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Food and farming - summer 2012



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  • 1. Food andFarming NewsSummer 2012Welcome to the third We are pleased to say that to date the agricultural industry has remained relatively recession tolerant however there is an ever increasing requirement for working capital and this,edition of the Food and coupled with the volatility of input prices, does need the focus of management.Farming newsletter. With this in mind we have included thoughts from John Barker HSBC on the potential funding gap together with some suggestions of how larger farming family businesses can learn from corporates and co-operatives by holding regular family corporate style meetings and actively managing potential risks. In this edition we have also looked at the main global economic drivers of wheat and milk together with other topical issues within the sector such as the proposed Supermarket Adjudicator, Tax on renewables, Focus on Northern Ireland and our regular Farm Snippets. We hope you find this edition both interesting and useful to drive and grow your businesses. Contents 01 Introduction 02 A global grain market 04 Renewables - making the finances stack up 06 Future of the dairy industry 08 Focus on Northern Ireland - food for thought 10 The funding gap 12 Risk management 14 Food & supermarket ombudsman 15 Farming snippets 16 Contact details
  • 2. A global grain market: volatile times to continue David Eudall, Senior Grain and Oilseed Analyst, AHDB, 0247 647 8761 Longer term trends There is no doubt that global grain markets are currently in, and are likely to stay in, a period of highly volatile prices. Price drivers recently have ranged from stranded vessels in ports, central bank involvement in foreign exchange markets and the ever more erratic global weather. Those with a vested interest in grain and oilseed products need to be increasingly vigilant and take action to combat against this volatility. 250 Global Grain Prices: supply and demand led volatility London Wheat Paris Wheat Chicago Wheat Chicago Maize 200£ per tonne 150 100 50 05/01/2007 05/04/2007 05/07/2007 05/10/2007 05/01/2008 05/04/2008 05/07/2008 05/10/2008 05/01/2009 05/04/2009 05/07/2009 05/10/2009 05/01/2010 05/04/2010 05/07/2010 05/10/2010 05/01/2011 05/04/2011 05/07/2011 05/10/2011 05/01/2012 The combined impact of population The headline of 9 billion people growth and increased incomes in to be on the Earth by 2050 steals developing countries is already in the the attention. However, it is worth focus of global markets. The rationale keeping an open mind on the topic being, we’re pretty certain that demand of population growth. To understand for food is going to rise, so where is where global markets are moving the supply going to come from? This we need to look at the fundamental pressure on supply is a key ingredient physical supply and demand picture of in the volatile market direction. today. 2 Food and Farming News Summer 2012
  • 3. Current market drivers Year period, extreme dry weather in July. A hot, dry, July will be negative toAt the current time in spring 2012, the South America hurt the yield potential of yield development. Conversely a mildmarket has two very different outlooks for Brazilian and Argentine maize crops. These damp July with reasonable sunshine wouldthe marketing season for July-June 2011/12 crops were seen as the world’s ‘back-up’ in be very positive for yield potential. The USand the July-June 2012/13 season. light of the poor US harvest. spring planting season, and yield forming summer, will be the major factor in grain Global production of three main grains: fluctuates around increasing demand to create changing stock profile market movements over the next year. Global stocks Global Production Global Demand2000 400 From a wheat perspective, we already 350 know that there is to be a record stock 300 level carried into the next season. Globally, 250 plantings are anticipated to expand for1500 200 2012 harvest. Therefore with a reasonable 150 growing season, the wheat market may 100 be very comfortably supplied through the 50 2012/13 season. 01000 2001/2002 2002-2003 2003-2004 2004/2005 2005/2006 2006-2007 2007/2008 2008/2009 2009/2010 2010-2011 2011-2012 External markets Starting with 2011/12, the market Put simply, erratic weather has Whilst the physical fundamentals ofhas two areas of conflicting fundamental disrupted supply at a time when demand markets are key drivers, the impact ofdrivers. 2011 saw both a record global has increased. Wheat supply remains external markets is ever important. Thiswheat harvest as well as a severe lack of comfortable, but the issue is with a lack of has been especially highlighted through thecoarse grain production. The global wheat maize stocks perpetuated by a poor US recent eurozone crisis. The lack of investorproduction came in at a record 693Mt, crop. Until the new crop is harvested in confidence this has brought has been awhich is likely to lead to a record level of the summer of 2012, markets may remain weight upon commodity markets. At the213Mt of stocks being carried into the next firm, barring any negative external market time of writing we seem to be moving to aseason. However, the lack of maize supply factors e.g. a slip back into eurozone/global resolution in the Greek debt crisis, althoughis the key issue as stocks are remaining at recession. in a protracted manner. A move to a morecritically low levels. positive sentiment towards the global The real driver of this lack of supply Looking forward economy will help to boost the wholeand stocks lies with the US maize market. Trying to predict what the price of commodity complex in the longer-term.Production in 2011 is estimated to have grain will be in a year’s time is near There is also the impact of speculativereached 314Mt, below the 316Mt of the impossible. Despite this difficulty, there investment in agricultural markets. Theseprevious season, and well below potential. are some principal areas that have driven speculators, in my opinion, do not ‘create’US maize planted area expanded by 4% for current volatility that will continue to volatility but merely accentuate the speedharvest 2011. Yet a 7% reduction in yield be predominant in the global market’s and direction of markets. Agriculturalcurtailed production potential. attention through 2012. markets would still react to, for instance, a The principal volatile factor from this The first, and some may say most reduction in global maize supply, yet thelower output lies with stocks. US maize important, of these market drivers is again added investment money accelerates thesestocks at the end of September 2012 are the US maize crop. As noted previously, the market movements.forecast at 20.35Mt. This forecast stock level US maize crop, or lack thereof, has been a To conclude, global grain markets arewill only account for circa 6.3% of total US key instigator of market fluctuations over in a period of uncertain fundamentals withdemand for the current season. To put it recent months. For 2012, expectations are pressure on supply to meet a growinganother way, the US stock accounts for 23 that US farmers will again increase planted demand being hampered by unfavourabledays of potential US demand. Any further area in response to the recent higher prices. erratic weather. Knowledge, monitoringsupply disruption from the US will see a Yet the problem of recent poor supplies and action to manage risk in these marketslarge market reaction. hasn’t been area planted but yields achieved. is ever important to protect business More recently, over the festive & New The key month of yield forming is through stability. Food and Farming News Summer 2012 3
  • 4. Renewables -making the financials stack up It is envisaged that a project will be undertaken with the intention of selling electricity and benefiting from Feed-in Tariffs (FIT), and realising a profit. It is expected that the Revenue will regard this endeavour as an adventure in the nature of a trade, and that profits will be taxed accordingly.Structure strategy Therefore the target structure in mostMost projects will have a reported situations would be:Internal Rate of Return (IRR) and • SPV company with more than onePayback Period. These figures will be class of shareholdersquoted before tax therefore tax could • no other company owned by thehave a dramatic effect on the viability of individuals therefore no restrictionthe project. on AIAs or corporation tax The key points for an effective thresholdrenewable business structure are: • in some circumstances it may be• Annual Investment Allowances beneficial to run the project in a (AIA) currently £25,000 per tax partnership or LLP in the early year will normally have been years to benefit from any losses and utilised in a farming business and incorporate when trading profits are restrictions apply on obtaining achieved. further AIAs with connected persons or businesses. It should be possible to obtain AIAs in a company if one does not already exist• the effective tax rate on the FIT and sales of electricity needs to be minimised• if a Special Purpose Vehicle (SPV) company is used thought needs to be given to extracting the profits through dividends to basic rate taxpayers such as spouses.4 Food and Farming News Summer 2012
  • 5. Other considerations venture capital funds. This is relatively ConclusionHome consumption of electricity new territory for the average farmer There are manyproduced from a SPV Ltd may be and guidance will be needed, howevertaxable on the individuals and there many of these projects are below the opportunities for farmingmay be a disallowance of some tax relief minimum deal of most corporate businesses in renewablesin proportion to private consumption finance advisers who specialise in however, to make a projectin a non-corporate environment. raising funds usually for takeovers If the project is an integral part of and management buy outs in larger a success, a great deal ofan existing agricultural business for businesses. homework needs to be doneexample electricity production for a This then leaves the funding gap and to ensure the structure isdairy enterprise, it could be argued many farm advisers and land agents are quickly learning about this area of work correct. Capital is requiredthat the whole project may be anagricultural activity. A typical structure will be a new limited to get to planning stage and company called a Special Purpose possibly to fund an appealThe funding gap Vehicle (SPV) with the following: and then a third or up toMany smaller on-farm projects such • the funder will require say 30% upas solar PV up to £200,000 to £300,000 to 50% of the shares of the company a half of the value of theor smaller wind turbines of around • the funder will provide the capital project needs to be given to£100,000 can be funded through in the form of a loan, loan notes or a funder to take the risk infarming businesses. However projects preference shares at an interest ratelarger than these will usually require of 7% to 12% funding. It is very importantoutside funding, particularly some AD • there will be set up fees and to use experiencedplants at around £5 million for a one professional fees for due diligence professional assistance atmegawatt capacity. work, checking all the paperwork Many farming businesses do and warranties on equipment etc. As each stage to ensure success.not wish to provide their land and the funder will wish to minimise itsproperty as security for these new risk as much as possibleventures and likewise the Banks are • the funder will require aunwilling to provide funds and take non-executive director on the boardall the risk. A typical example is an to represent its interests – this personAD plant with all planning permission may have to be paid say £20,000 toand land availability. It is difficult to £40,000 per annumobtain feed waste licences before the • it may be possible to agree anAD plant is built and the Bank will exit strategy for the funder at thenot fund the project without a robust beginning whereby they are boughtwaste licence as a secure feed input out by the SPV taking up bank financeinto the plant. in say year 5 and at that stage the bank Therefore the choices available may be willing to fund the project Gary J Markhamare either private equity partners or with a track history of trading. Director of Agriculture Food and Farming News Summer 2012 5
  • 6. Futureof the dairy industry The UK dairy farming and processing These include: sector looks set for a challenging • EU policy - the end of the EU milkCloser supply chain time over the next 12 months and quota system has already beenrelationships - an important beyond as it still comes to terms with agreed, but there is no consensus asway of combating market the impact of the varying economic to whether the outcome will be anvolatility conditions around the world. This increase in milk production in the commercial challenge is all set against EU. The simple answer is that some a wider background of the need to countries might well produce more feed a world population that has now milk if they have a combination of reached 7 billion. Dairy businesses in efficient farming systems, a strong the UK are currently experiencing the and consolidated processing sector biggest economic down turn since the and access to a range of markets. 1930s. The current GDP in the UK, for The Netherlands, Denmark, France example, is as much as 10% less than it and maybe Ireland in particular all would have been without a recession. seem better placed than others. A Predictions are that the UK economy number of countries have already might not return to ‘normality’ until been farming below quota for some 2014. There are a huge number of key time; this includes the UK external industry drivers the dairy • World dairy production - world sector needs to take into consideration. milk production has now reached some 710 million tonnes. The biggest growth is still being seen in the emerging markets, while in the EU and US, it is more modest. The UK produces in the region of 13 billion litres per annum - in context this is c. 10% of EU production, but just 1.8% of overall global production • World prices - the Food and Agriculture Organization’s (FAO) food price index hit a record level in early 2011 and producer prices in the US and across the EU (including the UK) have increased over the last 12 months. In theory, high farm gate prices are good news for farmers, but this benefit can be offset by6 Food and Farming News Summer 2012
  • 7. What needs to be done ? In these uncertain times, supermarkets, processors and large foodservice companies will still dominate the end user markets. Volatility will be a key feature of the UK and other international markets, but closer supply chain relationships will be an important way of combating this. A number of key actions seem to be imperative if dairy businesses are to survive, let alone thrive and these include a combination of the following: • Consolidate – or be consolidated International Dairy Milk Prices Brazil US • Ongoing full value chain analysis - China UK not least for businesses operating on 35 EU Average slender margins, every penny literally does count • Use every bit of technology available 30 in order to reduce costs and boost yields • Benchmark on a regular basis againstPence per litre 25 other best of class operations • Aim to be the leader on consumer and category knowledge unless the 20 discussion with customers is to be about price and price only. • Invest in R & D and knowledge 15 transfer and look to leverage the resources and expertise of commercial partners 10 Jun 2008 Jul 2008 Aug 2008 Sep 2008 Oct 2008 Nov 2008 Dec 2008 Jan 2009 Feb 2009 Mar 2009 Apr 2009 May 2009 Jun 2009 Jul 2009 Aug 2009 Sep 2009 Oct 2009 Nov 2009 Dec 2009 Jan 2010 Feb 2010 Mar 2010 Apr 2010 May 2010 Jun 2010 Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 The UK and international dairy supply chain is going through an extraordinary period of change. There are reports rising prices for inputs and the time they are still at high levels compared galore telling us why we have reached lag between prices going up and to those seen in previous years this situation. There seems to be less payment being received. Higher • The role of large dairy farms on what we need to do in order to meet prices can also squeeze margins – large scale dairy farms are now the challenges and then for the well for processors, who are sometimes becoming more common around the informed, bold and brave companies to not able to pass on such increases rest of the world – partly in response take advantage of the opportunities that to their retail or food service to the forecast increasing population will be presented by them. customers growth to 2050. In parts of the US • Feed prices – are largely dairy herds of up to 20,000 cows are John Giles, Divisional Director determined by wheat prices on not uncommon. It is worth noting with Promar International, the global markets. Sharp increases can though that the role of the small scale value chain consulting arm of often reflect reactions to global family dairy farm in the US is still Genus plc, has worked in 60 events such as what has been critical – over 75% of US dairy units countries and is the current Chair happening in Asia and the Middle still have fewer than 100 animals. of the Food, Drink & Agriculture East – rather than to data on crop However, the role of larger dairy Group of the Chartered Institute production, quality and availability. farms becomes more challenged when of Marketing. The international market is still costs for feeding materials such as nervous in its attitude. Even though wheat and soya are at the high levels Email: wheat prices have fallen recently, being seen at the moment. Food and Farming News Summer 2012 7
  • 8. Focus on Northern Ireland –fo d forthought businesses offers both strengths and potential weaknesses to future growth.The importance of the food and drink sector to the Larger businesses have demonstratedNorthern Ireland market can be starkly seen in the through their growth phases thatfollowing latest statistics: there is a need for strengthening their management teams, investing in improving efficiencies and ensuring• Total gross turnover at £3.5bn increasing year on year that their funding structures are• Food and drink processing accounted for almost 24% of total appropriate to support growth. The manufacturing sales most successful businesses in the future will be those that learn these• Total employees in food and drink processing at 19,685 full time lessons and appropriately plan to seize equivalent jobs over 20% of all manufacturing jobs opportunities that are increasingly going to be outside Northern Ireland. A number of the largest NI owned business already operate on an “allKey food and drink subsectors include Republic of Ireland is the second islands” basis with operations inbeef and lamb (26%), dairy products largest destination market at 25% with Republic of Ireland and increasingly(23%), poultry meat (17%) with other EU at 12% and Rest of World in GB.drinks at 10% of sales and combined representing only 3%. While food A key focus for the success of thecontribute over 50% of the value added sustainability is a key issue in GB, this wider sector will be to learn from thein the sector to the Northern Ireland is not a key issue in Northern Ireland example of our successful exporterseconomy. All subsectors showed due to the level of product exported. and encourage a step change in growthgrowth in the latest year with greatest Only 30% of the sales of the entire for some of the currently medium and% growth in drinks, dairy and eggs. Northern Ireland food and drink smaller players in the market. The Food and drink is a key sector sector were made for the domestic sector is ambitious with a target oftargeted for export growth in the future market. Ensuring the development being a £4bn industry by 2020.and this fact has been recognised by the of existing and new export markets is Northern Ireland businesseslocal government. Similar to our near high on the agenda of food and drink have demonstrated their strengthneighbours in the Republic of Ireland businesses in NI to underpin their and resilience over the years despitethe food and drink sector has been a growth aspirations. challenges inc food scares , Footsuccess with 14% of exports from the The sector has its dependency with and Mouth disease etc . The regionsector, with GB being a key export the Top 10 businesses representing has also a strong track record ofmarket. In a recent survey the sector close to 50% of turnover and quality products and innovation.reported expectation that exports could employment. Within the sector there The Northern Ireland players havegrow by 40% over the next decade. is a predominance of businesses that been moving to focus on delivering Currently the largest market for are under local ownership with 6 more added value product to theirthe sector in Northern Ireland is of the Top 10 still locally owned. customers, focusing on developingGB representing 60% of export, The dominance of locally owned products in growth areas including8 Food and Farming News Summer 2012
  • 9. convenience and health and wellbeing. The dominance of the grocery In a recent report and consultation with the sectormultiples channel means thatbusinesses that want to achieve scale the following key issues were cited as both challengeswill be required to equip themselves and potential opportunities:to sell to this customer group. Akey challenge will be to ensure that • increasing costs (raw materials, transportation and energy) and ability to pass on totheir products are differentiated in their customersalready crowded shelf spaces and to • end consumer trading down to lower cost optionsensure that margins can be sustained • achieving subsector efficiency to ensure cost competitivenessin the future. Northern Ireland food • sustainability of consistent raw material supply to the manufacturing sectorand drink businesses are looking • access to markets; exporting near markets or beyondat creating this distinction through • access to growth finance.development of their brand identity.Once again deploying an effective Grant Thornton represent a number of key players in the food and drink market andbrand strategy can be a challenge for with over 1700 clients in the sector nationally, we feel we understand the needs of itsthe SME business and may require owners. In the last 24 months the sector has been active for Grant Thornton as we havethe investment of external expertise advised food and drink clients on access to funding, acquisitions and disposals andto achieve success. Opportunities are strategic reviews. Last year we supported one of the largest food and drink transactionsalso evident in the food service sector in the UK when our client, SHS Group made its strategic acquisition of the brandedfor NI businesses with once again the soft drinks business Bottlegreen. Recently we also completed a significant deal in theaccess to key distribution channels and Northern Ireland seafood sector with the sale of Rockall Seafoods to Whitby Seafoods.achieving this competitively being of In a dynamic market there is opportunity for growth and we see that there is strongcritical importance. “Co-opetition” potential for us to support the growth of key businesses in the sector. Our strong localbetween SME’s may become more presence in the sector and our national and international network makes us ideallyprevalent in the future. placed to advise business owners and managers through their growth plans. Charlie Kerlin Director - Head of Corporate Finance Food and Farming News Summer 2012 9
  • 10. The fundingJohn Barker With the Eurozone debt crisis continuing to hit theJohn is a Global Relationship headlines on a weekly basis and a recent GovernmentManager with HSBC Corporate report forecasting a business funding gap of as muchBanking and is a Corporate as £190 billion over the next five years no one couldAgrifood Specialist. be blamed for being slightly concerned as to how the financial landscape might change in the future. Getting a clear view when the news is filled with political, government and union rhetoric is challenging however we will try to sift the wheat from the chaff and explain some of the key drivers for change and opportunity within the Agriculture and Food Keen entrepreneurs are expert risk It is therefore critical to secure bank managers, weighing up the options support for their ventures. Continual before them and forming a clear reports in the media would suggest such strategy to deliver results. In almost all support has been harder to acquire in cases one of the keys to success is access recent times. to working and investment capital to Prior to the Financial Crisis in 2008 allow the wheels of commerce to turn. banking regulation was already being tightened. That process was accelerated to repair banks’ balance sheets allowing them to meet stringent new regulatory requirements and return stability to the market. As a result a number of Eurozone banks have been constrained in the amount of money they have been able to lend to households and businesses. While not untarnished the majority of the main UK clearing banks have remained open for business and increased their lending. HSBC was among those who exceeded the ‘Project Merlin’ new lending to business targets set by the Government. Basel III regulations are on their way which10 Food and Farming News Summer 2012
  • 11. will further challenge the banks to retain Agriculture and Food businesses minute to refinance. Those businessesprofits, however those requirements remain relatively recession tolerant with more challenging requests willwill not be the key driver of credit and with the current commodity need to ensure their banks are givenavailability moving forward. prices most are thriving. Within HSBC good visibility, an excellent business Since the summer of 2011 money has Agrifood is our most preferred sector plan and potentially the benefit ofslowly been leaving the Eurozone as US and has been for as long as any of us Financial Due Diligence assigned tomoney funds have reduced their deposits can remember. That long term view has the bank to secure funding. In all casesand banks rein in the amount they lend meant that we have significant appetite having a banking group which reallyto each other. The ECB’s intervention to to grow our lending book in the sector understands your business, its risks anddole out unlimited amounts of three year focussing on good quality businesses opportunities is the most importantmoney has eased liquidity pressures for as they expand and invest. As a result, However central bank liquidity can bank lending appetite for both singleonly help to buy time while the banks bank holds and our share of largerheal themselves through a process of facilities in the sector has increased inselling off non core assets and reducing the past few exposures to peripheral Eurozone Looking at the wider market place,governments, banks and corporates. corporates intending to refinance inIn the mean time the term ‘Liquidity the coming year should find reasonablePremium’ will be here to stay – referring availability of funding with theirto the cost banks have to obtain the existing UK banks. However thosecash funding they require to then lend banking groups including foreign bankson to their customers. This will see the may present more of a problem withcontinued enhanced credit interest rates variable appetite in some quarters.being paid over and above base rate As a result early dialogue with theby banks who are themselves short of banks is advisable. When it comes tocash. While some of those rates can be the funding structures, the majorityeye catching the shrewd investor must of corporate facilities today are beingremain cognisant of individual banks’ done on a three or four year term ratings when examining their risk You can expect covenants to be closelyprofile and counterparty risk. negotiated and tested on a quarterly Businesses looking for increased basis in the majority of cases. Finallylending facilities are set to enjoy the margins are likely to be higher thanlowest overall cost of borrowing for those a corporate may have been abledecades. At the time of writing 10 to negotiate previously. Businessesyear cost of amortising funds was less operating internationally should givethan 3% cost of funds (Libor rate) special consideration to which currencyplus the lending margin meaning that they borrow in as Liquidity Premiumthe majority of customers will enjoy and bank lending margins can vary byfunding cost for long term investment currency depending on the bank inof between 5% and 6%. Talking to my question and their sources of fundingcustomers recently they are recognising and lending exposures.that given the volatility seen in Libor To secure the best deal on the bestrates and the risk that it could again rise terms it will be critical to engage withreacting to market shocks, fixing Libor your bank at an early stage. Whilelinked term debt de-risks their business funding is likely to be relatively widelyfunding cost. At current rates that is a available for good quality customersvery affordable additional cost. you should not leave it to the last Food and Farming News Summer 2012 11
  • 12. RiskmanagementIncreasingly volatile market placein agriculture calls for a new styleof management.Many family farming businesses are Table 1 - Family AGMincreasingly interacting with end EXAMPLE AGENDAcustomers, ranging from the food chainto on farm commercial tenants. As a Business performanceresult of this and the general business • Physical – benchmarking • Financial – annual accountsenvironment they are operating in an • Staff performanceincreasingly volatile market place withmany financial, statutory, family and People and familyoperational risks interacting daily with • Personal goals and aspirations ofthe business. It is difficult for families individualsand individuals to deal with these • Capability – strengths and weaknessespressures without some form of logical • Training requirements • Retirement and Successionstructured approach. Most larger agribusinesses and Financialfarmer-owned cooperatives have regular • Bookkeepingmanagement meetings and proactively • Liaison with professionals – accountantsmanage their risks through a risk and solicitorsregister and many larger family farms • Pro active tax planningcould benefit from adopting these • Bank relationship and facilities Changes do require an initialimpetus which is usually driven by the Personal requirements • Drawingsyounger generation. Many farming • School feesfamilies do not communicate effectively • Holidaysallowing individuals, particularly theyounger generation, to discuss their Future investmentsgoals and aspirations in the business. • On FarmTherefore a formal family meeting • Off Farmcalled The Family AGM, chaired by anindependent person, can bring fresh life Alternative enterprisesinto a family business. Table 1 shows atypical agenda for a Family AGM. AOB12 Food and Farming News Summer 2012
  • 13. John Barker HSBC in his article infers that margins are likely to be higher in the future with many lendersstating they will increasingly charge based on assessed trading risk rather than asset value. Thereforebusinesses that have identified and quantified their risks with associated mitigation strategies, regularlymanaged by a cohesive family team, may well be able to negotiate better borrowing terms in the future. Riskmanagement and regular family AGMs could well prove a good investment. The Risks to a business are usually Table 2 - Managing your business risksmanaged by drawing up a Risk Register FINANCIAL STATUTORY FAMILY OPERATIONALas shown in Table 2 where 12 risks are 1 Interest 4 Health 7 Death 10 Key employee leavingshown. These can be assessed in terms 2 Tax 5 RPA Compliance 8 Divorce 11 Commodity pricesof Likelihood and Impact by a graph 3 Banking facilities 6 Employee rights 9 Succession 12 Diversificationas shown in Table 3 and then a RiskMitigation Strategy Table 4 Table 3 - Risk management chart The most important point is thatsuccessful businesses are driven bymotivated and skilled individualstherefore profit is mainly about people, 8and not necessarily numbers. 5 10 11 3 1 2 Impact 12 7 6 9 4 Likelihood Table 4 - Risk mitigation strategy 1 Fixed rates, cap and collar 7 Business strategy - family AGM 2 Proactive tax planning, company strategy 8 Use of trusts - review asset ownership 3 Forward planning, budgets 9 Business strategy - family AGM 4 Staff training, annual audits 10 Motivation, management skills 5 Professional assistance 11 Hedging 6 Professional legal advice 12 Managing training professional advice Gary J Markham Director of Agriculture Ashley Clarkson Associate Director - Food and Beverage Food and Farming News Summer 2012 13
  • 14. Food & supermarketombudsman Reforming the way the major UK supermarkets deal with their suppliers, and in particular creating an enforceable framework of best practice that requires them to deal with suppliers fairly, has been a long haul since the OFT first referred the matter to the Competition Commission in April 1999.The issue has become the focus of on retrospective and unilateral changes secondly he will be far too restricted inserious concern in recent years, not least to contracts, on requirements for the evidence he can use in launching anbecause of the cost pressures imposed contributions to marketing costs without investigation into unfair practices.on primary producers at the far end of prior agreement, on imposing supplier Our concerns on the first point havethe food chain, for example in the fruit liability for “shrinkage” of goods at a been somewhat allayed. The governmentand veg sectors, many of whom have retailer’s premises, and on requirements has confirmed that the formal Bill willleft the industry in the last decade citing to use specific third parties for goods or allow the Secretary of State to introduceunviable financial pressures brought services (e.g. packaging). fines at a later date, through secondaryabout by unreasonable and impossible Coinciding with the GSCOP’s legislation, if he believes the existingdemands from their retailer customers. publication, the Labour government sanctions of “naming and shaming” At last, however, a resolution initiated a consultation into the powers prove ineffective. However, the clausesseems to be in sight. The Competition and form an Ombudsman might take. in the Bill relating to the launching ofCommission, in a report into the subject Indeed, there has been cross-party investigations by the Adjudicator give usin 2008, recommended a Groceries support for an Ombudsman (now much greater cause for concern.Supply Code of Practice, or GSCOP, referred to as the Adjudicator), for Under the provisions set out inand the establishment of some sort of some years – all the more reason why it the draft Bill, the Adjudicator’s mostGroceries Ombudsman to oversee the is of considerable disappointment that, significant power will be to investigaterelationship. The GSCOP came into some two years after the inception of potential breaches of the code byforce in February 2010, and establishes the GSCOP, there is still no body to retailers. It is envisaged that the latteran overarching obligation on the ten enforce it. will primarily be used to uncoverlargest groceries retailers to deal fairly Nevertheless, the coalition patterns of behaviour and systematicwith suppliers. It sets out a number government did publish a draft abuses by retailers. Furthermore, theof requirements aimed at preventing Groceries Adjudicator Bill last year, Adjudicator will have a duty to protectretailers from engaging in the sorts of setting out the legal basis for the body’s the anonymity of complainants.unfair practices they have been accused powers, and how it was to monitor There is, however, a strangeof in the past. These include restrictions and enforce the GSCOP. It is widely restriction on the evidence he will be anticipated that a Bill may be included allowed to use when deciding whether in the Queen’s Speech on May 9th this to launch an investigation. He can year, and so there is some optimism take evidence privately from a named that the Adjudicator could be enshrined supplier, or he can use evidence that is in in law late in 2012 or early 2013, and the public domain. He cannot, however, so operational in the Summer of 2013. take anonymised evidence from a third Better late than never. party such as a trade association, or However, before we get ahead of even a whistle-blower from within a ourselves, the NFU believes there are retailer. What this means is that in many two significant shortcomings with the instances, the fact that an investigation legislation as currently drafted. Firstly, has been launched, will imply that a the Adjudicator will not be able to complaint has been made – something fine retailers who breach the code, and which is sure to deter many suppliers14 Food and Farming News Summer 2012
  • 15. Farmingfrom complaining who will be afraid thatit will be obvious that it is they who havecomplained. Already, many suppliers are unwillingto complain of being treated unfairly snippetsby retailers for fear of being subjectedto retributive action, for instanceloss of business with that retailer infuture. Indeed, this “climate of fear”was identified in the CompetitionCommission’s 2008 report and was themain reason it believed an ombudsman This is a summary of some of the points raised over thewas justified. The ability of the past several months that may have an impact on yourAdjudicator to investigate retailerbehaviour without revealing the identity, business or your tax bill. If you wish to discuss any ofeven inadvertently, of anyone who has these please contact your usual adviser.supplied information is crucial. It is vital that, if we are to have Stock valuations small paddocks with potential developmentan Adjudicator (as we surely must if Crops in store at the end of the financial year opportunities.GSCOP is to be effective – there is are valued at the lower of cost of productionalready evidence that it is being ignored) or market value. HMRC accepts actual cost Gifts out of Incomehe must be able to launch investigations or deemed cost calculated at 75% of market This relief is very useful where regular giftsbased on any information, whatever value. At current crop prices the actual cost out of surplus income fall outside Inheritancethe source, as long as he can satisfy of production can be considerably lower than Tax however the regular gifts need to be deemed cost. We have come across several documented.himself that it is credible. Under the farming businesses where their accountantsCompetition Act, the Office of Fair still use deemed cost therefore there is an Use of trustsTrading can launch investigations into opportunity to have a one off reduction with a Discretionary trusts are very useful vehicles to:anti-competitive practice where it has likely corresponding reduction in tax paid. • remove assets out of a partnership thatreasonable grounds to believe such Depreciation traditionally included in crop may be inhibiting Inheritance Reliefpractice exists. The Adjudicator should and tillage valuations should no longer be • pass income from grandparents tohave commensurate powers. By allowing included and again we have come across grandchildren without giving them the accountants who have not made this assets. Quite often this income canthe Adjudicator to accept evidence adjustment in tax computations. There is an be used for school fees and the childfrom a broad rather than narrow range opportunity to reduce these valuations and reclaim the tax back making it possible toof persons and bodies, breaches of benefits from a one-off reduction in tax bills. effectively fund school fees out ofthe GSCOP can be identified without untaxed income.revealing the identity of particular Machinery purchasessuppliers, and, as importantly, without Annual Investment Allowances have reduced Pension fundsthe implication that any particular dramatically and this has been publicised Self-Invested or Self-Administered Schemessupplier has complained. widely. Therefore it is very important now can be very tax efficient vehicles to fund to plan the funding of machinery well in on farm investment such as grain stores or At last, there is a real possibility advance to ensure maximum tax efficiency. reservoirs.that suppliers, and in particular small Consideration needs to be given to hiring A number of self-invested personalproducers, will get a better deal from machinery in some form and there are pensions could be used to purchasethe large supermarkets. Ultimately various ways to achieve this. Thought needs commercial property or farmland. Forthis will benefit consumers – the to be given to funding of machinery when example, joint ventures between severalreason the Competition Commission there is a company as a partner in a farming adjoining farmers could purchase farmlandrecommended an Ombudsman back in partnership as Annual Investment Allowances containing a reservoir through their pensions2008. We hope there will be a Bill in the are not available. and share the costs of purchase. These are specialist areas andQueen’s Speech in May, and then the Entrepreneur’s relief on capital gains professional advice should always be takenlast push can begin to ensure the powers Entrepreneur’s relief can reduce capital on pension arrangements.given to the Adjudicator allow him to do gains tax from 28% to 10% however inhis job effectively. order to achieve this it is essential to plan Enterprise Investment Schemes (EIS) at least 12 months in advance of a sale. It is possible to set up a simplified version of For example in the 12 months prior to the main EIS provisions to be eligible to defer exchange of contracts the asset needs to capital gains tax liabilities. These structures be used in the business and for disposal of are not restricted on shareholdings and canThe author is NFU’s head of government shares the vendor needs to be a officer or be 100% owned by one person.affairs Nick Von Westenholz. employee of a company. Beware renting out Food and Farming News Summer 2012 15
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