This document summarizes the third edition of the Food and Farming News newsletter. It discusses the relatively recession-tolerant agricultural industry and the need for risk management. It provides thoughts on potential funding gaps and how larger farming businesses can learn from corporates and co-operatives. The edition also looks at the main global economic drivers of wheat and milk as well as other topical issues such as the proposed Supermarket Adjudicator and tax on renewables. The newsletter hopes to provide both interesting and useful information to drive and grow businesses.

1. Food and
Farming News
Summer 2012
Welcome 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
david.eudall@ahdb.org.uk, 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 to
At the current time in spring 2012, the South America hurt the yield potential of yield development. Conversely a mild
market has two very different outlooks for Brazilian and Argentine maize crops. These damp July with reasonable sunshine would
the marketing season for July-June 2011/12 crops were seen as the world’s ‘back-up’ in be very positive for yield potential. The US
and 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 Demand
2000
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 for
1500
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.
0
1000 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 of
has two areas of conflicting fundamental disrupted supply at a time when demand markets are key drivers, the impact of
drivers. 2011 saw both a record global has increased. Wheat supply remains external markets is ever important. This
wheat harvest as well as a severe lack of comfortable, but the issue is with a lack of has been especially highlighted through the
coarse grain production. The global wheat maize stocks perpetuated by a poor US recent eurozone crisis. The lack of investor
production came in at a record 693Mt, crop. Until the new crop is harvested in confidence this has brought has been a
which is likely to lead to a record level of the summer of 2012, markets may remain weight upon commodity markets. At the
213Mt of stocks being carried into the next firm, barring any negative external market time of writing we seem to be moving to a
season. However, the lack of maize supply factors e.g. a slip back into eurozone/global resolution in the Greek debt crisis, although
is the key issue as stocks are remaining at recession. in a protracted manner. A move to a more
critically low levels. positive sentiment towards the global
The real driver of this lack of supply Looking forward economy will help to boost the whole
and 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 speculative
reached 314Mt, below the 316Mt of the impossible. Despite this difficulty, there investment in agricultural markets. These
previous 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 speed
harvest 2011. Yet a 7% reduction in yield be predominant in the global market’s and direction of markets. Agricultural
curtailed 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 the
lower output lies with stocks. US maize important, of these market drivers is again added investment money accelerates these
stocks 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 are
will only account for circa 6.3% of total US key instigator of market fluctuations over in a period of uncertain fundamentals with
demand for the current season. To put it recent months. For 2012, expectations are pressure on supply to meet a growing
another way, the US stock accounts for 23 that US farmers will again increase planted demand being hampered by unfavourable
days of potential US demand. Any further area in response to the recent higher prices. erratic weather. Knowledge, monitoring
supply disruption from the US will see a Yet the problem of recent poor supplies and action to manage risk in these markets
large 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 most
Most projects will have a reported situations would be:
Internal Rate of Return (IRR) and • SPV company with more than one
Payback Period. These figures will be class of shareholders
quoted before tax therefore tax could • no other company owned by the
have a dramatic effect on the viability of individuals therefore no restriction
the project. on AIAs or corporation tax
The key points for an effective threshold
renewable 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 Conclusion
Home consumption of electricity new territory for the average farmer There are many
produced from a SPV Ltd may be and guidance will be needed, however
taxable on the individuals and there many of these projects are below the opportunities for farming
may be a disallowance of some tax relief minimum deal of most corporate businesses in renewables
in proportion to private consumption finance advisers who specialise in however, to make a project
in 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 of
an existing agricultural business for businesses. homework needs to be done
example electricity production for a This then leaves the funding gap and to ensure the structure is
dairy enterprise, it could be argued many farm advisers and land agents are
quickly learning about this area of work
correct. Capital is required
that the whole project may be an
agricultural activity. A typical structure will be a new limited to get to planning stage and
company called a Special Purpose possibly to fund an appeal
The funding gap Vehicle (SPV) with the following:
and then a third or up to
Many smaller on-farm projects such • the funder will require say 30% up
as solar PV up to £200,000 to £300,000 to 50% of the shares of the company a half of the value of the
or 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 in
farming businesses. However projects preference shares at an interest rate
larger than these will usually require of 7% to 12% funding. It is very important
outside funding, particularly some AD • there will be set up fees and to use experienced
plants at around £5 million for a one professional fees for due diligence professional assistance at
megawatt 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 its
property as security for these new risk as much as possible
ventures and likewise the Banks are • the funder will require a
unwilling to provide funds and take non-executive director on the board
all the risk. A typical example is an to represent its interests – this person
AD plant with all planning permission may have to be paid say £20,000 to
and land availability. It is difficult to £40,000 per annum
obtain feed waste licences before the • it may be possible to agree an
AD plant is built and the Bank will exit strategy for the funder at the
not fund the project without a robust beginning whereby they are bought
waste licence as a secure feed input out by the SPV taking up bank finance
into 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 Markham
are either private equity partners or with a track history of trading. Director of Agriculture
Food and Farming News Summer 2012 5

6. Future
of the dairy industry
The UK dairy farming and processing These include:
sector looks set for a challenging • EU policy - the end of the EU milk
Closer supply chain
time over the next 12 months and quota system has already been
relationships - an important beyond as it still comes to terms with agreed, but there is no consensus as
way of combating market the impact of the varying economic to whether the outcome will be an
volatility 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 by
6 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 against
Pence 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: John.Giles@genusplc.com
wheat prices have fallen recently, being seen at the moment.
Food and Farming News Summer 2012 7

8. Focus on Northern Ireland –
fo d for
thought
businesses offers both strengths and
potential weaknesses to future growth.
The importance of the food and drink sector to the
Larger businesses have demonstrated
Northern Ireland market can be starkly seen in the through their growth phases that
following 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 “all
Key food and drink subsectors include Republic of Ireland is the second islands” basis with operations in
beef 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 the
contribute over 50% of the value added sustainability is a key issue in GB, this wider sector will be to learn from the
in the sector to the Northern Ireland is not a key issue in Northern Ireland example of our successful exporters
economy. All subsectors showed due to the level of product exported. and encourage a step change in growth
growth 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 of
targeted 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 businesses
local government. Similar to our near high on the agenda of food and drink have demonstrated their strength
neighbours in the Republic of Ireland businesses in NI to underpin their and resilience over the years despite
the food and drink sector has been a growth aspirations. challenges inc food scares , Foot
success with 14% of exports from the The sector has its dependency with and Mouth disease etc . The region
sector, with GB being a key export the Top 10 businesses representing has also a strong track record of
market. 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 have
grow 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 their
the sector in Northern Ireland is of the Top 10 still locally owned. customers, focusing on developing
GB representing 60% of export, The dominance of locally owned products in growth areas including
8 Food and Farming News Summer 2012

9. convenience and health and well
being. The dominance of the grocery In a recent report and consultation with the sector
multiples channel means that
businesses that want to achieve scale
the following key issues were cited as both challenges
will be required to equip themselves and potential opportunities:
to sell to this customer group. A
key challenge will be to ensure that • increasing costs (raw materials, transportation and energy) and ability to pass on to
their products are differentiated in their customers
already crowded shelf spaces and to • end consumer trading down to lower cost options
ensure that margins can be sustained • achieving subsector efficiency to ensure cost competitiveness
in the future. Northern Ireland food • sustainability of consistent raw material supply to the manufacturing sector
and drink businesses are looking • access to markets; exporting near markets or beyond
at 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 and
brand strategy can be a challenge for with over 1700 clients in the sector nationally, we feel we understand the needs of its
the SME business and may require owners. In the last 24 months the sector has been active for Grant Thornton as we have
the investment of external expertise advised food and drink clients on access to funding, acquisitions and disposals and
to achieve success. Opportunities are strategic reviews. Last year we supported one of the largest food and drink transactions
also evident in the food service sector in the UK when our client, SHS Group made its strategic acquisition of the branded
for NI businesses with once again the soft drinks business Bottlegreen. Recently we also completed a significant deal in the
access 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 strong
critical importance. “Co-opetition” potential for us to support the growth of key businesses in the sector. Our strong local
between SME’s may become more presence in the sector and our national and international network makes us ideally
prevalent 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 funding
John Barker With the Eurozone debt crisis continuing to hit the
John is a Global Relationship headlines on a weekly basis and a recent Government
Manager with HSBC Corporate report forecasting a business funding gap of as much
Banking and is a Corporate as £190 billion over the next five years no one could
Agrifood 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 industries.
gap
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 which
10 Food and Farming News Summer 2012

11. will further challenge the banks to retain Agriculture and Food businesses minute to refinance. Those businesses
profits, however those requirements remain relatively recession tolerant with more challenging requests will
will not be the key driver of credit and with the current commodity need to ensure their banks are given
availability 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 of
slowly been leaving the Eurozone as US and has been for as long as any of us Financial Due Diligence assigned to
money funds have reduced their deposits can remember. That long term view has the bank to secure funding. In all cases
and banks rein in the amount they lend meant that we have significant appetite having a banking group which really
to each other. The ECB’s intervention to to grow our lending book in the sector understands your business, its risks and
dole out unlimited amounts of three year focussing on good quality businesses opportunities is the most important
money has eased liquidity pressures for as they expand and invest. As a result, factor.
now. However central bank liquidity can bank lending appetite for both single
only help to buy time while the banks bank holds and our share of larger
heal themselves through a process of facilities in the sector has increased in
selling off non core assets and reducing the past few years.
credit exposures to peripheral Eurozone Looking at the wider market place,
governments, banks and corporates. corporates intending to refinance in
In the mean time the term ‘Liquidity the coming year should find reasonable
Premium’ will be here to stay – referring availability of funding with their
to the cost banks have to obtain the existing UK banks. However those
cash funding they require to then lend banking groups including foreign banks
on to their customers. This will see the may present more of a problem with
continued enhanced credit interest rates variable appetite in some quarters.
being paid over and above base rate As a result early dialogue with the
by banks who are themselves short of banks is advisable. When it comes to
cash. While some of those rates can be the funding structures, the majority
eye catching the shrewd investor must of corporate facilities today are being
remain cognisant of individual banks’ done on a three or four year term basis.
credit ratings when examining their risk You can expect covenants to be closely
profile and counterparty risk. negotiated and tested on a quarterly
Businesses looking for increased basis in the majority of cases. Finally
lending facilities are set to enjoy the margins are likely to be higher than
lowest overall cost of borrowing for those a corporate may have been able
decades. At the time of writing 10 to negotiate previously. Businesses
year cost of amortising funds was less operating internationally should give
than 3% cost of funds (Libor rate) special consideration to which currency
plus the lending margin meaning that they borrow in as Liquidity Premium
the majority of customers will enjoy and bank lending margins can vary by
funding cost for long term investment currency depending on the bank in
of between 5% and 6%. Talking to my question and their sources of funding
customers recently they are recognising and lending exposures.
that given the volatility seen in Libor To secure the best deal on the best
rates and the risk that it could again rise terms it will be critical to engage with
reacting to market shocks, fixing Libor your bank at an early stage. While
linked term debt de-risks their business funding is likely to be relatively widely
funding cost. At current rates that is a available for good quality customers
very affordable additional cost. you should not leave it to the last
Food and Farming News Summer 2012 11

12. Risk
management
Increasingly volatile market place
in agriculture calls for a new style
of management.
Many family farming businesses are
Table 1 - Family AGM
increasingly interacting with end EXAMPLE AGENDA
customers, ranging from the food chain
to on farm commercial tenants. As a Business performance
result of this and the general business • Physical – benchmarking
• Financial – annual accounts
environment they are operating in an
• Staff performance
increasingly volatile market place with
many financial, statutory, family and
People and family
operational risks interacting daily with • Personal goals and aspirations of
the business. It is difficult for families individuals
and individuals to deal with these • Capability – strengths and weaknesses
pressures without some form of logical • Training requirements
• Retirement and Succession
structured approach.
Most larger agribusinesses and
Financial
farmer-owned cooperatives have regular
• Bookkeeping
management meetings and proactively • Liaison with professionals – accountants
manage their risks through a risk and solicitors
register and many larger family farms • Pro active tax planning
could benefit from adopting these • Bank relationship and facilities
Changes do require an initial
impetus which is usually driven by the Personal requirements
• Drawings
younger generation. Many farming
• School fees
families do not communicate effectively • Holidays
allowing individuals, particularly the
younger generation, to discuss their Future investments
goals and aspirations in the business. • On Farm
Therefore a formal family meeting • Off Farm
called The Family AGM, chaired by an
independent person, can bring fresh life Alternative enterprises
into a family business. Table 1 shows a
typical agenda for a Family AGM. AOB
12 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 lenders
stating they will increasingly charge based on assessed trading risk rather than asset value. Therefore
businesses that have identified and quantified their risks with associated mitigation strategies, regularly
managed by a cohesive family team, may well be able to negotiate better borrowing terms in the future. Risk
management and regular family AGMs could well prove a good investment.
The Risks to a business are usually Table 2 - Managing your business risks
managed by drawing up a Risk Register
FINANCIAL STATUTORY FAMILY OPERATIONAL
as shown in Table 2 where 12 risks are
1 Interest 4 Health 7 Death 10 Key employee leaving
shown. These can be assessed in terms 2 Tax 5 RPA Compliance 8 Divorce 11 Commodity prices
of Likelihood and Impact by a graph 3 Banking facilities 6 Employee rights 9 Succession 12 Diversification
as shown in Table 3 and then a Risk
Mitigation Strategy Table 4
Table 3 - Risk management chart
The most important point is that
successful businesses are driven by
motivated and skilled individuals
therefore profit is mainly about people, 8
and 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 & supermarket
ombudsman
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 in
serious concern in recent years, not least to contracts, on requirements for the evidence he can use in launching an
because 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 have
the food chain, for example in the fruit liability for “shrinkage” of goods at a been somewhat allayed. The government
and veg sectors, many of whom have retailer’s premises, and on requirements has confirmed that the formal Bill will
left the industry in the last decade citing to use specific third parties for goods or allow the Secretary of State to introduce
unviable financial pressures brought services (e.g. packaging). fines at a later date, through secondary
about by unreasonable and impossible Coinciding with the GSCOP’s legislation, if he believes the existing
demands 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 clauses
seems to be in sight. The Competition and form an Ombudsman might take. in the Bill relating to the launching of
Commission, in a report into the subject Indeed, there has been cross-party investigations by the Adjudicator give us
in 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 in
and the establishment of some sort of some years – all the more reason why it the draft Bill, the Adjudicator’s most
Groceries Ombudsman to oversee the is of considerable disappointment that, significant power will be to investigate
relationship. The GSCOP came into some two years after the inception of potential breaches of the code by
force in February 2010, and establishes the GSCOP, there is still no body to retailers. It is envisaged that the latter
an overarching obligation on the ten enforce it. will primarily be used to uncover
largest groceries retailers to deal fairly Nevertheless, the coalition patterns of behaviour and systematic
with suppliers. It sets out a number government did publish a draft abuses by retailers. Furthermore, the
of requirements aimed at preventing Groceries Adjudicator Bill last year, Adjudicator will have a duty to protect
retailers 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 strange
of 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 suppliers
14 Food and Farming News Summer 2012

15. Farming
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
snippets
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 This is a summary of some of the points raised over the
was justified. The ability of the past several months that may have an impact on your
Adjudicator to investigate retailer
behaviour without revealing the identity, business or your tax bill. If you wish to discuss any of
even 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 development
an 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 production
already evidence that it is being ignored) or market value. HMRC accepts actual cost Gifts out of Income
he must be able to launch investigations or deemed cost calculated at 75% of market This relief is very useful where regular gifts
based on any information, whatever value. At current crop prices the actual cost out of surplus income fall outside Inheritance
the 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 accountants
Competition Act, the Office of Fair still use deemed cost therefore there is an Use of trusts
Trading 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 that
reasonable grounds to believe such Depreciation traditionally included in crop may be inhibiting Inheritance Relief
practice exists. The Adjudicator should and tillage valuations should no longer be • pass income from grandparents to
have 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 can
the Adjudicator to accept evidence
adjustment in tax computations. There is an be used for school fees and the child
from a broad rather than narrow range
opportunity to reduce these valuations and reclaim the tax back making it possible to
of persons and bodies, breaches of benefits from a one-off reduction in tax bills. effectively fund school fees out of
the GSCOP can be identified without untaxed income.
revealing the identity of particular Machinery purchases
suppliers, and, as importantly, without Annual Investment Allowances have reduced Pension funds
the implication that any particular dramatically and this has been publicised Self-Invested or Self-Administered Schemes
supplier 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 personal
producers, will get a better deal from machinery in some form and there are pensions could be used to purchase
the large supermarkets. Ultimately various ways to achieve this. Thought needs commercial property or farmland. For
this will benefit consumers – the to be given to funding of machinery when example, joint ventures between several
reason the Competition Commission there is a company as a partner in a farming adjoining farmers could purchase farmland
recommended an Ombudsman back in partnership as Annual Investment Allowances containing a reservoir through their pensions
2008. We hope there will be a Bill in the are not available. and share the costs of purchase.
These are specialist areas and
Queen’s Speech in May, and then the
Entrepreneur’s relief on capital gains professional advice should always be taken
last 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 in
his 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 can
The 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

16. If you would like to find out more about how Grant Thornton can assist
you, please contact one of the regional specialists listed below.
Belfast London
Charlie Kerlin Trefor Griffith
T 028 9031 6510 T 020 7728 2537
E charlie.kerlin@uk.gt.com E trefor.a.griffith@uk.gt.com
Cambridge Norwich
Ian Carr Nigel Savory
T 01223 225625 T 01603 203200
E ian.carr@uk.gt.com E nigel.r.savory@uk.gt.com
Kettering Oxford
Marissa Lebeau Kathy Fidgeon
T 01536 315960 T 01865 799925
E marissa.lebeau@uk.gt.com E kathy.fidgeon@uk.gt.com
Ashley Clarkson Scotland
T 01536 315443 James Chadwick
E ashley.clarkson@uk.gt.com T 0141 223 0709
E james.chadwick@uk.gt.com
Leeds
Jonathan Riley Southampton
T 0113 200 1542 Clive Buckland
E jonathan.c.riley@uk.gt.com T 02380 381231
E clive.g.buckland@uk.gt.com
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