Risk Management in Processed Food Industry
All these three companies have large capitulation in processed food industry, learning these companies’ risk management policies and activities will be very helpful to understand the processed food industry risk management program. This paper will be structured into eight parts: Part I: Overview of Processed food industry Part II: Tyson Foods, Pilgrim’s Pride, Smithfield Foods Risk Management Program Part III: Risk of Commodity Price Risk Part IV: Exchange Rate Risk Part V: Interest Rate Risk Part VI: Credit Risks Part Ⅶ: Final Statements Part Ⅷ: Appendix and References Part I： Processed Food Industry Overview 1. 1：Industry Overview The introduction of trans-fats into the supply chain in the 1900s has allowed for the tremendous growth of the processed food industry. Companies commenced the manufacturing of portable and more durable food products.
As with any new industry in an open market, the high liquidity of the food processing market attracted more investments which as a result created more job opportunities and a corresponding global rise of the American food processing business. Furthermore, the food industry has become more consumer-focused over the last decades, as consumers are more aware of how what they consume affects their overall health. This idea is a result of technological advances and consumers having more access to information and thus is demanding more from the food industry in the way of health and safety. Thus, the food industry is highly focused on setting food quality standards and complying with guidelines and regulations in all markets across the globe. 2: Risk in the processed food industry This industry is facing an array of risks threatening to steal their lunch money.
The risks eating away at all processed food companies include tightening regulation, supply chain disruption, labor costs and retention, pricing pressure, economic conditions and cyber security breaches. 3: Failure risk management case On 17th March 2017, some of the largest food processors in Brazil were raided by federal agents over bribery allegations in a bid to evade scrutiny. According to the agents, the companies’ employees were accomplices in an arrangement that involved bribing inspectors to allow exportation of salmonella-contaminated meat to Europe and serving public schools with rotten meals. The investigation of the companies revealed that even smaller meatpacking businesses were part of the scheme whereby plastic containers were used to transfer cash that was used to bribe the inspectors and reduction of prices of beef like sirloin cap or picanha.
Further investigations revealed a highly fraudulent industry resulting to a suspension of 21 meat processing units by the government according to Blairo Maggi, Brazil’s Agricultural Minister. Processed meat is arguably one of the biggest exports from Brazil with annual revenues of over $12. The company currently operates in Puerto Rico, Mexico and 14 U. S states. The company has its footprints on various levels of the supply chain from distribution, marketing, processing and production. Most of the company’s clients are foodservice operators, distributors and retailers. Smithfield Foods is another American-based food processor which is the largest hog producer and pork processor in the globe. This sector of the market must manage risks that could affect population health and workers in food industry facilities.
Food can become contaminated in various ways and processes, checks and balances must be developed to prevent the risks related with this fact. Contamination risks, if not handled properly, can cause serious injury or even death to consumers and facility workers. Managing food security involves creating barriers to defective equipment components or contaminated finished goods, as well as controls for purchased materials and manufacturing and verification inspections of finished products is necessary for the quality and safety of food (Yamina, Noureddine, & Mebarek, 2014). This paper explores the enterprise risk management efforts of three companies, namely, Smithfield Foods, Tyson Foods and Pilgrim’s Pride. This includes the safety of their vehicle fleet and their drivers, which includes the implementation of operations standards for the entire fleet (Tyson, 2009).
4: Pilgrim’s Pride The Pilgrim’s Pride Company has a comprehensive enterprise risk management program in place that includes processes that are designed to significantly mitigate risks in their business operations. This includes risks associated with geographical boundaries and product diversification, to comply with global domestic markets’ health and safety regulations and guidelines. Additionally, the company is committed to upholding corporate responsibility in its food production operations, which includes using natural resources responsibly with its Pilgrim’s Sustainable Progress program. This initiative involves minimizing resources used and lessening generated waste, which is an area of risk management of issues relating to by-products, wastes, land, air, packaging, transportation, energy, and all areas of the supply chain (Pilgrims, 2008). Additionally, Smithfield Foods has developed a risk management program that ensures global adherence to formal ERM objectives.
This includes risk assessments being conducted yearly and risk identification in the areas of controls, management and monitoring of risk mitigation processes (Smithfield, n. d. The annual assessment of the ERM program at Smithfield Foods includes specialized evaluation and audit processes to ensure effectiveness of the program’s initiatives. Risk management areas identified that the company focuses on have key-risk priority status. Nonetheless, suppleness is most essential considering that it is often not safe to guarantee protection for entire price while there is rigidity. Strategies for Generic risk management Commodity price risk can be mitigated by various strategies which include: • Increasing prices to control risk Here, the company has an option of either altering customer or supplier contracts which ultimately raises the price of the end product which is basically moving the risk exposure from the company or it can absorb any changes on margins as a result of rising commodity prices.
• Avoid or minimize Costly commodity increase a company’s exposure hence they can decide to reduce reliance on these commodities. If that option is taken, then the company will need to alter operations and processes of product development. Moreover, there needs to be a reevaluation and revision of alterations in the supply chain. 2 since year 2015. This can mean that the prices will most likely remain stable for the upcoming years so I think processed food companies just need to spend a little on corn price hedging. 1: Tyson Foods Commodity Price Risk Normal operations in Tyson Foods require buying of livestock, grains and other commodities. Underlying commodities are procured by the company through a mechanism that reduces the impact of varying prices.
Basically, this includes utilizing derivative financial instruments as a function of activities of risk management. However, issues such as government regulations, weather, supply and demand, political and economic issues are beyond the control of the company and can affect the supply of these commodities hence subject to price fluctuations. In most cases, the company signs contract for the supply of these items for a 12-months period. These contracts are all created in an attempt to prevent risk of price fluctuations. The contracts can include option or exchange-traded contracts and physical forward contracts. Nonetheless, the company is not prohibited from signing longer contracts for different items where need arises. In an attempt to protect itself from possible fluctuation in the price if inputs, Pilgrim’s Pride uses a 12 months approach to seek to formulate financial instruments that are agreed upon between the company and its suppliers especially for options and exchange-traded futures.
Using the provided data, a fluctuation of $0. 4 million and $0. 5 million was expected in December 25, 2016 and December 31, 2017 respectively if there was a 10% rise in in the price of soybean oil, soybean meal and corn. 3: Smithfield Foods Commodity Price Risk Apart from soybean meal, corn and live hogs, there are various raw materials that are used by Smithfield Foods to process meat. For instance, in a time of high prices of grains, the result is a counterbalance of increased cash price paid to farmers and other stakeholders in the spot markets. Nonetheless, in a case of using current prices of commodities which has been illustrated previously, the changes in counterbalancing do not necessarily occur during the same time which can even delay for a year.
4: Comparing the management of commodity prices risk in three companies Tyson Foods: to reduce uncertainties about the future, the company enters longer-term contract with their suppliers and operates their own farms. Moreover, Tysons insures the risk of rising commodity prices using derived financial instruments. Pilgrim’s Pride: The Company either uses contracts between them and suppliers or purchase commitments in order to hedge themselves against price fluctuation risks. https://www. investopedia. com/articles/forex/082515/how-avoid-exchange-rate-risk. asp 4. 2: Tyson Foods Exchange Rate Risk In figure 4. Primary currencies which this company is exposed to include the Brazilian real, the sterling pound, Chinese renminbi, the Euro, the yen, Canadian dollar and the Mexican peso. The company would frequently engage in both foreign exchange, forward and option contracts as a way of evading the exposure of parts of their foreign currency.
The company was slapped with a hypothetical 10% change on the foreign exchange rate on September 30, 2017, and concurrently on October 1, 2016. This change was as a result of the foreign exchange, and the contracts such as Future and also Option. This would mean USD7 and USD3 million correspondingly in the pre-taxed income. The foreign exchange rate fluctuations that influence the Mexican net monetary position of the Pilgrim’s Pride Mexican subsidiaries affects its earnings. However, this exposure is mitigated by the corporation’s attempt to have their Mexican peso net monetary position minimized. The potential currency exchange rate fluctuation is yet another risk that the corporation faces. This would see the corporation’s amounts repatriated from Mexico to the United States. To that end, it expects that their Mexico subsidiaries future cash flows would still be diverted to their Mexico operations.
85 Mexican pesos against the USD and 2016, as 18. 64 pesos to the dollar. The company minimizes the commodity purchase exposure using a risk management program that entails using forward purchase contracts and derivative financial tools. It would further periodically buy derivative financial instruments in a bid to minimize currency exchange rate exposure that relates to net assets of the corporation’s operations which are dominated by the pesos. 3: Smithfield Foods Exchange Rate Risk Risks such as fluctuations in the product prices, infamous interest rates, and forex swap rates pose a significant market risk for Smithfield Foods. In the 3rd of January 2016, the accumulative deposit cost that was recorded with the company’s agents stood at USD 47. 9 million. Foreign currency dominated assets and liabilities are in USD.
This is arrived at after the swap rate was used as per the date on the balance sheet. The outcomes of the operations of the company and its flow of cash on the foreign currencies were as well interpreted into USD by use of the mean swap rate all year long. asp#ixzz5DKzsoV7j Interest rate assessment evaluation is very broad with loans and saving, thrifts, banks, unions of credit and other financial organizations and within their regulations. The broadly deployed CAMELS system f rating examines a financial organization’s: sensitivity, management capability, capital adequacy, earnings, and liquidity to a risk of the market. A big section of the sensitivity is the interest risk rate. A lot of what is famous regarding analyzing interest risk rate has been established by the financial institutions' interactions with their regulators from the year 1990.
The risk of interest rate is concisely the biggest portion of sensitivity evaluation I the system of camels for many of the banking organizations. Transformations in market plan assets value can affect the financed cause volatility and interest rate in the net annual gain cost and their requirements for future financing. The accurate cash contributions amount contributed to pension plans annually rely on numbers of factors, not excluding the least financing needs. Market risks associated with the activities outcomes and basically from transitions prices of commodities, rates of foreign exchange and rates of interests and also credit risk emphasis. On 30th September 2017, there was a variable debt rate of 2. 756 million dollars with a weighted interest rate average of 1. Operations of a business led to increases in a given market risk exposures usually because of changes in prices of the commodity, rates of interest and exchange rates of foreign currency.
They control portion risks via the use of imitative instruments of finance to minimize their vulnerability to risk in prices of commodities, currency and interest rate risks. Their risk control programs are subjected to annual analysis reviewed periodically by the board of directors in the audit committee. In figure 5. 1, it indicates Tyson yearly maturities of Owings 2018, 2019, 2020, 2021 and 2022. The expenditure in interest went down because of lesser average rates of interest coming out of the refinancing of their ten percent senior secured notes due 2014 July notes and their 7075 percent senior unsecured notes due 2013 may. They enter the interest rates swaps periodically to hedge their vulnerability in interest rates changes on specific instruments of finance and to regulate the general mix of floating debt and fixed rate instruments.
Periodically they also enter the into forwarding contracts of interest rates to cover the vulnerability to changes in rates of foreign currency on assets that are foreign-dominated and liabilities and the estimated transactions denominated in other currencies apart from domestic. In figure 5. 4: pilgrim’s pride interest rate risk Pilgrim’s pride interest rate risk emanates from the expense of interest and cost of debt. 9 million dollars in the year 2016 from 37. 5 million dollars in the year 2015 fundamentally due to a rise in average interest expense in the year 2016 and 2015 was 0. 58 percent and 0. 46 percent. That means that That is to say, changes in interest rates will cause corresponding changes in Pilgrim’s Pride Corporation’s interest expense, thereby affecting the final profit. Applying a discounted cash flow analysis, a hypothetical 10.
o percent decline in the rate of interest might have reduced their fixed rate fair value debt by almost 11. 6 million dollars and 7. 2 million dollars as of 25th December 2016 and 27th December 2015. The change in rates of interest will impact the debt cost of the company. This risk may occur when the borrower intends to use future cash flow to offset current debts. It is next to impossible to ascertain if the borrower may have funds, with the future cash flows, to settle their debts. The interest payments by the borrower are the funds which the issuer gets for overlooking the risks associated with the loan. Credit Risk https://www. investopedia. This shows that Tyson Foods’ financial condition is not stable. Figure 6.
2, on the other hand, is a summary of the company’s maximum risk exposure, and here, it’s evident that from 2013 to 2014 its total cash and that for equivalents the accounts receivable drastically declined. From 2014 to 2017, the company’s total cash and its equivalent cash, its account receivable had only minimal change. Figure 6. This will see the company leverage drop to under 2. 5 times by the close of September 2018. 3: Smithfield Foods Credit Risk This company may be at risk for two reasons, one, alteration in products prices and their credit rating. The latter will affect their requirement on cash deposit under their agents and counterparty pacts. In the event that the company’s credit scores declines, its other pacts that entails credit risk factors will require the company itself.
From the 3rd of January 2016 the company’s state of its net liability for its open derived tools under credit risk dependent aspects was immaterial. Figure 6. 5 demonstrates that the company’s rating was unchanged since 2000. This implies that its financial standing was steady. Figure 6. 9% of receivables as per December 2017. At least $1367 million and $711. 2 million of the company’s net assets came from the European and Mexican market respectively as of December 31, 2017, as shown in figure 6. This figure is an increment from the previous year whereby there was $1,232. 8 million from Europe and $673 million from Mexico in the combined carrying amount total assets. Therefore, the risk management strategy should first come up with the appropriate risk level before developing ways of implementing and observing.
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