The Company implements risk management practices to handle risks effectively and carefully. Several risks faced by the Company in carrying out its business lines are as follows:
1. Contagious Disease
The high demand for poultry products in the domestic market and the development of Indonesia’s poultry industry in densely populated areas might pose a threat to the spread of contagious disease. This is particularly caused by poor management of live poultry trade, which could spur the outbreak of endemic respiratory diseases such as Avian Influenza, Newcastle Disease, and Infectious Bronchitis. This becomes one of the main challenges to the Company’s business performance.
The spread of infectious diseases in its upstream business may heavily affect downstream operations and result in a risk of losses. In order to mitigate this risk, the Company produces its own animal vaccines through PT Vaksindo Satwa Nusantara and implements a strict biosecurity system. The vaccine productionalso benefits the Company in terms of cost efficiency, which in turn can prevent financial losses.
2. The Availability and price Fluctuation of Raw Materials
The Company’s Poultry Feed uses main raw materials that are prone to price and availability fluctuations, such as corn and soybean, which make up 70-75% of the raw materials. These raw materials are international commodities so that the prices are heavily dictated by the global commodity market. Moreover, the availability and the price of raw materials are influenced by weather, epidemic disease, production levels, global demand for commodity products, supply and demand trends, as well as recent trends in other commodities’ prices like crude oil. In an effort to mitigate this risk, the Company provides an intensive guide on the production of quality products to local farmers to be further utilized as raw material.
3. Foreigner Exchange Rate Risks Fluctuation and Inflation Risk
Unpredictable inflation and the rupiah exchange rate have a direct impact on most industries, including the Company. As the Company heavily depends on imported raw material products, any depreciation of rupiah poses a risk to the Company, as it will increase raw material costs. Furthermore, product prices in the domestic market will increase following any upward trend in global market prices. This, in effect, provides a limited natural hedge against fluctuations in value of the rupiah against the US Dollar.
The depreciation of the Rupiah against the US Dollar has certainly taken a toll on the Company’s operations and financial condition. Preventative measures like price adjustments are conducted to mitigate the impact of those inescapable risks. However, market prices cannot be adjusted instantly as we need to take into account the value of depreciation. In addition, any sharp decline of the rupiah or high inflation may potentially result in weak purchasing powers and lower demand for the Company’s products.
In anticipation the Company has implemented the following:
1. Hedged interest payments for USD bonds.
2. Performed operational hedging by purchasing raw materials for the next 2-3 months.
3. Ensured availability of cash in USD.
4. Competition Risk
Due to the easiness in building the infrastructure and simple technology required by the industry, the opportunity for newcomers to enter this industry is wide open. Free trade is already implemented regionally and internationally in the era of free markets, not only in the ASEAN region, but also in AANZFTA, the Single European Market and APEC. All WTO members have the same opportunity to market their products as long as the products are competitive and have comparative advantages.
In fact, the development of the national poultry industry is faced with global challenges, especially the readiness of the poultry products to compete, associated with quality standards, halal certifications, and assurances on the adequate supply of poultry products. Such issues might trigger a more intense business competition in the industry, which further could result in the decline in the Company’s market share and revenue.
In an effort to maintain its reputation in the industry, the Company continues to prioritize product quality, implement production efficiency from upstream to downstream business, and maintain good relationships with customers, including providing technical assistance when needed.
5. Government Regulation
The Government acts as the state regulator with the rights to make regulations that may directly or indirectly affect the Company’s business activities and revenues. This condition is one of the risks beyond the Company’s control. Thus, It is essential for the Company to continuously comply with and adjust operations according to the Government’s Regulations.
The Company sees that risk management practices in the Company have helped prevent and mitigate business risks.In anticipating the increasingly dynamic and diverse risks, the Company continues to refine its risk management practices by implementing strategic measures.