Risk Management

Risk Management Approach

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. ForFarmers acknowledges the importance of good internal risk management and control systems, and strives for a high level of risk awareness in the organisation by actively monitoring risk management. This system is entrenched in the organisation, all the way from the Executive Board and the Executive Committee, under supervision of the 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 group corporate governance & compliance team gives risk and compliance workshops and facilitate self-assessment of the processes by the business units. Key officers (risk owners and risk managers) are designated for all major risks and are accordingly 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). An overview of the process executed within ForFarmers is as follows:

 

Internal environment

The Executive Board, being ultimately responsible for all aspects of risk management, has appointed a Risk Advisory Board (‘RAB’) to execute, monitor and report on this topic. The Executive Board gives account to the Board. The RAB comprises the CFO, Director Supply Chain, COO UK, the Director Accounting, Tax and Treasury and the Risk Manager. 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 and possible to take additional control measures. In addition there is a Purchase Risk Board (‘PRB’) that needs to approve purchases and pre-sales contracts exceeding the authorization or exposure limits as described in the risk policy. The PRB meets at an ad-hoc basis when approval is requested by Purchase or business unit directors.

ForFarmers has a Code of Conduct and a Whistle-blower Policy, to optimally ensure that its employees act ethically and follow the local rules and procedures.
ForFarmers has a regular Planning & Control cycle, with which financial risks are mitigated. The monthly result reports, the quarterly forecast for the current year, the annual next year’s budget, and the annual 5 year forecast planning and scenario analyses all form part of this cycle. The Executive Committee and local Management Teams discuss the content and essence of each of these reports. Furthermore, the Executive Committee discusses with the Board whether the financial performance meets the expectations.

Risk appetite

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

Strategic objectives

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

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

  • Sustainability: Key topics for ForFarmers are sustainable raw materials, the environment, energy usage, 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.

  • Safety: ForFarmers considers providing a safe and good working environment for all employees, temporary contracted staff, contractors and visitors essential.  Accordingly, ForFarmers applies a very low acceptance level and strives to zero LTI's.

Operational objectives

Purchasing raw materials is inherent to the business practices of ForFarmers. Prices of raw materials are prone to fluctuate substantially. ForFarmers accordingly 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. In the execution of procurement acitivities within the boundaries of the risk policy, occassions can occur whereby price fluctuations of raw material prices cannot fully be passed on the customers, which can result in the development of the gross profit coming under pressure.  

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. ForFarmers hedges currency positions with regard to raw materials, or for other purchases for operational activities. 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 it can always meet its financial obligations.

Compliance

ForFarmers has a very low risk acceptance level for risks regarding complying with legislation and regulations. 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 of Conduct 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.

Non-financial and emerging risks

ForFarmers continuously monitors relevant internal and external trends and potential disruptors in the industry. These include, but are not limited to:

  • Climate risks: A potential further global warming could have damaging economic and social consequences. It is difficult to estimate when and to what extent these risks could manifest themselves. Low(er) water levels in rivers can disrupt the transportation of raw materials to the ForFarmers mills and therefore can have a negative impact on the ForFarmers inbound logistic costs. Climate change can impact harvests and consequently the price of raw materials.

  • 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.

  • Regulations and environmental laws and its impact on the feed business: There is an increasing pressure on the agricultural sector in general and the livestock industry in particular to reduce its environmental impact (carbon footprint) and to improve animal health and welfare. This pressure could lead to measures, laws and regulations that have an effect on the size of herds in a country or on the expansion possibilities of farmers.

  • Brexit: There is still large 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. In addition there is a risk of delay of importing raw materials due to the implementation of more custom controls. Finally, there is the possibility that farmers, particularly in the swine and poultry 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.

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

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Risk Description Control measure
Strategic objectives
Price development and availability of raw materials Prices of raw materials can be volatile and are impacted by external factors like the quality and size of harvests, demand from the biofuel industry and speculative trading. ForFarmers wants to be sure of supply and therefore takes forward positions and keeps inventories of raw materials, thus creating a price risk for ForFarmers. ForFarmers closely follows developments of prices and availability of raw materials. A risk management system has been implemented that outlines who is authorised to take positions, up to what level and under which terms agreements can be made. Longer-term pre-sales contracts for customers are immediately hedged for 85%. The authorisation boundaries are defined per Business Unit.
Size of livestock herd and animal diseases The size of livestock herds can change, e.g. because of legislation or animal diseases, including transport restrictions which may be imposed by official authorities. As a result, the demand for raw materials and/or compound feed may fluctuate, which may affect ForFarmers’ results. ForFarmers limits these risks by spreading activities both geographically and over various animal species. In the event of an outbreak of animal disease, an (international) crisis team closely follows developments and instructs the business units concerned on actions to be taken and on which protocols should be followed. In such cases, the crisis team stays in close contact with the relevant authorities.
Development of energy & fuel prices Changes in energy and fuel prices affect ForFarmers’ production and transport costs. Cost fluctuations cannot always fully be passed on to customers, potentially adversely impacting results. Developments on the energy and fuel markets are closely monitored. ForFarmers has an energy-purchase policy. Price risks can be, where necessary and depending on market circumstances, hedged by financial instruments and commodity contracts. The enforcement of this purchasing policy is monitored.
Mergers & acquisitions ForFarmers aims to grow organically and 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 an M&A team that works closely with the Executive Committee members, the Directors of the BU and other relevant key employees. In addition there is an integration script with relevant policies, and periodic review of synergies and integration status with the Executive Board and Supervisory Board.
Operational objectives
Health & Safety In general, ForFarmers runs safety risks in its operating activities due to the nature of its business, in its factories, during transport and on farm. Consequently, sufficient vigilance is required by all employees and contractors to avoid incidents, reduced motivation of employees, claims and reputational risk. Safety plans are drawn up for all ForFarmers’ locations. The Company also places a lot of importance on creating heightened awareness, as well as training all staff (this also refers to logistics safety), completing inventories in all factories as regards safety aspects and reporting on the status of any shortcomings and actions to resolve these.
Feed safety The quality of raw materials is of essential importance for the production of safe and reliable compound feed and delivery of Total Feed solutions. 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 of loss of customers. In the various countries, ForFarmers works in several partnerships to ensure maximum feed safety. ForFarmers subscribes to the Sedex code and requires its suppliers to do the same. Knowledge is shared in respect of monitoring, quality control, tracking and tracing, and crisis management, including performing analyses to signal potential contamination at an early stage and to subsequently take adequate measures.
Risk Description Control measure
Business continuity Operational business continuity is essential to ForFarmers and its customers who rely on secured supply of feed for their animals. Business continuity can be jeopardized by disruptions in the inbound logistics chain, e.g., from obstruction of the water ways on which raw materials are transported. Business continuity can also be impacted if production in one of ForFarmers’ larger mills is temporarily disrupted. ForFarmers has disaster recovery protocols for events which may impact business continuity, stipulating who to contact, which steps to take to minimize the disruption and which next steps could be required.
Cyber security Organisations are increasingly confronted with cyber crime. Failure to adequately restrict access to ICT systems from internal and external sources, or to implement effective back-up and recovery procedures, may result in disrupted operations, unauthorized transactions or changes to data, unauthorized use of information and knowledge, reduced data integrity or loss of data. Several tests were conducted in 2018 to increase the awareness of IT risks among employees. The outcomes of these tests led to further improvements to the relating procedures. In addition ForFarmers hired a Group Information Security Manager and the final phase of the transition to its external back-up data servers was realized.
Financial objectives
Currency and interest risks The purchase of raw materials and the entry into sale and purchase agreements may result in currency risks, if raw materials are purchased in a foreign currency other than the currency of the feed sales. The potential currency differences that result from this cannot necessarily be passed on in the sales prices and can therefore affect gross profit. In principle, raw material positions are purchased in local currency. If positions are entered into in a foreign currency, they are immediately hedged by means of forward currency contracts and/or other financial instruments. The Executive Committee closely monitors compliance with the principles, which are formally established in the purchasing risk management policy, as part of the monthly reporting cycle.
Credit and liquidity risks contracting parties Credit risks of customers may lead to buyers who do not, or potentially no longer, comply with their obligation, resulting in a write-off or provision for the outstanding claim. Credit risks of suppliers may lead to suppliers not complying with their obligation to deliver contracted raw materials, which may result in inefficiencies in production processes or ad-hoc purchases of raw materials at higher spot prices. ForFarmers actively reviews the financial situation of its customers. If required, additional arrangements are required such as providing collateral. In addition the credit risk of larger customers is insured. There are strict arrangements and order release procedures regarding the maximum outstanding amounts per customer as well as applicable payment terms, and a system is in place to signal and communicate with customers on overdue payments. On the supplier side, ForFarmers aims to do business with financially healthy and trustworthy counterparts.
Liquidity risks ForFarmers must always be able to comply with its financial obligations to ensure continuity of its operations. In 2014, ForFarmers entered into a multicurrency revolving facility agreement with ABNAMRO, Rabobank, Lloyds Bank and BNP Paribas for which no collateral is provided. The agreement has a maturity date of 31 January 2020. The facility amounts to a maximum of €300 million, which is still largely undrawn. In the funding agreement, loan covenants were established that must be complied with. ForFarmers continuously monitors the liquidity position and periodically its bank covenants.
Pension risks Changes in actuarial assumptions and other external developments may have a negative impact on defined benefit (DB) schemes, and therefore on ForFarmers funding these schemes. The pension schemes used in the Dutch subsidiaries are insured schemes (defined contribution (DC)), for which only the agreed premium must be paid. In the United Kingdom (‘UK’), a defined benefit (DB) scheme was operated up to 2006, after which it was closed. The risk thereof remains with ForFarmers. The risk management model of the investments for the closed pension scheme in the UK is assessed periodically, and its implementation is in the hands of a fiduciary manager. The current active DC scheme (as of 2006) is placed with an insurance company, meaning that no risk exists for ForFarmers as regards this scheme. There is no pension risk in Poland. In Germany, an in-house DB scheme applies for a limited number of people, and in Belgium, there is also DB scheme. The risks for these DB schemes cannot be mitigated, but are limited given the number of employees involved.
Risk Description Control measure
Compliance
Amendments in legislation and regulations Amendments in legislation and regulations at a 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, feed (and food) safety and production processes. ForFarmers closely monitors developments of legislation and regulations that are important to the business and contracting parties and, if so required, implements adjustments as a result of amended legislation. Compliance with legislation is determined through, among other things, periodic reviews.
Taxes ForFarmers operates in five different countries with different tax systems. The risk exists that ForFarmers’ 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 and pays its tax on time. ForFarmers 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, including various meetings during the year which take place with tax authorities in the different countries. ForFarmers’ staff are actively encouraged and trained to keep their knowledge on legislation up-to-date.

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Risk response

The GDPR regulation was enforced in 2018. Focus was put on complying with these new privacy regulations and improving privacy awareness throughout the organization. Implementation of the new regulations was managed centrally during 2018. In 2019, the further steps and implications of the GDPR regulation will be managed decentrally in the various business units to ensure compliance.

An increased focus has been put on Purchase risk, especially on pre-sales contracts after two incidents that took place in 2018. All commercial teams have again been made aware of the procedures and authorization levels by means of a series of workshops facilitated by Purchasing, Sales and Finance.

The development of energy prices has been a concern in 2018. Electricity, gas and diesel prices increased, resulting in an increase in both production and logistic costs. These costs could partly be passed on to customers. Energy and diesel prices will continue to be closely monitored.

During 2018, a larger acquisition was made in Poland, a new country for ForFarmers. A number of smaller acquisitions was also made in the existing countries of operations. Particularly given the size of the acquisition in Poland and the fact that it was in a new country, a structured and thorough approach was needed to implement the appropriate procedures. A pragmatic script was made comprising the ForFarmers policies which were also reviewed and updated. In 2019 focus will remain on the integration of the acquisitions, including a transition of Van Gorp Biologische Voeders and Algoet Voeders to the ForFarmers ERP system. The transition of Tasomix to the ForFarmers ERP system will follow later. Maatman, which was acquired in the Netherlands, was already transitioned to the ForFarmers ERP system in 2018.

Safety remained a key priority in 2018. The number of LTI’s remained too high. ForFarmers made investments in its mills with respect to safety measures. In addition, employees were trained with the aim to change their behaviour and embed risk awareness in their daily way of working. Risks at the farms of customer were also as­sessed, to increase safety of drivers and sales employees.

With respect to Animal Diseases, wild boars were detected in the south-eastern part of Belgium that were infected with African Swine Fever. A dedicated team was immediately installed to implement hygiene protocols and other measures aligned with national instructions. The ForFarmers swine sales force were provided with relevant health and safety boxes regarding hygiene protocols. Management is being informed frequently.

Increased focus was put on Business Continuity during 2018. A mill was reopened in Deventer (the Netherlands) that is fully dedicated to the production of non-GMO feed. A side effect of reopening this mill was that it created necessary spare capacity as the other mills in the Netherlands were approaching maximum utilisation levels.

ForFarmers started a review of its business continuity and factory disaster recovery protocols across all countries. This will be further reviewed and refined during 2019. The focus is on sharing best practices between countries and harmonizing the procedures in case of emergencies. ForFarmers’ Business continuity procedures were proven to be adequate when the Company was put to the test during the temporary closing of a lock in the Netherlands, which blocked the access by water to four factories in total. Later in 2018, raw materials could not be delivered to the Deventer mill as its entry lock was closed due to the low water level in the river. A dedicated team was installed to ensure the continuity of supply of raw materials, as delivery of feed to customers was the key priority. Transport routes were diverted, using tankers to supply the mills with raw materials. This resulted in higher inbound logistic costs.

Control and monitoring

During the period under review the Executive Board, assisted by the internal auditor, systematically reviewed the design and operation of the internal risk management and control systems. The effectiveness of the design and operation of these systems was discussed with the Audit Committee, the Board and the external auditor.

ForFarmers has various tools, such as the Enterprise Risk Management (‘ERM’) framework and the In-Control Framework (‘ICF’) to control, monitor and annually test the risks and the mitigating control measures. The Executive Board and the Board discuss and review these tests. The ICF controls are reviewed twice a year via a self-assessment by the managers of the control owners, followed by a full review by the Risk Manager and a sample test by the Internal Auditor. The ERM risks and controls are reviewed and tested once a year, in collabora­tion between the risk owners and the Risk Manager. Finally a Tax Control Framework (‘TCF’) has been designed in 2018 to control the risks concerning corporate income tax, VAT and wage/labour taxes. The TCF has been implemented in the Netherlands in 2018 and will subsequently be implemented in the other countries.
In addition to these predefined frameworks, ForFarmers’ Internal Auditor performs its own audits (approved by the Supervisory Board) on the risks, controls and procedures within ForFarmers. The External Auditor is engaged to pro­vide assurance on the consolidated financial statements.

Based on these various actions aimed at controlling and monitoring risks, the managers of the ForFarmers business units 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.

Despite all the control measures, some things still went wrong in 2018

Despite the risk management process in place, several shortcomings were identified. Corrective actions have been implemented to reduce the likelihood of reoccurrence in the future. The main shortcomings in 2018 were as follows:

In Germany, a pre-sales contract, which was agreed with a customer, was not communicated timely to Purchasing, amongst others because of a short holiday of some of the key employees involved. Driven by a strong increase in raw material prices, a limited loss was incurred. As a result, all members of the sales teams that are authorized to close pre-sales contracts with customers, as well as the Procurement teams, Finance and Business Unit Directors, were again trained in the pre-sales procedures and processes.
Also in Germany, an excessive open purchase position in Moist products was taken for which no sales contract with customers was sought and without asking for approval from the PRB. As raw material prices did not materially change, no financial impact resulted from this. To prevent this from happening in the future, DML Managers were trained in the policies and an automated report was also implemented to monitor the open risk position. This report is now monitored by the local teams on at least a weekly basis, and on a Group level on a monthly basis.

In the Netherlands additional costs were incurred in the second half of 2018 due to the blockage of the Eefde and the Deventer lock, as described above, which could not be passed on to customers.  ForFarmers’ mills are in general located on rivers or canals and this is not always the case for its competitors. It was therefore not commercially possible to pass on the extra logistic costs to customers. As disclosed this had a negative impact on the financial results in the Netherlands and Germany.

ForFarmers was confronted with a relatively high number of employees leaving the organisation during 2018 in the United Kingdom. Based on the outcome of the exit interviews, follow-up actions are being implemented to retain employees.

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. Several new risks are emerging, which are being followed closely, and which may require changes to the key risks for which mitigating control measures need to be established. Despite a well-functioning risk management process, there is still room for improvement, specifically in adhering to the existing procedures. This was highlighted by the incidents that occurred in 2018.