To cover its overall funding needs, the AGRANA Group, in addition to its ability to self-finance, has access to bonds, syndicated credit lines and bilateral bank credit lines. Financial instruments are generally procured centrally and distributed Group-wide. The principal aims of obtaining financing are to achieve a sustained increase in enterprise value, safeguard the Group’s credit quality and ensure its liquidity.

To manage the seasonally fluctuating cash flows, the AGRANA Group in the course of its day-today financial management uses conventional investments (demand deposits, time deposits and securities) and borrowings (in the form of overdrafts, short-term funds and fixed rate loans).

Bank loans and overdrafts and amounts owed to affiliated companies amounted to € 555,346 thousand (prior year: € 635,741 thousand) and carried interest at an average rate of 3.43% (prior year: 3.24%). They are measured at repayable amounts. In the case of bank debt denominated in foreign currencies, principal amounts are translated into euros by applying the exchange rates prevailing at the balance sheet date. Fair values may therefore increase or decrease from the prior-period values, depending on movements in exchange rates.

The fixed interest portion of bank loans and overdrafts and amounts owed to affiliated companies was € 272,835 thousand (prior year: € 246,874 thousand), representing a fair value of € 276,563 thousand (prior year: € 246,614 thousand). The fair values (i.e., market values) of the variable rate bank loans and overdrafts are equivalent to their carrying amounts. At the balance sheet date, € 1,368 thousand (prior year: € 2,968 thousand) of bank loans and overdrafts were secured by mortgage liens and € 21,602 thousand (prior year: € 21,202 thousand) were secured by other liens.

In the course of its day-to-day financial management, the Group invests in demand deposits and time deposits. Compared with the prior year end, cash and cash equivalents decreased by € 5,070 thousand to € 70,388 thousand. In addition, there were securities in the amount of € 3,515 thousand (prior year: € 5,830 thousand) held as current assets; these were categorised as held-for-trading.

To hedge part of the risks arising from its operating activities (risks due to movements in interest rates, foreign exchange rates and raw material prices), the AGRANA Group to a limited extent uses derivative financial instruments. AGRANA employs derivatives largely to hedge the following exposures:

• Interest rate risks from money market rates, arising mainly from liquidity fluctuation typical during campaigns or from existing or planned floating rate borrowings.
• Currency risks, which may arise primarily from the purchase and sale of products in US dollars and Eastern European currencies and from finance in foreign currencies.
• Commodity price risks, arising principally from changes in the sugar world market price and in energy and grain prices.

The Group employs only conventional derivatives for which there is a sufficiently liquid market (for example, interest rate swaps, interest rate options, caps, forward foreign exchange contracts, currency options or commodity futures). The use of these instruments is governed by Group policies under the Group’s risk management system. These policies prohibit the speculative use of derivative financial instruments, set ceilings appropriate to the underlying transactions, define authorisation procedures, minimise credit risks, and specify internal reporting rules and the organisational separation of risk-taking and risk oversight. Adherence to these standards and the proper processing and valuation of transactions are regularly monitored by an internal department whose independence is ensured by its organisational separation from risk origination.

The notional principal amounts and the fair values of the derivative financial instruments held by the AGRANA Group were as follows:

The currency derivatives and commodity derivatives are used to hedge cash flows over periods of up to one year; the interest rate derivatives serve to hedge cash flows for periods of one to ten years. The notional principal amount of the derivatives represents the face amount of all hedges, translated into euros.

The fair value of a derivative is the amount which the AGRANA Group would have to pay or would receive at the balance sheet date in the hypothetical event of early termination of the hedge position. As the hedging transactions involve only standardised, fungible financial instruments, fair value is determined on the basis of quoted market prices.

Fair value changes of derivatives employed to hedge future cash flows (cash flow hedges) are initially recognised directly in equity. Only when the cash flows are realised are the value changes recognised in profit or loss. The fair value of cash flow hedges at 28 February 2010 was an asset of € 1,277 thousand (prior year: liability of € 7,622 thousand).

The value changes of the derivative positions to which cash flow hedge accounting is not applied are recognised in profit or loss. The hedging transactions were carried out both to hedge sales revenue and raw material costs for the Juice activities, and to hedge sales contracts in the Sugar segment. To some extent, fair value hedge accounting under IAS 39 was used for the transactions presented. The fluctuations in the value of these hedging instruments are offset against the fluctuations in the value of the hedged items.

Carrying amounts and fair values of fi nancial instruments
Set out in the table below are the carrying amounts and fair values of the Group’s financial assets and liabilities. The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Those securities which in the prior year were held for trading were reclassified to the “available-for-sale” category in accordance with IAS 8.

The fair values of financial instruments were determined on the basis of the market information available at the balance sheet date and of the methods and assumptions outlined below.

The non-current assets item “investments in non-consolidated subsidiaries and outside companies”, and the securities held as non-current and as current assets, include available-for-sale securities. These are measured at market value as represented by prices quoted on securities exchanges at the balance sheet date.

Current-assets securities that are held for trading are also measured at market prices as represented by prices quoted on securities exchanges at the balance sheet date.

Other investees as well as those securities for which fair value could not be determined due to a lack of market prices in absence of active markets, are measured at cost. These are primarily shares of unlisted companies where the shares were not measured by the discounted cash flow method because cash flows could not be reliably determined. For these shares it is assumed that the fair values are equivalent to the carrying amounts.

As the non-current loan receivables bear interest at floating rates, their carrying amount is substantially equivalent to their market value.

As a result of the short maturities of the trade receivables, other assets and cash and cash equivalents, their fair values are assumed to be equivalent to their carrying amounts.

The positive and negative fair values of interest rate, currency and commodity derivatives relate both to fair value hedges and cash flow hedges. For the interest rate hedges, the fair values are determined on the basis of discounted future cash flows. Forward foreign exchange contracts are measured on the basis of reference rates, taking into account forward premiums or discounts. The fair values of interest rate and commodity derivatives are obtained from the bank confirmations as at the balance sheet date. The fair values of currency derivatives represent the difference between the forward rates determined by AGRANA at the balance sheet date and the hedged exchange rates. The interest rates and exchange rates used for the determination of the forward rates are based on the reference rates published by the ECB or the national central banks. In some cases, as a result of differences in interest rates, the fair values determined by the Group may differ to an insignificant extent from the fair values calculated by the commercial banks that issue the bank confirmations.

For trade payables, payables for the sugar market restructuring levy and for the purchase of additional sugar quota, and current other payables, it is assumed in view of the short maturities that the fair values are equivalent to the carrying amounts.

Non-current other payables are generally carried at their present values. Accordingly, it is assumed that the fair values are equivalent to the carrying amounts.

The table below shows how the fair values were determined, broken down by category of financial instrument. The fair value measurements were classified into three categories according to how closely the inputs used were based on quoted market data:

The three levels were defined as follows:

• Level 1: Exchange or market price quoted for the exact instrument on an active market (used without adjustment or change in composition)
• Level 2: Exchange or market price quoted on an active market for similar assets or liabilities, or other valuation techniques for which the significant inputs are based on observable market data
• Level 3: Valuation techniques using significant inputs that are not based on observable market data.

Financial instruments were recorded in the income statement at the following net amounts for each measurement category:

The AGRANA Group is exposed to market price risks through changes in exchange rates, interest rates and security prices. On the procurement side, the Group is subject to commodity price risks. These relate primarily to energy costs in connection with sugar production and to the cost of wheat and corn for bioethanol production. In addition, the Group is exposed to credit risks, associated especially with trade receivables.

AGRANA uses an integrated system for the early identification and monitoring of risks relevant to the Group. The Group’s proven approach to risk management is guided by the aim of balancing risks and returns. The Group’s risk culture is characterised by risk-aware behaviour, clearly defined responsibilities, independent risk control, and the implementation of internal control systems.

AGRANA regards the responsible management of business risks and opportunities as an important part of sustainable, value-driven corporate governance. Risk management thus forms an integral part of the entire planning, management and reporting process and is directed by the Management Board. The parent company and all subsidiaries employ risk management systems that are tailored to their respective operating activity. The systems’ purpose is the methodical identification, assessment, control and documenting of risks.

In a three-pronged approach, risk management at the AGRANA Group is based on risk control at the operational level, on strategic control of Group companies by the Group, and on an internal monitoring system delivered by the Group’s internal audit department.

In addition, emerging trends that could develop into threats to the viability of the AGRANA Group as a going concern are identified and analysed at an early stage and continually re-evaluated as part of the risk management process.

Credit risk
Credit risk is the risk of an economic loss as a result of a counterparty’s failure to honour its payment obligations. Credit risk includes both the risk of a deterioration in customers’ or other counterparties’ credit quality, and the risk of their immediate default.

The trade receivables of the AGRANA Group are largely with the food, chemical and retail industries. Credit risk in respect of trade receivables is managed on the basis of internal standards and guidelines. Thus, a credit analysis is generally conducted for new customers. The Group also uses credit insurance and security such as bank guarantees.

For the residual risk from trade receivables, the Group establishes provisions for impairment. The maximum exposure from trade receivables is equivalent to the carrying amount of the trade receivables. The carrying amounts of past due and of impaired trade receivables are set out under 7.5.

The maximum credit risk from investments in non-consolidated subsidiaries and outside companies, loan receivables and other receivables is equivalent to their carrying amount and is not considered by AGRANA to be material.

AGRANA maintains business relationships with many large international industrial customers having excellent credit ratings.

Liquidity risk
Liquidity risk is the risk that a company will not be able to meet its financial obligations when due or in sufficient measure.

The AGRANA Group generates liquidity with its business operations and from external financing. The funds are used to fund working capital, investment and business acquisitions.

In order to ensure the Group’s solvency at all times and safeguard financial flexibility, a liquidity reserve is maintained in the form of credit lines and, to the extent necessary, of cash.

To manage the seasonally fluctuating cash flows, both short-term and long-term finance is raised in the course of day-to-day financial management.

The following maturity profile shows the effects of the cash outflows from liabilities as at 28 February 2010 on the Group’s liquidity situation. All cash outflows are undiscounted.

The undiscounted cash outflows as presented are based on the assumption that repayment of liabilities is applied to the earliest maturity date. Interest payments on floating rate financial instruments are determined by reference to the most recent prevailing rates.

Currency risk
The worldwide scope of the AGRANA Group’s operations exposes its operating business, net financial items and cash flows to risks from fluctuation in foreign exchange rates. The significant currency relations are those between the euro and the Polish zloty, Romanian leu, Russian ruble, Hungarian forint, Ukrainian hryvnia and US dollar.

The AGRANA Group has financial assets and liabilities in foreign currencies. Until settlement, these assets and liabilities are subject to the risk of decreases or increases in value as a result of exchange rate movements. Financial liabilities of € 63,410 thousand (prior year: € 152,175 thousand) were subject to currency risk as a result of the functional currency not being the contract currency.

Most of the Group’s foreign exchange risk arises in the operating business, when revenue is generated in a different currency than are the related costs.

In the Sugar segment, Group companies based in the European Union whose local currency is not the euro are exposed to sugar-regime-induced foreign exchange risk between the euro and their respective local currency, as the beet prices for a given campaign are set in euros EU-wide. The subsidiaries in Romania and Bosnia-Herzegovina are subject to additional currency risk from raw sugar purchases in US dollars.

In the Starch segment, foreign exchange risks arise from borrowings not denominated in local currency.

In the Fruit segment, foreign exchange risks arise when revenue and materials costs are in foreign currency rather than local currency. In addition, risks arise from borrowings not denominated in local currency.

For active hedging of risks, the AGRANA Group mainly uses forward foreign exchange contracts. In the financial year under review, forward foreign exchange contracts were employed to hedge revenue, purchasing commitments and foreign currency borrowings totalling a gross € 280,873 thousand against exchange rate fluctuation. Principally this related to hedges of Hungarian forint exposure of € 98,406 thousand (prior year: € 95,377 thousand) [or HUF 27.784.567 thousand (prior year: HUF 24,186,638 thousand)], US dollar exposure of € 42,151 thousand (prior year: € 74,210 thousand) [or USD 59,585 thousand (prior year: USD 109,887 thousand)], Czech koruna exposure of € 18,845 thousand (prior year: € 12,207 thousand) [or CZK 477,421 thousand (prior year: CZK 304,275 thousand)] and Romanian leu exposure of € 81,191 thousand (prior year: € 126,928 thousand) [or RON 343,182 thousand (prior year: RON 311,658 thousand)].

The amount of financial assets and liabilities denominated in foreign currency in the AGRANA Group overall is not material.

Using sensitivity analysis, AGRANA models the effects of hypothetical movements in exchange rates on the Group’s results and equity. This is done by conducting stress tests and measuring the stress-induced change in the amounts of the relevant items – revenue, cost of materials, and foreign-currency borrowings. An appreciation in the euro was assumed in determining the latent risk. The analysis showed that if the euro had been 10% stronger during the 2009|10 financial year against the currencies named below, the Group’s profit and equity would have been higher by € 1,356 thousand (in the prior year, they would have been lower by € 13,699 thousand). The potential effects of the other currency relations in the AGRANA Group are immaterial both individually and in the aggregate.

Interest rate risk
The AGRANA Group is exposed to interest rate risks primarily in the euro zone.

Interest rate risks are captured using sensitivity analyses, in accordance with IFRS 7. These analyses portray the impacts of changes in market interest rates on interest payments, interest income and expense and, where applicable, on equity. The sensitivity analyses were based on the following premises:

Changes in market interest rates of fixed-interest non-derivative financial instruments have an effect on net interest expense or income only when the instruments are measured at fair value. Therefore, none of the financial instruments measured at amortised cost are subject to interest rate risks as defined by IFRS 7.

The floating rate borrowings are subject to interest rate risk. To hedge against this risk, interest rate swaps were entered into for a portion of the borrowings, thus achieving fixed interest rates on this portion. For the unhedged floating rate borrowings, if market interest rates at 28 February 2010 had been 100 basis points higher or lower, this would have made, respectively, a negative or positive difference of € 2,825 thousand (prior year: € 3,589 thousand) in net interest income or expense. The hypothetical effect on net interest income or expense arises from non-derivative, floating rate debt of € 282,511 thousand (prior year: € 388,867 thousand).

Commodity price risk
AGRANA’s business activities expose it to market price risk from purchases of commodities. This is particularly true in the production of bioethanol, where the most important cost factors by far are the prices of the main inputs, corn and wheat. To a lesser but still significant extent, the Sugar segment has exposure to the purchase prices of raw sugar.

At the balance sheet date the Group had open commodity derivative contracts to purchase 12,446 tonnes of raw sugar for Eastern Europe (prior year: 12,193 tonnes), to sell 11,350 tonnes of white sugar (prior year: 0 tonnes) and to purchase 22,000 tonnes of wheat for the Austrian bioethanol production facility (prior year: 19,550 tonnes). These positions represented a total contract amount of € 16,991 thousand (prior year: € 4,989 thousand) and, based on the underlying closing prices, had a positive fair value of € 616 thousand (prior year: € 803 thousand). A change in the underlying raw material prices of plus or minus 10% would result, respectively, in an increase in the value of these commodity derivate positions of € 525 thousand (prior year: € 412 thousand) or in an increase of € 234 thousand (prior year: decrease of € 713 thousand).