1.5.2.1

Methodology

In order to be able to realise strategic objectives, opportunities need to be seized, which implies taking risks. An important part of good management is having a good risk management system in place to ascertain whether the Company’s strategic objectives can be realised within its risk profile. This forms part of fulfilling the corporate governance requirements. A good monitoring system enables the Executive Committee to determine the degree to which the organisation is 'in control'. Through an active risk management monitoring system, ForFarmers aims to create a high level of awareness of risk control. This system is entrenched in the organisation, all the way from the Executive Committee, under supervision of Supervisory Board, to all operational and financial departments. This includes the tone at the top, the hard control measures and the soft controls. Everybody contributes to identifying risks and opportunities, as well as to the associated control measures. The team corporate governance & compliance department, organises risk and compliance workshops and facilitates self-assessments for the relevant business units and processes. Key officers (risk owners and risk managers) tasked with risk management as part of their role are designated for all risks.

Risk appetite with regard to the most important risks

In general, ForFarmers aims for a low risk profile. Risk appetite differs by sub-category of risk. When realising our strategic objectives, the organisation accepts the associated higher risks up to a certain level. For some categories, ForFarmers has 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 further analysed the risks and the relevant control measures. The current risk profile was compared to the risk profile desired by the organisation, that has been updated in 2016.

ForFarmers has defined 21 major risks. There are control measures determined and implemented for each risk. These are periodically tested by the risk managers. A peer review also takes places on the application of the control measures. Every year, an evaluation takes place of the major risks to assess whether there are new risks or whether existing risks have become less relevant. Action plans are also set up if the risk control is insufficient to be able to realise the desired risk appetite.

The desired risk appetite for ForFarmers for the various risk categories is established as follows:

1.5.2.2

1.5.2.3

The risk appetite for each sub-category of objectives and the respective considerations are outlined below.

Strategic objectives

To realise the growth objective as part of the strategy and further expansion activities, international or national, major investments need to be made. ForFarmers has an average to high risk appetite 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 appetite:

• Reputation: Our reputation is crucial in respect of the confidence that our customers, suppliers and society place in ForFarmers. A very low to low risk acceptance level applies as regards reputation.
• Sustainability: ForFarmers places great importance on sustainable resources, the environment, energy, waste reduction, animal health and welfare, people and society. A very low to low risk acceptance level also applies here. 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 its customers and to ForFarmers.

Operational objectives

Due to the size of the Company and the high volatility of raw material prices, risks with regard to purchasing have increased in recent years. As a consequence, ForFarmers is confronted with a number of risks when realising its operational objectives. With regard to, inter alia, the purchase policy, a low to average risk acceptance level applies, and as regards quality of purchases a very low risk acceptance level. As a result of positions taken by competitors and the high volatility of raw material prices, controlling risks with regard to the purchasing of raw materials is an important factor. 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 ForFarmers’ information, 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 abroad are partly hedged through funding with borrowed capital in the same currency. The acquisition of an investment in a foreign company (outside the Eurozone) is not hedged. This also applies to the annual result and undistributed dividends. 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 comply with its financial obligations. This is guaranteed through a solid equity and liquidity position.

Compliance

ForFarmers has a very low acceptance level for risks regarding compliance with legislation and regulations. The Company has a Code of Conduct, which includes a Whistle-blower Policy. The Code of Conduct contains the business principles, values and rules of conduct that are applicable to everybody who works within ForFarmers. It is important to ForFarmers that all employees be familiar with the Code of Conduct and be aware of its implications. Managers regularly discuss this with their teams. New employees receive the Code of Conduct in their own language. Via an associated online training module, which can be accessed both from home and via the intranet at work, employees are given an explanation about the Code of Conduct and some dilemmas are presented by way of illustration. At the end of the module the employee is asked to sign the Code of Conduct.

ForFarmers has a 'Zero Tolerance' policy with regard to breaching the ForFarmers Code of Conduct.

ForFarmers’ tax policy is based on the principle that it believes that paying taxes is part of its corporate responsibility. The policy includes, amongst others, the following principles:

• ForFarmers’ risk appetite with respect to taxes is limited. ForFarmers is tax compliant and pays taxes when they are due and owed.
• ForFarmers has an open and transparent communication line to the tax authorities. During the year, several meetings with the tax authorities are conducted.
• Tax should be aligned with the business and ForFarmers does not have tax driven structures that are not in line with the business operating model and tax regulations.
• ForFarmers is active in multiple tax jurisdictions and hence there is a risk that if the nominal tax rate in a country changes, this has an impact on the effective tax rate of the Group. ForFarmers is currently active in the Netherlands, Germany, Belgium and the United Kingdom.
• Next to corporate income tax the policy is applicable to VAT, wage tax, social securities, (dividend) withholding tax, real estate tax and any other taxes and is applicable in the multiple jurisdictions in which ForFarmers is active.

The risk management system is entrenched throughout the organisation. Performance, monitoring and reporting of risk management is under the responsibility of the Risk Advisory Board, which is accountable for the outcomes thereof to the Executive Committee, the Audit Committee and the Supervisory Board. The Risk Advisory Board (RAB) consists of the CFO, Director Supply Chain, Director Reporting and the Manager Accounting & Risk.

The systems for risk management and internal controls of ForFarmers aim at optimally supporting the realisation of strategic and financial objectives. A suitably organised risk management and internal control system does not guarantee that the strategic and financial objectives are realised. Nor can it guarantee that human error, unforeseen circumstances, incorrect reports, fraud and non-compliance with legislation and regulations can completely be excluded.

Risk Management in 2016

In 2016, the Risk Advisory Board (RAB) discussed the status and reporting of the risk management system three times. Aspects such as scoping activities, setting priorities and assessing the most significant risks for ForFarmers were, among other things, discussed.

In 2016, a self-assessment was conducted at least twice by the risk owners for the 21 most important risks, which also analyses the desired risk level as regards the current risk level. These self-assessments are evaluated by the team corporate governance & compliance and discussed with the risk owners. Where any deviations are identified, these are discussed with the risk owners and action plans are set up to improve the control of these risks. With respect to these risks, a continuous assessment takes place of the internal control measures available and of the degree to which they are in line with ForFarmers’ risk appetite. By making use of internal guidelines, quality systems, audits, reporting and monitoring systems and insurance, the most important risks are controlled. These control measures have the objective of reducing to an acceptable level the chance that a risk occurs, and the potential consequences thereof, and guaranteeing the continuity of the business.

In 2016, risks were identified in the following areas, leading to additional measures from internal control:

• Safety: ForFarmers sees safety as an important precondition. The extent to which the organisation fulfils its safety objectives is measured based on the number of LTIs (Lost-Time-Incidents). In April 2016 an unfortunate accident occurred in the Beeliz factory. Further analysis was conducted on the safety measures. This led, in 2016, to the safety measures and the control of these safety measures being sharpened. A programme of investments was also embarked on to make sites safer. Finally, a tool was implemented to make an inventory of risks to ForFarmers’ employees on farm. Safety can be better ensured via this tool.
• Information Technology (IT): Organisations are increasingly confronted with cybercrime. ForFarmers has also seen this increase and has had a number of cyber-crime-related incidents in 2016. This led to greater attention being paid to these risks in 2016. An Information Security Committee was set up, headed up by the Information Security Manager, IT Director and the Director Reporting, which reports to the Risk Advisory Board (RAB). Alongside a number of IT security measures, several publications were made across the organisation on the importance of security and safeguarding of information. In 2016, the risks and internal measures were incorporated into the information security policy. It should also be noted here that these measures are not always of a technical nature, but also relate to behaviour of employees and their day-to-day awareness of sensitive information streams.

Monitoring and reports

The RAB is in charge of monitoring the performance of control measures. This monitoring is primarily based on the periodic report which shows the progress as regards the monitoring of the main risks. This report serves as a tool to measure the risk appetite of ForFarmers as regards the actual risks and where necessary to take additional control measures. In addition, in 2016 a number of additional control measures were taken in the area of ICT to increase the integrity of the IT systems.

As part of the control measures, ForFarmers asks the management of all its business units to sign a Letter of Representation (LOR) twice a year. In this LOR, they must declare that they comply with local and national laws, legislation and regulations as well as the internal rules of ForFarmers, including the Code of Conduct. The LOR also includes the possibility to report fraud and incidents, as well as the confirmation that the business units comply with the minimum internal control measures as included in the risk management system and the internal control framework system of ForFarmers. Cases of suspected fraud are directly reported to the compliance department. In 2016, nine incidents or suspected incidents have been reported. These reports are examined and where necessary, measures are taken. In light of an increasing risk in the domain of ‘Information Security’, a program was initiated in 2016 which focuses on increasing the awareness of staff with respect to mail messages, and on IT technical possibilities to protect incoming and outgoing information. This program is to be continued in 2017.

Top risks and their control measures

The top risks as defined by the Executive Committee of ForFarmers are presented below. In addition, the recent developments are shown. The explanation of the risks in question are further described in this section.

Strategic objectives

Price development and availability of raw materials

Risk

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 scale of harvests. This can also be affected by the demand from the biofuel industry and speculative trade. Changes in raw materials prices will affect the prices that are passed on to customers. If ForFarmers takes positions in raw materials for own use, this may affect the results of the Company. Taking positions is, however, necessary to guarantee the availability of raw materials for deliveries, as the largest part of volume sales does not take place on the basis of sales contracts.

Control measure

ForFarmers closely follows developments in the area of prices and availability of raw materials. To reduce the risk of raw material positions, ForFarmers has implemented a separate risk management system in which measures are taken that reduce the risk of 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. Longer term pre-sales contracts for customers are immediately hedged for 85%. The authorisation boundaries are defined per Business Unit.

1.5.2.4

1.5.2.5

Update 2016

The risk fell further in 2016 as a result of further honing of the control measures. All business units now report in the same format, in which the limits within which purchases can occur are closely observed. Potential purchases beyond these limits must first be agreed with the Purchase Risk Board, and substantiated. The pre-sales procedure has also been fine-tuned and pre-sales are purchased directly.

Size of livestock herd and animal diseases

Risk

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 ForFarmers’ results. 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 thanks to the geographic distribution of activities and a distribution of the activities over various animal breeds. When necessary, an international crisis team closely follows the developments of animal diseases, 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 national authorities.

Update 2016

The risk has fallen slightly, through the introduction and execution of hygiene protocols by ForFarmers in the various countries of operation. This was introduced prior to being prescribed by a government. The risk profile has not changed across the organisation as a whole. The team has needed to take action in 2016 following the outbreak of bird-flu in the Netherlands, Germany and the United Kingdom. Hygiene protocols were followed as precaution in Belgium.

Price development of energy and fuel prices

Risk

A part of ForFarmers’ costs consists of energy and fuel costs. Changes in these prices influence the costs of production and transport of ForFarmers’ products. Changes in 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 hedge price risks via financial instruments and commodity agreements, where possible. The enforcement of this purchasing policy is monitored. Developments on the energy and fuel markets are closely monitored.

Update 2016

The risk profile has remained the same. In 2016, two hedge contracts were entered into for diesel. These contracts had a maturity shorter than 1 year and ended in December 2016.

Operational objectives

Safety

Risk

The absence of a comprehensive safety system (including procedures, training, physical safety measures, personal safety awareness etc.) and insufficient vigilance as to the practice of the safety system exposes ForFarmers to an unacceptable level of incidents, reduced motivation of employees, claims and reputational risk.

Control measure

These include, inter alia, the set-up of a detailed safety plan for all locations of ForFarmers, creation of heightened awareness, as well as training of all staff (this also refers to logistics safety), completion of inventories in all factories as regards safety aspects and reporting on the status of any shortcomings and actions to resolve these.

Update 2016

The risk increased in 2016. In 2016, important steps were again taken to increase awareness of safety inside and outside the organisation. This includes closely assessing the safety of ForFarmers’ employees on farm and where necessary taking action to increase this safety.

Quality risks

Risk

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 revenue and gross profit.

Control measure

In the various countries ForFarmers works with several partnerships to maximally ensure feed safety. Knowledge is shared in respect of monitoring, quality control, tracking and tracing, and crisis management. In addition, 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.

Update 2016

The risk profile has decreased slightly. In 2016, ForFarmers established and implemented a supplier code. Furthermore, in 2016 ForFarmers has become a member of Sedex (Supplier Ethical Data Exchange), a not-for-profit member organisation which focuses on enhancing responsible and ethical business practices in global supply chains.

Financial objectives

Currency and interest risks

Risk

The purchasing of raw materials and the conclusion of sale and purchase agreements may result in currency risks. If raw materials are purchased in a foreign currency, 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, they are immediately hedged by means of forward currency contracts and/or other financial instruments. The Governance, Risk & Compliance Team accurately follows compliance with the principles, which were formally established in the purchasing risk management policy.

Update 2016

The risk profile has remained the same; both as regards risks and control measures, there have been no substantial changes.

Credit and liquidity risks contracting parties

Risk

Credit risks occur if contracting parties of ForFarmers, like suppliers or buyers, do not comply with their contractual obligations. Non-compliance with contractual obligations may have a direct effect on the result of ForFarmers. If buyers do not or potentially no longer comply with their obligation, this results in a write-off or provision for the outstanding claim. If suppliers do not comply with their obligation, 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 and possible, risks are insured. The correct settlement of obligations and developments by contracting parties are followed accurately. ForFarmers introduced a new system in 2015 that sees to timely collection of outstanding claims. This system has become operational in all business units in 2016. Moreover, strict agreements were made 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 sector in the first half of 2016 and have subsequently decreased.  ForFarmers contacts contracting parties where credit and liquidity risks increase at a very early stage.

Update 2016

The risk profile has stayed the same. However, this is in combination with an increased risk of buyers not meeting their contractual obligations (partly as a result of market conditions) and the Company’ additional control measures. In 2016, ForFarmers actively converted overdue receivables into loans, secured by collateral as much as possible, and clear arrangements as to interest. Clients with credit limits of more than €250,000 are closely monitored and discussed by the Executive Committee in their monthly meetings.

Liquidity risks

Risk

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, Rabobank, Lloyds Bank and BNP Paribas for which no collateral is provided. The agreement has a maturity date up to 31 January 2020. The facility amounts to a maximum of €300 million. Based on the funding agreement, loan covenants were established that ForFarmers must comply with.

Control measure

ForFarmers monitors the liquidity position and bank covenants by means of periodic reports.

Update 2016

The risk profile has remained the same; both as regards risks and control measures, there have been no substantial changes. From the funding facility, on the balance sheet date, an amount of £40.0 million (€46.6 million) has been used up. ForFarmers has met its bank covenants in 2016.

Pension risks

Risk

The pension schemes used in the Dutch subsidiaries are defined contribution schemes that were placed with insurance companies. This means that these subsidiaries only have to pay the stipulated premiums to the insurance companies. In the German subsidiaries there is an in-house defined benefit scheme for a number of people. Changes in the actuarial assumptions 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 United Kingdom 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, meaning that no risk exists to ForFarmers as regards this scheme. Changes in the actuarial assumptions may have a negative impact on the equity position of the pension fund and could imply that ForFarmers United Kingdom 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.

Update 2016

The risk profile has dropped. In 2016, talks took place with the trustee of the pension fund in the United Kingdom. By changing the arrangements, the pension risk has fallen. This change is a conversion of the definition of inflation from RPI (retail price index) to the lower CPI (consumer price index).

Compliance

Amendments in legislation and regulations

Risk

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, food safety and production processes.

Control measure

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

Update 2016

The risk profile has remained the same. In 2016, there was a change to the data protection legislation. A project group was set up for this, which will assess the changes and effects for the Company thereof and where necessary, come up with the necessary additional measures.

Improvements planned for 2017

The risk management system at ForFarmers is entrenched in the organisation and has been further improved and broadened in recent years. For 2017, ForFarmers plans to expand further on the following improvements and/or actions:

• reassessment of important risks, including assessment of whether, with input from the business units, Executive Committee and Supervisory Board, the current risks and the associated risk appetite are still valid;
• involvement of the new internal audit function, in testing and monitoring control measures and assessing risks;
• the subject of risk management will be discussed, from the point of view of the team corporate governance & compliance, several times a year. This further increases risk control by risk owners and risk managers, who are directly responsible for control;
• the roll out of the  risk assessment on farms programme, that has already begun, will be further implemented. This also applies for the further investments with respect to safety improvements in ForFarmers’ factories.
• the data protection legislation project will be continued in the risk area of compliance. This project concerns further controlling the use of data protection-sensitive subjects and the associated risks within the limits of the legislation and regulations.