business community in general or our industry in particular. 

In 2015 ForFarmers introduced the Code of Conduct, which also includes whistle-blowers’ regulations. The Code of Conduct is an overview of the business principles, values and rules of conduct that are applicable to everybody who works within ForFarmers. It discusses, among other things, the integrity and the responsibilities of both the organisation and the employee.

It is important to ForFarmers that all employees are familiar with the Code of Conduct and are aware of its implications. Managers discussed this with their teams. Employees also received information about the Code of Conduct at their home address in their own language. Via the associated online training module, which could be reached both from home and via the intranet at work, employees were given an explanation about the Code of Conduct and some dilemmas were presented by way of illustration. At the end of the module the employee was asked to endorse the Code of Conduct.

ForFarmers has a ‘Zero Tolerance’ policy with regard to any and all risks that may result in a breach of the Code of Conduct of ForFarmers. Through the implementation of, and compliance with, the Code of Conduct ForFarmers controls integrity risk. ForFarmers has a very low acceptance level for this sub-risk.

Risk Management in 2015

In 2015 ForFarmers also gave further substance to the integral risk management. The most important risks, which had already been identified, quantified and discussed with the senior management of the organisation in 2014, were elaborated on further in 2015. In this context self-assessments were carried out for all risks, an analysis of the desired risk level compared to the current risk level was performed and action plans were prepared for further improvement for the control of these risks.

Starting with these risks, a continuous assessment takes place of available internal control measures and the degree that they are in line with the risk acceptance of ForFarmers.

By making use of internal guidelines, quality systems, audits, reporting and monitoring systems and insurances the most important risks are controlled. These control measures have the objective of reducing the chance that a risk occurs, and the potential consequences thereof, to an acceptable level and guaranteeing the continuity of the business.

Starting with the integral risk management monitoring of all risks takes place per Business Unit, with central coordination and monitoring of the identified risks. The integral risk management at ForFarmers focuses on obtaining certainty about realising objectives in the area of:

  • Continuity of services;
  • Reliability of supply of financial information;
  • Compliance with relevant legislation and regulations, policy guidelines and procedures;
  • Monitoring assets and other properties.

The systems for risk management and internal controls of ForFarmers aim at optimally supporting the realisation of strategic and financial objectives.

An adequately organised risk management and internal control system does not guarantee that the strategic and financial objectives are realised. Nor can it guarantee that human mistakes, unforeseen circumstances, incorrect reports, fraud and non-compliance with legislation and regulations can be excluded completely.

Risks and the relevant imposed control measures

Price development and availability of raw materials

Risk (operational objectives)
For its core activities ForFarmers relies on raw materials of an agricultural origin, like wheat, maize, soy meal and barley. Price setting on the market for these raw materials can be very volatile and is influenced by, among other things, the quality and the scope of realised harvests. This can also be affected by the demand from the biofuel industry and speculative trade by financial investors. Changes in prices of raw materials affect the prices that we pass on to customers.
If ForFarmers takes positions in raw material agreements this may affect the results of the organisation. Taking positions is, however, necessary to guarantee the availability of raw materials for deliveries.

Control measure
ForFarmers follows developments in the area of prices and availability of raw materials intensively. To reduce the risk of raw material positions ForFarmers has implemented a separate risk management system in which measures were taken that reduce the risk of taking positions on raw material agreements. This system outlines who is authorised to take positions, up to what level and also under which terms agreements can be concluded. The authorisation boundaries were defined per Business Unit.

Currency and interest risks

Risk (financial objectives)
The purchasing of raw materials and the conclusion of sale and purchase agreements may result in currency risks. If raw materials are purchased in foreign currency then the risk exists that due to rises and/or falls in exchange rates the purchase prices of raw materials may not correspond with the change in raw material prices in the market. The potential differences that result from this cannot necessarily be passed on in the sales prices and can therefore affect gross profit.

Control measure
Raw material positions are purchased in local currency. If positions are entered into in a foreign currency then they are immediately hedged by means of forward currency contracts and/or other financial instruments. The Governance, Risk & Compliance Team follows compliance with the principles, which were formally established in the purchasing risk management policy, accurately.

Credit and liquidity risks contracting parties

Risk (financial objectives)
Credit risks can occur if contracting parties of ForFarmers, like suppliers or buyers, do not comply with their contractual obligations. Non-compliance with contractual obligations may affect the result of ForFarmers. If buyers do not or potentially no longer comply with their obligation then this results in a write-off or provision for the outstanding claim. If suppliers do not comply with their obligation then this may result in, for instance, inefficiencies in production processes.

Control measure
The contracting parties are assessed on a number of criteria. If required, additional arrangements are agreed on, including the establishment of additional securities. If required, possible risks are insured. The correct settlement of obligations and developments at contracting parties are followed accurately. With regard to buyers, ForFarmers introduced a new system in 2015 that controls the monitoring of timely collection of outstanding claims. Strict arrangements were also agreed on regarding the maximum outstanding amounts per customer as well as applicable payment terms.
Due to the difficult market conditions of previous years the credit risks have increased, in particular in the swine industry. ForFarmers contacts contracting parties where credit and liquidity risks increase at an early stage.

Liquidity risks

Risk (financial objectives)
ForFarmers must always be able to comply with its financial obligations. In 2014, ForFarmers concluded a new funding agreement (multicurrency revolving facility agreement) with ABN AMRO Bank, Rabobank, Lloyds Bank and BNP Paribas that is free from securities into which the funding of the company with ABN AMRO Bank and the Rabobank respectively the funding of BOCM Pauls with Lloyds Bank was transferred. The agreement has a term up to 31 January 2020. The amount of the funding amounts to a maximum of € 300 million of which a nominal amount of £ 40.0 million (€ 54.5 million) was used. Based on the funding agreement loan covenants were established that ForFarmers must comply with. ForFarmers holds liquid assets of € 88.3 million as at the end of the year. The balance of the loans and the liquid assets is € 33.3 million in the positive.

Control measure
ForFarmers monitors the liquidity position by means of periodic reports to ensure that sufficient liquidity is available to the group to comply with the obligations. In addition the financial headroom is monitored to ensure the group remains within the imposed loan covenants.

Pension risks

Risk (financial objectives)
The applied pension schemes of the Dutch and Belgian companies are defined contribution schemes that were placed with insurance companies on 1 January 2016. This implies that these Business Units are only held to pay the stipulated contributions to the insurance companies. In the German Business Units there is an in-house defined benefit scheme for a number of people. External developments may have a negative impact on the level of the provision to be booked by ForFarmers.
In the United Kingdom up to 30 September 2006 the legal predecessor of ForFarmers UK operated a defined benefit scheme. This scheme was closed to further accrual on 1 October 2006. On that date a new scheme was implemented on the basis of defined contribution. The obligations in the context of the defined contribution scheme were placed with an insurance company.
External developments may have a negative impact on the equity position of the pension fund and could imply that ForFarmers UK needs to make additional payments.

Control measure
The risk management model of the investments for the pension scheme in the United Kingdom is assessed periodically. The implementation of the investment policy is in the hands of a fiduciary manager.

Quality risks

Risk (strategic objectives: Reputation)
The quality of raw materials is of essential importance for the production of safe and reliable compound feed. There is a risk that due to contamination of products or cross-contamination during the production process the finished products of ForFarmers do not comply with imposed requirements.
Apart from claim risks and the costs of potential recall actions, there is also the risk that customer confidence may drop, which may affect turnover and gross profit.

Control measure
ForFarmers is affiliated with several cooperative ventures in various countries. The objective of these cooperative ventures is to ensure feed safety. To aid this, knowledge is shared in respect of, monitoring, quality control, tracking and tracing and crisis management and specific arrangements were agreed on about the choice of raw materials and suppliers.
These choices are based on a solid and objective risk analysis from the origin of a raw material up to the actual delivery.
ForFarmers also applies its own procedures and uses instruments to signal potential contamination at an early stage and to subsequently take adequate measures. Analyses are performed at in-house laboratories and by external parties.

Market risks

ForFarmers follows the developments in the market accurately and adapts its policy, if so required. Multiple market risks are possible.

Size of livestock herd and animal diseases

Risk (strategic objectives: Sustainability)
As a result of the changes in the size of livestock herds and the outbreak of animal diseases the demand for raw materials and/or compound feed may fluctuate, which may affect the results of ForFarmers. The size of livestock herds is influenced by a number of factors, including prices of agricultural products and the costs of compliance with legislation and regulations, including environmental legislation and regulations. Animal diseases may have a negative effect on the number of animals. Animal diseases can result in transport restrictions that are imposed by official authorities.

Control measure
ForFarmers limits these risks due to the geographic distribution of activities and a distribution of the activities over various animal breeds.

Price development of energy and fuel prices

Risk (financial objectives)
A part of the costs of ForFarmers consists of energy and fuel costs. Changes in these prices influence the costs of production and transport of the products of ForFarmers. Higher costs cannot always be passed on in sales prices, which may have an adverse effect on the result. In previous years the price of energy and fuel were relatively volatile.

Control measure
ForFarmers established a purchasing policy for the purchasing of energy. Part of this policy is to, where possible, hedge price risks via financial instruments and commodity agreements. The enforcement of this purchasing policy is monitored. Developments on the markets for energy and fuel are followed intensively.

Amendments in legislation and regulations

Risk (operational objectives)
Amendments in legislation and regulations at the European, national or local level may affect the activities of ForFarmers or its contracting parties. This concerns, among other things, legislation in the area of the environment, food safety and production processes.

Control measure
ForFarmers follows the developments in the area of legislation and regulations that are important to ForFarmers and its contracting parties closely and, if so required, adjustments as a result of amended legislation are implemented. Compliance with legislation within ForFarmers is determined through, among other things, periodic reviews.