Risk appetite with regard to the most important risks

The Executive Committee has determined that in general, ForFarmers aims for a low risk profile. This forms the guiding principle for the assessment and taking of risks in the realisation of strategic goals.
The risk profile and risk appetite is evaluated annually by the Executive Committee and risk managers, and wherever necessary adjusted to the changing market conditions or a revision of strategy.

This is so that the Company can optimally weigh up handling decisions and commercial or strategic goals with the associated risks/opportunities. 

ForFarmers has grouped the 21 main risks into the four key categories, for which control measures are determined and implemented.

The desired and established risk appetite can differ per category or sub-category as described below:

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Strategic objectives

To be able to meet the growth objectives within the strategy, both organically and through acquisitions, (substantial) investments will be made. In this respect, ForFarmers has an average to high risk appetite.
However, when pursuing strategic business objectives, there are two specific areas where ForFarmers applies a very low to low risk appetite:

• Reputation: reputation is crucial for the confidence that customers, suppliers and society place in ForFarmers.

• Sustainability: ForFarmers places great importance on sustainable raw materials, the environment, energy, waste reduction, animal health and welfare, people and society.  When controlling these risks, ForFarmers applies ‘economic sustainability' as a guiding principle. This means that each and every initiative for sustainability must be commercially feasible both to customers and to ForFarmers.

Operational objectives

An inherent aspect of the business is the purchase of raw materials, the prices of which are prone to fluctuate substantially. Because of the nature of the business and the corresponding volume of necessary raw materials for the production of feed, the Company faces risks relating to these purchases. This is why the purchasing policy applies a low to average risk acceptance level, and for the quality of purchased products, a very low risk acceptance level. To control such purchasing risks, the risk limits are defined on the basis of the ‘value at risk’ principle that applies to the organisation as a whole, translated for the various business units.

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 information of ForFarmers, financial or otherwise. Currency positions with regard to raw materials, or for other purchases for operational activities, are hedged by ForFarmers. Currency risks of assets outside the Eurozone are partly hedged through funding in the same currency. Currency risks relating to the annual result and undistributed dividends are 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 and risks are, if so required, hedged by means of swaps and other financial instruments. ForFarmers ensures, through a robust equity and liquidity position, that the Company’s financial obligations can always be met.

Compliance

ForFarmers has a very low risk acceptance level for risks regarding compliance with legislation and regulations. The Company has a Code of Conduct and a Whistle-blower Policy. The Code of Conduct contains the business principles, values and rules of conduct that are applicable to everybody working at ForFarmers. All ForFarmers employees must be familiar with the Code of Conduct and be aware of its implications. New employees receive the Code of Conduct in their own language and they are tested on its enforcement with the help of case studies. They are also asked to sign the Code of Conduct. The Code is regularly discussed and highlighted internally. ForFarmers has a zero tolerance policy with regard to breaching the ForFarmers Code of Conduct. Both the Code of Conduct and the Whistle-blower Policy serve as control measures with respect to combating corruption and bribery.

Methodology of the internal risk management and control systems

In order to be able to realise strategic, operational and financial objectives, ForFarmers has to seize opportunities and run risks. It is therefore important to properly identify, weigh up and manage risks; the primary goal of good risk management. The Executive Committee acknowledges the importance of good internal risk management and control systems, and strives for a high level of awareness in the organisation by actively monitoring risk management. This system is entrenched in the organisation, all the way from the Executive Committee, under supervision of Supervisory Board (‘the Board’), to all operational and financial departments. This includes the tone at the top, and the hard and soft control measures. The corporate governance & compliance team give risk and compliance workshops and facilitate self-assessment for the relevant business units and processes. For all major risks, key officers (risk owners and risk managers) are designated who are tasked with risk management as part of their role.

The methodology used by ForFarmers for the control and management of the different risks is based on the model formulated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and in line with ISO31000. In June 2017, COSO issued a new publication called “Enterprise Risk Management - Integrating with Strategy and Performance”. ForFarmers is studying this publication.

Management, Monitoring and Reports

All aspects of risk management (execution, monitoring and reports) are under the responsibility of the Executive Board, which has appointed a Risk Advisory Board (RAB) hereto. The executive Board gives account to the Board. The RAB is composed of the CFO, Director Supply Chain, Director Reporting, Tax & Risk. The Internal Auditor participates in meetings as an observer.

The RAB monitors the control of the main risks based on the periodic reports. These reports serve, amongst others, as a tool to measure ForFarmers’ risk appetite as regards the actual risks, and where necessary to take additional control measures.

The managers of the business units have to sign a Letter of Representation (LOR) twice a year to declare that they comply both with the (local) laws and legislation and the internal control rules, including the Code of Conduct. The LOR, in addition to the Whistle-Blower Policy, provides the opportunity to report potential fraud and incidents.

Risk Management in 2017

In 2017, risk owners followed additional training sessions on conducting self-assessments of risks. The 21 main risks were assessed twice in this manner, including an analysis of the overall desired risk profile compared with the current risk profile. The corporate governance & compliance team discussed the outcomes of this with the risk owners and where necessary, action plans were drawn up to improve the control of these risks.

The data protection legislation project will be pursued in the ‘compliance’ risk area. This project concerns further controlling the use of data protection-sensitive subjects and the associated risks within the limits of the legislation and regulations. In 2017, the decision was made to appoint a Privacy Officer who will make a risk inventory with the help of an external expert.

In 2017, the RAB met four times to discuss the status and reporting of the risk management system.

In general, the profiles of the risks stayed the same or decreased in 2017; the risk profile ‘Size of livestock herd and animal diseases’ increased slightly. Dairy livestock in the Netherlands decreased by almost 10% as a result of phosphate measures implemented there. The risk of loss of volume of Total Feed solutions remained low through the introduction of new tools in the sector, and through intensive guidance of customers by ForFarmers advisors. The Fipronil affair in the layers sector led–especially in the Netherlands–to financial loss for individual poultry farmers. Given the spread of activities, this affair had a very limited impact on the level of ForFarmers.

The risk profile ‘Credit and liquidity risks contracting parties’ decreased in 2017. This was because of the improved financial positions of a large proportion of customers as a result of overall higher prices, primarily for milk and swine. In 2017, a limited amount of the overdue receivables was proactively converted into loans, secured by collateral as much as possible, and with clear arrangements as to interest. Customers with credit limits of more than €250,000 are discussed by the Executive Committee in their monthly meetings. Most of the receivables are insured. 

The pension risk also fell in 2017. After reaching an agreement with the trustee of the pension fund in the United Kingdom, an extra sum was paid in to the British pension fund in January 2017. This is in line with an adjustment of the inflation definition; from RPI (Retail Price Index) to the lower CPI (Consumer Price Index).

In the past year, attention was also devoted to the risks associated with mergers and acquisitions (‘M&A’). One of the pillars of the Horizon 2020 strategy is growth through M&A. For an acquisition to become a success, it is important to draw up a good business plan to be able to assess an appropriate valuation. Proper implementation of the integration plan is also important. Management is aware of the risks associated with M&A transactions and is implementing risk mitigating measures. 

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Main risks and their control measures

The main risks and control measures as defined by ForFarmers’ Executive Committee are shown below:

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Apart from the regular items on the agenda for the RAB, attention was also devoted in 2017 to the following subjects, which led to additional control measures:

Climate risks

One of the main risks companies are faced with is climate change. Greenhouse gases are emitted both in the production and the logistics processes of ForFarmers. These contribute to potential further global warming, which could have damaging economic and social consequences. It is difficult to estimate when and to what extent these risks could manifest themselves. The water levels in rivers can have an influence on the ForFarmers costs of logistics forwarding. One ForFarmers factory risks being left inaccessible because of high water. ForFarmers has included the reduction of greenhouse gas emissions in its sustainability objectives. Every quarter, the progress of various implemented relevant parameters is reported to the Executive Committee, and additional points for action are determined where necessary. In 2018, this process will be fine-tuned further.

Information Technology (IT)/cybersecurity

Organisations are increasingly confronted with cyber-crime. Several tests were conducted in 2017 to increase the awareness of IT risks among employees.
The outcomes of these tests led to further improvements to the policy. More attention will be devoted to this subject in 2018.

Feed Fraud

In the production of feed, ForFarmers is dependent on the quality and provenance of the raw materials and ingredients added to the feed. There is a risk that the raw materials and/or ingredients bought do not comply with the legal standards or with the quality description based on which they were bought, in order for the counter party to obtain an economic advantage. These raw materials could be processed in feed and could therefore lead to a food safety risk. The risk of feed fraud, and the measures to be taken against it, is additional to the quality risks that ForFarmers could face as a result of the potential contamination of products or cross-contamination during the production process.

In 2018, the existing measures for quality risks were broadened to identify potential feed fraud at an earlier stage.

AMR (Anti-Microbial Resistance)

If antibiotics are used at too great a scale or too frequently, some bacteria may become resistant. The fact that some bacteria are no longer responsive to antibiotics prescribed to humans is a source of major concern for society. In certain countries, the agricultural sector still adds antibiotics to feed as a pre-emptive measure. In the Netherlands and Germany, sectoral agreements have been entered into to stop pre-emptive use of antibiotics in feed. ForFarmers works proactively in Belgium and the United Kingdom to stop or reduce the use of antibiotics. ForFarmers specialists are trained to discuss and put forward alternatives to customers. In 2018, this subject will continue to be focused on.

M&A

ForFarmers has a growth objective, which must be attained through both organic growth and growth through acquisitions. In making acquisitions there are inherent risks, such as in the area of due diligence, valuation, risk management, achieving synergy, management and integration. All of these factors can have a negative impact on ForFarmers’ results. ForFarmers has a team for Mergers and Acquisitions, which works closely on this subject with the Executive Committee members and the managers of the clusters. These control measures are regularly discussed in the Executive Committee and Supervisory Board meetings and fine-tuned wherever necessary.

Availability of biological (organic) raw materials

ForFarmers is a leader in the biological (organic) feed market, operating under the name of Reudink. There is increasing interest in animal welfare and good nutrition. The whole chain, from raw material to the final product, has to meet specific conditions to be able to justify the ‘organic’ seal. The risk exists that there is a shortage of biological (organic) raw materials or production capacity. This could damage Reudink’s market position. The RAB has discussed this and taken measures to properly monitor the availability of biological (organic) raw materials.

Strategy and disruptive developments

Both the consolidation occurring in the value chain and the increasing role of (big) data can affect the long-term value creation of ForFarmers and thereby the results of the Company. ForFarmers actively monitors changes in the market and actively takes part in various initiatives in order to stay tuned with developments. To properly be able to weigh up opportunities and risks, a designated ‘Disruptor team’ has been set up. Certain specific points for attention have been established for which steps should be taken in 2018. The Disruptor Team periodically reports to the Executive Committee on findings.

Impact of the announcement by the United Kingdom of its withdrawal from the EU

On 29 March 2017, the British government triggered Article 50 of the Lisbon Treaty and announced to the European Council its intention to leave the EU. There is an initial two-year period for the United Kingdom to reach a deal with the EU on its withdrawal and on the future relations between the United Kingdom and the EU, although this period may be extended.
At this stage, there is a lot of uncertainty about the exit process, the time it will take, and the outcome of the negotiations on the future deals between the United Kingdom and the EU.

As a result, there is uncertainty about the period for which the existing EU Member State legislation will still apply for the United Kingdom and which laws will apply to the United Kingdom after Brexit.

There is a risk that the exchange rate of the Pound sterling will (further) decrease versus the euro. This has an impact on the consolidated results of ForFarmers. Furthermore, there is the possibility that farmers, particularly in the swine and dairy sector, will expand their businesses leading to an increase of the self-sufficiency ratio. This requires investments to be made by the farmers. Whether and when a possible expansion of farm businesses will take place is therefore uncertain. ForFarmers is actively following the developments.

ForFarmers tax policy

ForFarmers operates in four different countries with different tax systems. The risks exists that the Company’s policy does not comply with local requirements as a result of the complexity of the various tax systems and legislation. ForFarmers’ tax policy is based on the principle that paying tax forms part of its social responsibility, and consequently complies with laws and legislation in the area of tax. ForFarmers’ risk appetite as regards taxes is low.

ForFarmers complies with its tax obligations and pays its tax on time. ForFarmers also monitors potential changes in the law and legislation both on a group level and local level, and anticipates upon them. In this respect, ForFarmers maintains an open line of communication with tax authorities. Over the year, various meetings take place with tax authorities in the different countries.

ForFarmers’ staff are actively encouraged to keep their knowledge on legislation up-to-date. The current procedures and processes facilitate cooperation between the Group and local staff in the various tax zones.

Conclusion

In the period under review, no significant shortcomings were identified in the design and operation of the internal risk management and control systems and/or no significant changes were made to these systems. The anticipated improvements to these systems are specified above. The Executive Board has discussed the design and operation of the internal risk management and control systems with the Audit Committee and the Supervisory Board.