As a manufacturing company in the agricultural sector, AGRANA’s particular business activities expose it to specific operational risks that may have significant negative effects on its financial position and results of operations.
Procurement risks
As an agricultural processor, AGRANA is exposed to procurement risks that may result in weather-related shortages of agricultural inputs. These raw materials may also be subject to price fluctuations that cannot be fully passed through to customers. These risks pertain especially to the Starch segment.
In the production of bioethanol within that segment, raw material costs (particularly for corn and wheat) are major determinants of the cost structure. The procurement strategy is to cover as much of the forecast raw material requirement as possible through physical supply agreements, and at least enough to meet the contracted bioethanol delivery commitments. For the portion of the requirement not covered by supply agreements, futures contracts are entered into where commercially appropriate. The extent of these hedging transactions is proposed by segment management and approved by the AGRANA Management Board. A rise in commodity prices may be partially off set by higher selling prices for ActiProt, the protein-rich co-product of bioethanol production, as the sale prices for protein-containing byproducts are closely correlated with wheat prices (creating a so-called “natural hedge”).
Raw material costs are also a key factor in cornstarch production. Higher raw material costs can to a large extent be rapidly passed through to customers. The strategy for risk mitigation is the same as in the bioethanol business.
In the Sugar segment (except for those countries where the main production input is raw sugar rather than beet), the procurement risk is relatively low, as sugar beet production is currently typically more profitable than other field crops. For the refining of raw sugar in Bosnia-Herzegovina, the price of the required quantities of raw sugar is hedged. A procurement risk exists in respect of the purchasing of raw and white sugar imported into the EU, as the market access rules in this region mean that hedging via commodity derivatives is only partially possible.
In the Fruit segment, unfavourable weather and plant diseases could cause serious crop failures, leading to a significant increase in raw material costs. The Fruit segment’s global presence and familiarity with the procurement markets allow it to avoid or mitigate input supply bottlenecks and price volatility. The centralised purchasing organisation in AGRANA Fruit analyses the global raw material markets and can thus react effectively to input shortfalls and variations in quality. To provide year-round security of supply and take into account the differences in crop cycles between major crop regions, long-term agreements have also been concluded with suppliers and customers, thus ensuring consistent high quality, reliable deliveries and secure production.
Product quality and safety
As a supplier of agricultural products to the food industry, AGRANA as a matter of course adheres to all relevant food and beverage legislation. Risks associated with processing defects or quality shortcomings, arising for instance from contaminated raw materials, are mitigated through very rigorous, certified internal quality management systems. Adherence to the associated quality standards is regularly monitored throughout the Group. The product liability insurance carried aff ords sufficient cover for potential payments for damages.
Market risks and competitive risks
AGRANA operates in various markets, where it is exposed to intense competition. Through detailed sales planning (quantity/price) for each product and customer, AGRANA is able to detect changes in demand patterns early on and take timely action in response. The implications for the market position are analysed and business strategies are adjusted as appropriate. Competition-induced swings in sales prices are met by the continual optimisation of cost structures, with the goal of cost leadership.
Other operational risks
To minimise the risk of rising energy costs, AGRANA locks in the prices and quantities of the planned energy requirement through short-term and medium-term physical supply contracts. Further, it continually improves the energy efficiency of its production facilities and increases the use of alternative sources of energy.
Risks arising in the areas of production, logistics, research and development as well as from the use of information technology are of comparatively little significance. AGRANA reduces these risks by permanent monitoring, clear documentation and continuous improvement of processes.