Food and farming - summer 2012

Summer 2012

Welcome to the third edition of the Food and Farming newsletter.

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, coupled with the volatility of input prices, does need the focus of management.

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.

Food andFarming News

Contents

01 Introduction02 A global grain market04 Renewables - making the finances stack up06 Future of the dairy industry08 Focus on Northern Ireland - food for thought10 The funding gap12 Risk management14 Food & supermarket ombudsman15 Farming snippets16 Contact details

A global grain market: volatile times to continue

David Eudall, Senior Grain and Oilseed Analyst, [email protected], 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.

The combined impact of population growth and increased incomes in developing countries is already in the focus of global markets. The rationale being, we’re pretty certain that demand for food is going to rise, so where is the supply going to come from? This pressure on supply is a key ingredient in the volatile market direction.

The headline of 9 billion people to be on the Earth by 2050 steals the attention. However, it is worth keeping an open mind on the topic of population growth. To understand where global markets are moving we need to look at the fundamental physical supply and demand picture of today.

Global Grain Prices: supply and demand led volatility

50

100

150

200

250

05/0

1/20

07

05/0

4/20

07

05/0

7/20

07

05/1

0/20

07

05/0

1/20

08

05/0

4/20

08

05/0

7/20

08

05/1

0/20

08

05/0

1/20

09

05/0

4/20

09

05/0

7/20

09

05/1

0/20

09

05/0

1/20

10

05/0

4/20

10

05/0

7/20

10

05/1

0/20

10

05/0

1/20

11

05/0

4/20

11

05/0

7/20

11

05/1

0/20

11

05/0

1/20

12

£ pe

r to

nne

London Wheat Paris Wheat Chicago Wheat Chicago Maize

2 Food and Farming News Summer 2012

Current market driversAt the current time in spring 2012, the market has two very different outlooks for the marketing season for July-June 2011/12 and the July-June 2012/13 season.

Starting with 2011/12, the market has two areas of conflicting fundamental drivers. 2011 saw both a record global wheat harvest as well as a severe lack of coarse grain production. The global wheat production came in at a record 693Mt, which is likely to lead to a record level of 213Mt of stocks being carried into the next season. However, the lack of maize supply is the key issue as stocks are remaining at critically low levels.

The real driver of this lack of supply and stocks lies with the US maize market. Production in 2011 is estimated to have reached 314Mt, below the 316Mt of the previous season, and well below potential. US maize planted area expanded by 4% for harvest 2011. Yet a 7% reduction in yield curtailed production potential.

The principal volatile factor from this lower output lies with stocks. US maize stocks at the end of September 2012 are forecast at 20.35Mt. This forecast stock level will only account for circa 6.3% of total US demand for the current season. To put it another way, the US stock accounts for 23 days of potential US demand. Any further supply disruption from the US will see a large market reaction.

More recently, over the festive & New

Year period, extreme dry weather in South America hurt the yield potential of Brazilian and Argentine maize crops. These crops were seen as the world’s ‘back-up’ in light of the poor US harvest.

Put simply, erratic weather has disrupted supply at a time when demand has increased. Wheat supply remains comfortable, but the issue is with a lack of maize stocks perpetuated by a poor US crop. Until the new crop is harvested in the summer of 2012, markets may remain firm, barring any negative external market factors e.g. a slip back into eurozone/global recession.

Looking forwardTrying to predict what the price of grain will be in a year’s time is near impossible. Despite this difficulty, there are some principal areas that have driven current volatility that will continue to be predominant in the global market’s attention through 2012.

The first, and some may say most important, of these market drivers is again the US maize crop. As noted previously, the US maize crop, or lack thereof, has been a key instigator of market fluctuations over recent months. For 2012, expectations are that US farmers will again increase planted area in response to the recent higher prices.

Yet the problem of recent poor supplies hasn’t been area planted but yields achieved. The key month of yield forming is through

July. A hot, dry, July will be negative to yield development. Conversely a mild damp July with reasonable sunshine would be very positive for yield potential. The US spring planting season, and yield forming summer, will be the major factor in grain market movements over the next year.

From a wheat perspective, we already know that there is to be a record stock level carried into the next season. Globally, plantings are anticipated to expand for 2012 harvest. Therefore with a reasonable growing season, the wheat market may be very comfortably supplied through the 2012/13 season.

External marketsWhilst the physical fundamentals of markets are key drivers, the impact of external markets is ever important. This has been especially highlighted through the recent eurozone crisis. The lack of investor confidence this has brought has been a weight upon commodity markets. At the time of writing we seem to be moving to a resolution in the Greek debt crisis, although in a protracted manner. A move to a more positive sentiment towards the global economy will help to boost the whole commodity complex in the longer-term.

There is also the impact of speculative investment in agricultural markets. These speculators, in my opinion, do not ‘create’ volatility but merely accentuate the speed and direction of markets. Agricultural markets would still react to, for instance, a reduction in global maize supply, yet the added investment money accelerates these market movements.

To conclude, global grain markets are in a period of uncertain fundamentals with pressure on supply to meet a growing demand being hampered by unfavourable erratic weather. Knowledge, monitoring and action to manage risk in these markets is ever important to protect business stability.

0

50

100

150

200

250

300

350

400

1000

1500

2000

2001/2002 2002-2003 2003-2004 2004/2005 2005/2006 2006-2007 2007/2008 2008/2009 2009/2010 2010-2011 2011-2012

Global production of three main grains: fluctuates around increasing demand to create changing stock profileGlobal stocks Global Production Global Demand

Food and Farming News Summer 2012 3

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 strategyMost projects will have a reported Internal Rate of Return (IRR) and Payback Period. These figures will be quoted before tax therefore tax could have a dramatic effect on the viability of the project.

The key points for an effective renewable business structure are:• AnnualInvestmentAllowances

(AIA) currently £25,000 per tax year will normally have been utilised in a farming business and restrictions apply on obtaining further AIAs with connected persons or businesses. It should be possible to obtain AIAs in a company if one does not already exist

• theeffectivetaxrateontheFITand sales of electricity needs to be minimised

• ifaSpecialPurposeVehicle(SPV)company is used thought needs to be given to extracting the profits through dividends to basic rate taxpayers such as spouses.

Therefore the target structure in most situations would be:• SPVcompanywithmorethanone

class of shareholders • noothercompanyownedbythe

individuals therefore no restriction on AIAs or corporation tax threshold

• insomecircumstancesitmaybebeneficial to run the project in a partnership or LLP in the early years to benefit from any losses and incorporate when trading profits are achieved.


Other considerationsHome consumption of electricity producedfromaSPVLtdmaybetaxable on the individuals and there may be a disallowance of some tax relief in proportion to private consumption in a non-corporate environment.

If the project is an integral part of an existing agricultural business for example electricity production for a dairy enterprise, it could be argued that the whole project may be an agricultural activity.

The funding gapMany smaller on-farm projects such assolarPVupto£200,000to£300,000or smaller wind turbines of around £100,000 can be funded through farming businesses. However projects larger than these will usually require outside funding, particularly some AD plants at around £5 million for a one megawatt capacity.

Many farming businesses do not wish to provide their land and property as security for these new ventures and likewise the Banks are unwilling to provide funds and take all the risk. A typical example is an AD plant with all planning permission and land availability. It is difficult to obtain feed waste licences before the AD plant is built and the Bank will not fund the project without a robust waste licence as a secure feed input into the plant.

Therefore the choices available are either private equity partners or

venture capital funds. This is relatively new territory for the average farmer and guidance will be needed, however many of these projects are below the minimum deal of most corporate finance advisers who specialise in raising funds usually for takeovers and management buy outs in larger businesses.

This then leaves the funding gap and many farm advisers and land agents are quickly learning about this area of workA typical structure will be a new limited company called a Special Purpose Vehicle(SPV)withthefollowing:• thefunderwillrequiresay30%up

to 50% of the shares of the company • thefunderwillprovidethecapital

in the form of a loan, loan notes or preference shares at an interest rate of 7% to 12%

• therewillbesetupfeesandprofessional fees for due diligence work, checking all the paperwork and warranties on equipment etc. As the funder will wish to minimise its risk as much as possible

• thefunderwillrequirea non-executive director on the board to represent its interests – this person may have to be paid say £20,000 to £40,000 per annum

• itmaybepossibletoagreeanexit strategy for the funder at the beginning whereby they are bought outbytheSPVtakingupbankfinancein say year 5 and at that stage the bank may be willing to fund the project with a track history of trading.

Conclusion

There are many opportunities for farming businesses in renewables however, to make a project a success, a great deal of homework needs to be done to ensure the structure is correct. Capital is required to get to planning stage and possibly to fund an appeal and then a third or up to a half of the value of the project needs to be given to a funder to take the risk in funding. It is very important to use experienced professional assistance at each stage to ensure success.

Gary J MarkhamDirector of Agriculture


Future of the dairy industry

The UK dairy farming and processing sector looks set for a challenging time over the next 12 months and beyond as it still comes to terms with the impact of the varying economic conditions around the world. This commercial challenge is all set against a wider background of the need to feed a world population that has now reached 7 billion. Dairy businesses in the UK are currently experiencing the biggest economic down turn since the 1930s. The current GDP in the UK, for example, is as much as 10% less than it would have been without a recession. Predictions are that the UK economy might not return to ‘normality’ until 2014. There are a huge number of key external industry drivers the dairy sector needs to take into consideration.

These include:• EU policy - the end of the EU milk

quota system has already been agreed, but there is no consensus as to whether the outcome will be an increase in milk production in the EU. The simple answer is that some countries might well produce more milk if they have a combination of efficient farming systems, a strong and consolidated processing sector and access to a range of markets. The Netherlands, Denmark, France and maybe Ireland in particular all seem better placed than others. A number of countries have already been farming below quota for some time; this includes the UK

• World dairy production - world 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 by

Closer supply chain relationships - an important way of combating market volatility


rising prices for inputs and the time lag between prices going up and payment being received. Higher prices can also squeeze margins for processors, who are sometimes not able to pass on such increases to their retail or food service customers

• Feed prices – are largely determined by wheat prices on global markets. Sharp increases can often reflect reactions to global events such as what has been happening in Asia and the Middle East – rather than to data on crop production, quality and availability. The international market is still nervous in its attitude. Even though wheat prices have fallen recently,

they are still at high levels compared to those seen in previous years

• The role of large dairy farms – large scale dairy farms are now becoming more common around the rest of the world – partly in response to the forecast increasing population growth to 2050. In parts of the US dairy herds of up to 20,000 cows are not uncommon. It is worth noting though that the role of the small scale family dairy farm in the US is still critical – over 75% of US dairy units still have fewer than 100 animals. However, the role of larger dairy farms becomes more challenged when costs for feeding materials such as wheat and soya are at the high levels being seen at the moment.

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–orbeconsolidated• Ongoingfullvaluechainanalysis-

not least for businesses operating on slender margins, every penny literally does count

• Useeverybitoftechnologyavailablein order to reduce costs and boost yields

• Benchmarkonaregularbasisagainstother best of class operations

• Aimtobetheleaderonconsumerand category knowledge unless the discussion with customers is to be about price and price only.

• InvestinR&Dandknowledgetransfer and look to leverage the resources and expertise of commercial partners

The UK and international dairy supply chain is going through an extraordinary period of change. There are reports galore telling us why we have reached this situation. There seems to be less on what we need to do in order to meet the challenges and then for the well informed, bold and brave companies to take advantage of the opportunities that will be presented by them.

John Giles, Divisional Director with Promar International, the value chain consulting arm of Genus plc, has worked in 60 countries and is the current Chair oftheFood,Drink&AgricultureGroup of the Chartered Institute of Marketing.

Email: [email protected]

10

15

20

25

30

35

Penc

e pe

r lit

re

International Dairy Milk Prices Brazil US China UKEU Average

Jun

2008

Jul 2

008

Aug

2008

Sep

2008

Oct

200

8N

ov 2

008

Dec

2008

Jan

2009

Feb

2009

Mar

200

9Ap

r 20

09M

ay 2

009

Jun

2009

Jul 2

009

Aug

2009

Sep

2009

Oct

200

9N

ov 2

009

Dec

2009

Jan

2010

Feb

2010

Mar

201

0Ap

r 20

10M

ay 2

010

Jun

2010

Jul 2

010

Aug

2010

Sep

2010

Oct

201

0N

ov 2

010

Dec

2010

Jan

2011

Feb

2011

Mar

201

1Ap

r 20

11M

ay 2

011

Jun

2011

Jul 2

011

Aug

2011

Sep

2011

Oct

201

1N

ov 2

011

Dec

2011

Jan

2012

Feb

2012

Mar

201

2


Focus on Northern Ireland –

fo d for thoughtThe importance of the food and drink sector to the Northern Ireland market can be starkly seen in the following latest statistics:

• Total gross turnover at £3.5bn increasing year on year

• Food and drink processing accounted for almost 24% of total manufacturing sales

• Total employees in food and drink processing at 19,685 full time equivalent jobs over 20% of all manufacturing jobs

Key food and drink subsectors include beef and lamb (26%), dairy products (23%), poultry meat (17%) with drinks at 10% of sales and combined contribute over 50% of the value added in the sector to the Northern Ireland economy. All subsectors showed growth in the latest year with greatest % growth in drinks, dairy and eggs.

Food and drink is a key sector targeted for export growth in the future and this fact has been recognised by the local government. Similar to our near neighbours in the Republic of Ireland the food and drink sector has been a success with 14% of exports from the sector, with GB being a key export market. In a recent survey the sector reported expectation that exports could grow by 40% over the next decade.

Currently the largest market for the sector in Northern Ireland is GB representing 60% of export,

Republic of Ireland is the second largest destination market at 25% with other EU at 12% and Rest of World representing only 3%. While food sustainability is a key issue in GB, this is not a key issue in Northern Ireland due to the level of product exported. Only 30% of the sales of the entire Northern Ireland food and drink sector were made for the domestic market. Ensuring the development of existing and new export markets is high on the agenda of food and drink businesses in NI to underpin their growth aspirations.

The sector has its dependency with the Top 10 businesses representing close to 50% of turnover and employment. Within the sector there is a predominance of businesses that are under local ownership with 6 of the Top 10 still locally owned. The dominance of locally owned

businesses offers both strengths and potential weaknesses to future growth. Larger businesses have demonstrated through their growth phases that there is a need for strengthening their management teams, investing in improving efficiencies and ensuring that their funding structures are appropriate to support growth. The most successful businesses in the future will be those that learn these lessons and appropriately plan to seize opportunities that are increasingly going to be outside Northern Ireland. A number of the largest NI owned business already operate on an “all islands” basis with operations in Republic of Ireland and increasingly in GB.

A key focus for the success of the wider sector will be to learn from the example of our successful exporters and encourage a step change in growth for some of the currently medium and smaller players in the market. The sector is ambitious with a target of being a £4bn industry by 2020.

Northern Ireland businesses have demonstrated their strength and resilience over the years despite challenges inc food scares , Foot and Mouth disease etc . The region has also a strong track record of quality products and innovation. The Northern Ireland players have been moving to focus on delivering more added value product to their customers, focusing on developing products in growth areas including


convenience and health and well being. The dominance of the grocery multiples channel means that businesses that want to achieve scale will be required to equip themselves to sell to this customer group. A key challenge will be to ensure that their products are differentiated in already crowded shelf spaces and to ensure that margins can be sustained in the future. Northern Ireland food and drink businesses are looking at creating this distinction through development of their brand identity. Once again deploying an effective brand strategy can be a challenge for the SME business and may require the investment of external expertise to achieve success. Opportunities are also evident in the food service sector for NI businesses with once again the access to key distribution channels and achieving this competitively being of critical importance. “Co-opetition” between SME’s may become more prevalent in the future.

In a recent report and consultation with the sector the following key issues were cited as both challenges and potential opportunities:

• increasing costs (raw materials, transportation and energy) and ability to pass on to their customers

• end consumer trading down to lower cost options• achieving subsector efficiency to ensure cost competitiveness• sustainability of consistent raw material supply to the manufacturing sector• access to markets; exporting near markets or beyond• access to growth finance.

Grant Thornton represent a number of key players in the food and drink market and with over 1700 clients in the sector nationally, we feel we understand the needs of its owners. In the last 24 months the sector has been active for Grant Thornton as we have advised food and drink clients on access to funding, acquisitions and disposals and strategic reviews. Last year we supported one of the largest food and drink transactions in the UK when our client, SHS Group made its strategic acquisition of the branded soft drinks business Bottlegreen. Recently we also completed a significant deal in the Northern Ireland seafood sector with the sale of Rockall Seafoods to Whitby Seafoods.

In a dynamic market there is opportunity for growth and we see that there is strong potential for us to support the growth of key businesses in the sector. Our strong local presence in the sector and our national and international network makes us ideally placed to advise business owners and managers through their growth plans.


Charlie KerlinDirector - Head of Corporate Finance

The fundingJohn BarkerJohn is a Global Relationship Manager with HSBC Corporate Banking and is a Corporate Agrifood Specialist.

Keen entrepreneurs are expert risk managers, weighing up the options before them and forming a clear strategy to deliver results. In almost all cases one of the keys to success is access to working and investment capital to allow the wheels of commerce to turn.

It is therefore critical to secure bank support for their ventures. Continual reports in the media would suggest such support has been harder to acquire in recent times.

Prior to the Financial Crisis in 2008 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 which

With the Eurozone debt crisis continuing to hit the headlines on a weekly basis and a recent Government report forecasting a business funding gap of as much as £190 billion over the next five years no one could 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 industries.


gap

will further challenge the banks to retain profits, however those requirements will not be the key driver of credit availability moving forward.

Since the summer of 2011 money has slowly been leaving the Eurozone as US money funds have reduced their deposits and banks rein in the amount they lend to each other. The ECB’s intervention to dole out unlimited amounts of three year money has eased liquidity pressures for now. However central bank liquidity can only help to buy time while the banks heal themselves through a process of selling off non core assets and reducing credit exposures to peripheral Eurozone governments, banks and corporates. In the mean time the term ‘Liquidity Premium’ will be here to stay – referring to the cost banks have to obtain the cash funding they require to then lend on to their customers. This will see the continued enhanced credit interest rates being paid over and above base rate by banks who are themselves short of cash. While some of those rates can be eye catching the shrewd investor must remain cognisant of individual banks’ credit ratings when examining their risk profile and counterparty risk.

Businesses looking for increased lending facilities are set to enjoy the lowest overall cost of borrowing for decades. At the time of writing 10 year cost of amortising funds was less than 3% cost of funds (Libor rate) plus the lending margin meaning that the majority of customers will enjoy funding cost for long term investment of between 5% and 6%. Talking to my customers recently they are recognising that given the volatility seen in Libor rates and the risk that it could again rise reacting to market shocks, fixing Libor linked term debt de-risks their business funding cost. At current rates that is a very affordable additional cost.

Agriculture and Food businesses remain relatively recession tolerant and with the current commodity prices most are thriving. Within HSBC Agrifood is our most preferred sector and has been for as long as any of us can remember. That long term view has meant that we have significant appetite to grow our lending book in the sector focussing on good quality businesses as they expand and invest. As a result, bank lending appetite for both single bank holds and our share of larger facilities in the sector has increased in the past few years.

Looking at the wider market place, corporates intending to refinance in the coming year should find reasonable availability of funding with their existing UK banks. However those banking groups including foreign banks may present more of a problem with variable appetite in some quarters. As a result early dialogue with the banks is advisable. When it comes to the funding structures, the majority of corporate facilities today are being done on a three or four year term basis. You can expect covenants to be closely negotiated and tested on a quarterly basis in the majority of cases. Finally margins are likely to be higher than those a corporate may have been able to negotiate previously. Businesses operating internationally should give special consideration to which currency they borrow in as Liquidity Premium and bank lending margins can vary by currency depending on the bank in question and their sources of funding and lending exposures.

To secure the best deal on the best terms it will be critical to engage with your bank at an early stage. While funding is likely to be relatively widely available for good quality customers you should not leave it to the last

minute to refinance. Those businesses with more challenging requests will need to ensure their banks are given good visibility, an excellent business plan and potentially the benefit of Financial Due Diligence assigned to the bank to secure funding. In all cases having a banking group which really understands your business, its risks and opportunities is the most important factor.


Many family farming businesses are increasingly interacting with end customers, ranging from the food chain to on farm commercial tenants. As a result of this and the general business environment they are operating in an increasingly volatile market place with many financial, statutory, family and operational risks interacting daily with the business. It is difficult for families and individuals to deal with these pressures without some form of logical structured approach.

Most larger agribusinesses and farmer-owned cooperatives have regular management meetings and proactively manage their risks through a risk register and many larger family farms could benefit from adopting these

Changes do require an initial impetus which is usually driven by the younger generation. Many farming families do not communicate effectively allowing individuals, particularly the younger generation, to discuss their goals and aspirations in the business. Therefore a formal family meeting called The Family AGM, chaired by an independent person, can bring fresh life into a family business. Table 1 shows a typical agenda for a Family AGM.


Risk management

Increasingly volatile market place in agriculture calls for a new style of management.

Table1-FamilyAGMEXAMPLE AGENDA

Business performance• Physical – benchmarking • Financial – annual accounts• Staff performance

People and family• Personal goals and aspirations of

individuals• Capability – strengths and weaknesses• Training requirements • Retirement and Succession

Financial• Bookkeeping• Liaison with professionals – accountants

and solicitors• Pro active tax planning• Bank relationship and facilities

Personal requirements• Drawings • School fees • Holidays

Future investments• On Farm• Off Farm

Alternative enterprises

AOB


Gary J MarkhamDirector of Agriculture

Ashley ClarksonAssociate Director - Food and Beverage

The Risks to a business are usually managed by drawing up a Risk Register as shown in Table 2 where 12 risks are shown. These can be assessed in terms of Likelihood and Impact by a graph as shown in Table 3 and then a Risk Mitigation Strategy Table 4

The most important point is that successful businesses are driven by motivated and skilled individuals therefore profit is mainly about people, and not necessarily numbers.

Table2-Managingyourbusinessrisks

FINANCIAL1 Interest2 Tax3 Banking facilities

STATUTORY4 Health5 RPA Compliance6 Employee rights

FAMILY7 Death8 Divorce9 Succession

OPERATIONAL10 Key employee leaving11 Commodity prices12 Diversification

13

4

5

67

8

9

10 11

12

Table3-Riskmanagementchart

Impa

ct

Likelihood

2

79

12

11 1

85

103

4

6

Table4-Riskmitigationstrategy

1 Fixed rates, cap and collar2 Proactive tax planning, company strategy3 Forward planning, budgets4 Staff training, annual audits5 Professional assistance6 Professional legal advice

7 Business strategy - family AGM8 Use of trusts - review asset ownership9 Business strategy - family AGM10 Motivation, management skills11 Hedging12 Managing training professional advice

John Barker HSBC in his article infers that margins are likely to be higher in the future with many lenders stating they will increasingly charge based on assessed trading risk rather than asset value. Therefore businessesthathaveidentifiedandquantifiedtheirriskswithassociatedmitigationstrategies,regularlymanagedbyacohesivefamilyteam,maywellbeabletonegotiatebetterborrowingtermsinthefuture.Riskmanagement and regular family AGMs could well prove a good investment.

Food & supermarket ombudsman

The issue has become the focus of serious concern in recent years, not least because of the cost pressures imposed on primary producers at the far end of the food chain, for example in the fruit and veg sectors, many of whom have left the industry in the last decade citing unviable financial pressures brought about by unreasonable and impossible demands from their retailer customers.

At last, however, a resolution seems to be in sight. The Competition Commission, in a report into the subject in 2008, recommended a Groceries Supply Code of Practice, or GSCOP, and the establishment of some sort of Groceries Ombudsman to oversee the relationship. The GSCOP came into force in February 2010, and establishes an overarching obligation on the ten largest groceries retailers to deal fairly with suppliers. It sets out a number of requirements aimed at preventing retailers from engaging in the sorts of unfair practices they have been accused of in the past. These include restrictions

on retrospective and unilateral changes to contracts, on requirements for contributions to marketing costs without prior agreement, on imposing supplier liability for “shrinkage” of goods at a retailer’s premises, and on requirements to use specific third parties for goods or services (e.g. packaging).

Coinciding with the GSCOP’s publication, the Labour government initiated a consultation into the powers and form an Ombudsman might take. Indeed, there has been cross-party support for an Ombudsman (now referred to as the Adjudicator), for some years – all the more reason why it is of considerable disappointment that, some two years after the inception of the GSCOP, there is still no body to enforce it.

Nevertheless, the coalition government did publish a draft Groceries Adjudicator Bill last year, setting out the legal basis for the body’s powers, and how it was to monitor and enforce the GSCOP. It is widely anticipated that a Bill may be included in the Queen’s Speech on May 9th this year, and so there is some optimism that the Adjudicator could be enshrined in law late in 2012 or early 2013, and so operational in the Summer of 2013. Better late than never.

However, before we get ahead of ourselves, the NFU believes there are two significant shortcomings with the legislation as currently drafted. Firstly, the Adjudicator will not be able to fine retailers who breach the code, and

secondly he will be far too restricted in the evidence he can use in launching an investigation into unfair practices.

Our concerns on the first point have been somewhat allayed. The government has confirmed that the formal Bill will allow the Secretary of State to introduce fines at a later date, through secondary legislation, if he believes the existing sanctions of “naming and shaming” prove ineffective. However, the clauses in the Bill relating to the launching of investigations by the Adjudicator give us much greater cause for concern.

Under the provisions set out in the draft Bill, the Adjudicator’s most significant power will be to investigate potential breaches of the code by retailers. It is envisaged that the latter will primarily be used to uncover patterns of behaviour and systematic abuses by retailers. Furthermore, the Adjudicator will have a duty to protect the anonymity of complainants.

There is, however, a strange restriction on the evidence he will be allowed to use when deciding whether to launch an investigation. He can take evidence privately from a named supplier, or he can use evidence that is in the public domain. He cannot, however, take anonymised evidence from a third party such as a trade association, or even a whistle-blower from within a retailer. What this means is that in many instances, the fact that an investigation has been launched, will imply that a complaint has been made – something which is sure to deter many suppliers

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 author is NFU’s head of government affairs Nick Von Westenholz.

from complaining who will be afraid that it will be obvious that it is they who have complained.

Already, many suppliers are unwilling to complain of being treated unfairly by retailers for fear of being subjected to retributive action, for instance loss of business with that retailer in future. Indeed, this “climate of fear” was identified in the Competition Commission’s 2008 report and was the main reason it believed an ombudsman was justified. The ability of the Adjudicator to investigate retailer behaviour without revealing the identity, even inadvertently, of anyone who has supplied information is crucial.

It is vital that, if we are to have an Adjudicator (as we surely must if GSCOP is to be effective – there is already evidence that it is being ignored) he must be able to launch investigations based on any information, whatever the source, as long as he can satisfy himself that it is credible. Under the Competition Act, the Office of Fair Trading can launch investigations into anti-competitive practice where it has reasonable grounds to believe such practice exists. The Adjudicator should have commensurate powers. By allowing the Adjudicator to accept evidence from a broad rather than narrow range of persons and bodies, breaches of the GSCOP can be identified without revealing the identity of particular suppliers, and, as importantly, without the implication that any particular supplier has complained.

At last, there is a real possibility that suppliers, and in particular small producers, will get a better deal from the large supermarkets. Ultimately this will benefit consumers – the reason the Competition Commission recommended an Ombudsman back in 2008. We hope there will be a Bill in the Queen’s Speech in May, and then the last push can begin to ensure the powers given to the Adjudicator allow him to do his job effectively.

Farming snippets

Stock valuationsCrops in store at the end of the financial year are valued at the lower of cost of production or market value. HMRC accepts actual cost or deemed cost calculated at 75% of market value. At current crop prices the actual cost of production can be considerably lower than deemed cost. We have come across several farming businesses where their accountants still use deemed cost therefore there is an opportunity to have a one off reduction with a likely corresponding reduction in tax paid.

Depreciation traditionally included in crop and tillage valuations should no longer be included and again we have come across accountants who have not made this adjustment in tax computations. There is an opportunity to reduce these valuations and benefits from a one-off reduction in tax bills.

Machinery purchases Annual Investment Allowances have reduced dramatically and this has been publicised widely. Therefore it is very important now to plan the funding of machinery well in advance to ensure maximum tax efficiency. Consideration needs to be given to hiring machinery in some form and there are various ways to achieve this. Thought needs to be given to funding of machinery when there is a company as a partner in a farming partnership as Annual Investment Allowances are not available. Entrepreneur’s relief on capital gainsEntrepreneur’s relief can reduce capital gains tax from 28% to 10% however in order to achieve this it is essential to plan at least 12 months in advance of a sale. For example in the 12 months prior to exchange of contracts the asset needs to be used in the business and for disposal of shares the vendor needs to be a officer or employee of a company. Beware renting out

small paddocks with potential development opportunities.

Gifts out of Income This relief is very useful where regular gifts out of surplus income fall outside Inheritance Tax however the regular gifts need to be documented.

Use of trustsDiscretionary trusts are very useful vehicles to: • remove assets out of a partnership that

may be inhibiting Inheritance Relief• pass income from grandparents to

grandchildren without giving them the assets. Quite often this income can be used for school fees and the child reclaim the tax back making it possible to effectively fund school fees out of untaxed income.

Pension fundsSelf-Invested or Self-Administered Schemes can be very tax efficient vehicles to fund on farm investment such as grain stores or reservoirs.

A number of self-invested personal pensions could be used to purchase commercial property or farmland. For example, joint ventures between several adjoining farmers could purchase farmland containing a reservoir through their pensions and share the costs of purchase.

These are specialist areas and professional advice should always be taken on pension arrangements.

Enterprise Investment Schemes (EIS)It is possible to set up a simplified version of the main EIS provisions to be eligible to defer capital gains tax liabilities. These structures are not restricted on shareholdings and can be 100% owned by one person.

This is a summary of some of the points raised over the past several months that may have an impact on your business or your tax bill. If you wish to discuss any of these please contact your usual adviser.


© 2012 Grant Thornton UK LLP. All rights reserved.

‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership.

Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to ‘Grant Thornton’ are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients.

This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

grant-thornton.co.uk V21673

If you would like to find out more about how Grant Thornton can assist you, please contact one of the regional specialists listed below.

BelfastCharlie KerlinT 028 9031 6510E [email protected]

CambridgeIan CarrT 01223 225625E [email protected]

KetteringMarissa Lebeau T 01536 315960 E [email protected]

Ashley Clarkson T 01536 315443 E [email protected]

LeedsJonathan RileyT 0113 200 1542E [email protected]

LondonTrefor GriffithT 020 7728 2537E [email protected]

NorwichNigel SavoryT 01603 203200E [email protected]

OxfordKathy FidgeonT 01865 799925E [email protected]

ScotlandJames ChadwickT 0141 223 0709E [email protected]

Southampton Clive BucklandT 02380 381231E [email protected]

Technology

Food and farming - summer 2012