The Group adopts a risk approach appropriate to the business activities being conducted, and the Board retain responsibility for regularly reviewing risk management strategies. Risks and uncertainties for the business are classified into two main categories, Financial and Operational, and the Board monitor such risks having developed policies for managing the uncertainties they bring. The monitored risk categories and the main policies for control are as follows:
Financial Risk Management:
The Group policies for managing treasury risks are developed and approved by the Board and are designed to minimise exposure to market volatility they include:
Interest Rate – While currently most of the Group’s term debt is floating base rate linked, the Board constantly reviews its option to fix the rates attached to this debt through the use of interest rate swap derivatives. Fixed rate term finance is generally used for the acquisition of vehicles.
Foreign Currency – The main currency related risk to the Group arises from the forward purchasing of imported raw materials for our Glasson business. This risk is mainly managed by entering into currency purchase agreements at the time the underlying transaction is completed. The fair value of these contracts is not material. As at the year end the principal amounts relating to forward purchased currency contracts were £8,529,816 (2016: £6,342,105).
Commodity Price - While the Group does not engage in the taking of speculative commodity positions, it does have to make significant forward purchases of certain raw materials, particularly for use in its animal feed manufacturing activities. Position reporting systems are in place to ensure the Board is appraised of the exposure level on a regular basis, and where necessary hedging tools, primarily wheat futures contracts on the London LIFFE market, are used to manage price decisions.
Credit – A significant proportion of the Group’s trade is conducted on credit terms and as such a risk of non payment is always present. Detailed systems of credit approval before initial supply, the operation of credit limits and an active credit control policy act to minimise this risk and historically the incidence of bad debts is low. The grain trading business has exposed the Group to certain substantial customer credit balances, and to assist in mitigating this perceived risk, a credit insurance policy has been purchased to provide partial cover against default by certain customers.
Finance Availability – Fluctuating commodity prices can adversely impact working capital levels, and the Group therefore has to maintain adequate financial resources to accommodate unexpected, but foreseeable trading patterns and conditions. The Group has historically operated with banking facilities that provide healthy headroom above the anticipated maximum requirement as projected in working capital cycle forecasts. This policy continues, and debt facilities are in place with HSBC Bank Plc which includes a significant element of committed facilities through to 2020.
Internal Controls – As the Group operates across a number of different markets in both its Agricultural and Specialist Retail segments, strong internal controls are required to ensure the business is not exposed to financial irregularities or losses that are not readily identifiable. Such controls include policies for the proper authorisation of the procurement of all products and services, and the sanctioning of expense expenditure and employment costs. These policies are principally controlled by the Management Boards of the operating subsidiaries of the Group, who meet on a regular routine basis. The Group Chief Executive and Finance Director attend all these meetings and undertake business and financial reviews of subsidiary activity with particular attention paid to the monitoring of actual performance against budget.
Operational Risk Management:
Trading concerns are regularly reviewed in routine Management Board meetings of the operating subsidiaries of the Group, with conclusions reported to the Board. Existing identified risks include:
Customer Loss and Competition – There is a constant risk of customer loss from increasing competition in the agricultural sector as the industry continues to consolidate. The Group continues to counter this risk by pursuing a sensible growth strategy to increase its market share primarily through geographic expansion and acquisitions. The Group specifically seeks to maintain a broad spread of activities across the main agricultural input areas to minimise threats affecting any particular farming enterprise. Significant investment continues in the Company’s sales channels, both in terms of the traditional direct teams and new trading desk facilities.
Brexit – The decision for the UK to exit the EU has created a considerable amount of business uncertainly throughout the whole economy, exacerbated within the agricultural sector due to the importance of the Common Agricultural Policy (CAP) to the income of many farmers. Some relief to the specific uncertainty was provided by the UK government announcement, in August 2016, that it would guarantee the same level of funding for farmers after an EU exit and through to 2020. This political support timeframe was then subsequently extended to the end of the current parliament in 2022 by the re-elected Conservative government following a manifesto commitment. Further information from the government, detailed at the Oxford Farming Conference, indicates funding may be extended to 2024. It is also likely that future funding will switch emphasis from the current acreage basis to focus on production and environmental issues, with a recognition of problems faced by farmers in less favoured areas. The variation in changes to the incomes of certain categories of customers as a result of restructured support payments could impact the performance of some product group income streams for the business. The Board will continue to monitor developments and any new policy indications issued by government with a view to formulating appropriate responses at the earliest opportunity.
Sterling Appreciation - Following the Brexit referendum decision in June 2016, the most immediate impact affecting the business related to the fall in the value of Sterling, which while having an adverse effect on some input costs such as fuel, it also created an immediate improvement in the value of many farm products, particularly grain. Additionally a lower exchange rate also benefited farmer customers who were in receipt of EU support payments calculated at fixed Euro rates across the community. When translated into Sterling, as the payments are received in the UK, this resulted in higher level of income than in previous years. Over the last year, there has been some appreciation in the value of Sterling against the US dollar, but limited movement against the Euro. Any marked appreciation against these important currencies is likely to be detrimental to the overall income of the Group’s farmer customer base, and therefore could adversely impact demand for the Company’s products.
World Commodity Prices – During 2015 and 2016, the value of grain and dairy commodities was depressed on a worldwide basis. This was a result of cyclical over production which coincided with geo-political issues such as the Russian ban on the importation of Western food products and the reduction in Chinese demand, which followed a period of economic uncertainty in that critically important import market. The effect of this global price weakness was immediately felt in the UK, where farmers responded by reducing costs and slashing production. The resultant fall in demand for many product categories had a detrimental impact on the Group’s activities and took some time to recover as confidence only slowly returned as prices eventually improved. The Board therefore acknowledges that the Group’s performance can sometimes be affected by circumstances beyond its control, but acts to minimise such risks through its policy of maintaining a diverse product offering, of appeal to a wide cross section of farming enterprises, so that a severe issue in one sector does not impact the entire Group.
Manufacturing Productivity – Much of the Group’s feed business is conducted on a customer “made to order” basis. This requires sophisticated order processing, manufacturing and delivery systems, as low lead times can provide a competitive advantage. The breakdown of any of these systems, through mechanical fault, weather and traffic disruption, or computer malfunctions and errors can create the risk of order fulfilment failure. The Group protects against this through the operation of multiple supply points, with third party manufacturing arrangements in place, and the back up of all IT systems supported with a disaster recovery plan. The increasing use of Customer Relationship Management (CRM) systems allow for higher levels of pre-emptive order processing, thereby encouraging customer retention. Efficient manufacturing and quality control compliance regimes, independently audited from time to time, also contribute to minimising the risks of such productivity failures.
Environmental – In accordance with the Group’s corporate social responsibility commitments, all activities are planned so as to limit environmental risks and adverse impacts, but a number of larger operating sites require a specific Environment Agency regulated permit to carry out certain activities. The continued efficient conduct of such activities on those sites is therefore dependent on compliance, to the regulator’s satisfaction, with the specific terms of the permits which have been issued. Non-compliance with permit terms could result in the prohibition of regulated activities at those locations, thereby adversely affecting the Group’s ability to conduct business connected to those activities. To effectively manage these situations and minimise risks of non-compliance the Board oversees the operations of an Environment & Regulatory Compliance Management Committee, which consists of a number of senior managers within the Group who have specific experience and responsibilities for the activities carried out on the regulated sites.
Licenced Activities – The Business requires a considerable number of governmental and other regulatory authority approvals and licences to conduct many important activities within the Group’s operations. The loss for whatever reason of any such approval or licence could have a detrimental impact on part or all of the performance of the Business. Such examples might include commercial vehicle operators and consumer credit licences issued by national regulators, explosive and other hazardous goods licences issued by local authorities, and industry regulated registrations required to legally supply certain product categories. The Group manages these obligations through a process of having a named individual with specific responsibility for each type of approval, who can provide regular updates on issues connected with that obligation to the appropriate Management Board Meeting.
Supply Chain Efficiency – The Group’s considerable inventories both in the retail businesses and as raw materials for the manufacturing activities are vital to the success of the organisation, and disruption to this supply would damage revenue streams. To minimise this risk, the Group operates partnership relationships with as many suppliers as possible which endeavour to ensure that optimum stock levels are maintained in Group warehouses, in wholesaler locations or within committed supplier facilities. A project team works to optimise stock turn ratios while ensuring adequate availability through challenging seasonal cycles.
Reputation – The Group’s trading philosophy is to seek to be the “Supplier of Choice” to its customers. To achieve this, a reputation for quality products, service and value for money must be maintained. Through a comprehensive employee Information and Consultation policy, all members of staff and local management are tasked with enhancing the Group’s reputation in the eyes of customers and all other stakeholders of the business. The Group’s corporate plan is communicated to management at various levels within the business to facilitate a strong understanding of the ethos and culture necessary for continued success.
Fraud - Difficult general economic circumstances, evolving trading channels and new methods of communication with customers and suppliers may increase the risk of fraud being perpetrated on the Group. The Board has recognised this increased risk, and continually reviews internal systems and controls, addressing areas of identified weaknesses including any matters raised as part of the Group audit process.
Paul Roberts Finance Director
30 January 2018