The Company is committed to managing risks consistently and continuously. As part of its risk management system, the Company identifies risk, consider the severity and prioritization of the risks as well as selects and deploys risk responses. Management also considers the potential costs and benefits of different risk reponses. For risks related to regulatory obligations and compliances, the management will look on the expectations of stakeholders instead of costs and benefits perspective.
Overall, the key risks faced by the Company in running its businesses are as follow:
The high demand for poultry and the growth of Indonesia’s poultry industry in areas with a high population density has triggered the potential spread of diseases. This is because the movement and trade of live birds are yet to be well regulated. Endemic diseases such as the Avian Influenza, Newcastle Disease, and Bronchitis infection can easily spread and pose a threat to the Company’s performance.
Any outbreak of diseases at the upstream level will greatly affect the downstream and inflict losses on the Company.
To mitigate the risks, the Company is focused on strengthening the biosecurity system in its operations. In addition, as an integrated livestock company, it specifically produces livestock vaccines through PT Vaksindo Satwa Nusantara and applies a strict biosecurity system. The livestock vaccine production benefits the Company in terms of cost efficiency that will eventually prevent economic losses.
2. Raw Material Availability and Price Fluctuation
Corn and soybean serve as the main raw materials for the Livestock Feed Division. For this reason, the availability of good quality corn and soybean are very important for the Company. The Company must also anticipate the price fluctuation of those raw materials, especially as they are classified as international commodities. Thus, their prices are set in accordance with the ones in the global commodity market. In addition, the availability and prices of those raw materials also depend on factor such as climate, pest outbreak, production and global commodity consumption levels, changes in supply and demand and the prices of other commodities such as oil.
To mitigate these risks, the Company has undertaken various efforts. These include intensive coaching of local farmers to produce good quality crops. As a result, the Company can use the good crops as raw materials for production. In addition, the Company has also invested in corn dryers that aim to process and store the corn so that to meet the Company’s standards for raw material and maintain its product quality.
3. Foreign Exchange Fluctuation and Inflation
Inflation and foreign exchange rates have become increasingly difficult to forecast and have a direct impact on almost all industries, including the Company. Since the Company needs to import part of its raw materials in foreign currency, the depreciation of the Indonesian Rupiah has made these materials more expensive. However, the selling prices in the domestic market follows the ones in the international market, thus providing to a certain extent a natural hedge to the Rupiah exchange rate fluctuation against the US Dollar. The significant depreciation of the Rupiah against the US Dollar negatively affects the Company’s operations and financial conditions. The Company has adjusted the prices of its products to mitigate the weakened Indonesian Rupiah exchange rate and any possible inflation. However, this adjustment needs time, depending on the depreciation value. In addition, a sharp depreciation of the Indonesian Rupiah or a high rate of inflation can potentially reduce consumer’s purchasing power which can result in a weakened demand for the Company’s products.
To mitigate the risk of foreign exchange rate fluctuation and inflation, the Company conducts hedging at least within the range required by Bank Indonesia.
The smooth infrastructure development and the industry’s low demand for high technology has lowered the entry barrier for any newcomer to this industry. The implementation of regional and international free trade also applies in the ASEAN, AANZFTA, European Single Market and APEC markets. All WTO member countries have the same opportunity to market their products as long as they have competitiveness and comparative strength. The national development of the poultry industry is facing global challenges, particularly with regard the competitiveness of poultry products in terms of quality, Halal certification, as well as supply continuity in accordance with market demand. This can lead to increased competition that may result in the reduction of the Company’s market share and revenue.
To maintain its position amid industry competition, the Company continues to prioritise product quality, implement product efficiency from upstream to downstream and develop good relationships with customers, including providing technical support as required.
The Company also faces a very high risk of chicken price fluctuation. For this reason, the Company keeps enhancing its performance and increasing the number of Chicken Slaughterhouses (RPAs). The goal is to prevent chcken sales at a low price in the market. Chicken meat can also be manufactured into added-value processed products to avoid the risk of loss as well as maintain chicken price.
Evaluation of Risk Management Implementation
As the Company develops its Risk Management practices, it regularly and continuously expands and enhances its risk management framework as well as an integrated and comprehensive internal control system which provide early information on any potential risks that may affect the Company’s result. This allows the Company to take adequate steps to minimize risks.
As the Company is yet to have a Risk Monitoring Committee, its Board of Commissioners is responsible to supervise the risk management activities and conduct periodic assessment as well as evaluate the effectiveness of risk management control and provide recommendations as needed. However, the responsibility for the implementation and management of the risk management framework has been assigned to the Board of Directors and each business segment which is responsible for the risk management function in the Company.
The risk management has contributed positively to the process of planning, decision making and strengthened the implementation of the GCG in the Company. The risk management system that is implemented in the Company is able to minimise or lower any possible risks.
The implementation of a comprehensive risk management system has enabled the Company to manage any risks effectively so that it can calculate possible portfolio risks and take preventive measures to maximise its earnings performance.