Risks for future development
Evaluation of opportunities
Recognizing and leveraging opportunities secures long-term commercial success. KWS identifies opportunities by means of a permanent observation of the market and intensive
dialog with customers, business partners and scientific institutions. The key to rapid and flexible exploitation of opportunities when they arise lies in the independence and the long years of breeding experience of KWS and its subsidiaries. A lean, medium-sized organizational structure and an active exchange of knowledge based on trust enable agility in responding to such opportunities.
The main opportunities arise from the global trend of growing demand for food, fodder and energy. This trend is influenced by the world’s growing population and increasing prosperity in individual regions. As their incomes rise, people demand higher-quality food and use more energy. Reserves of fossil fuels and land that can be used for agriculture on our planet are limited. That is why solutions for cost-effective, resource-saving and efficient production of food are growing in importance. We have explained how KWS will leverage these opportunities in entrepreneurial fashion in the “Outlook for the 2008/2009 fiscal year” section on page 35 of this management report.
Risk management
A suitable risk management system is needed to systematically and efficiently evaluate, document and control risks, the likelihood of their occurrence and their potential effects. KWS has firmly established such a system in its corporate planning and controlling and in its reporting system. The risk management system is based on strategic planning and investment controlling, continuous operational controlling and the quality and process monitoring systems. The efficiency of the risk management system is ensured by a clear assignment of responsibilities and internal control and was checked by the auditors as part of their audit of the annual financial statements. External auditing by experienced auditors is conducted at KWS and is a key component of risk management in ensuring that internal controls work. Several audits are held each year, covering processes and organizational units. The goals are to optimize internal control systems and to increase efficiency.
The KWS Group is subject to the usual economic and political risks in the countries in which it and its subsidiaries operate. In addition, the risks described below may significantly impair KWS’ net sales, financial position and performance. These risks have been identified. However, other risks that have not yet been recognized or have been underestimated may also influence its business. No risks that pose a threat to the company’s existence have been identified to date. There was no significant change in the risk situation in fiscal 2007/2008 compared with the previous year.
Market risks
The medium-term sales risk depends on product performance and the competitive situation. KWS addresses this challenge with systematic analyses of the market and competition and by permanently developing higher-quality seed for innovative, high-yielding plants. KWS counters the risk of a decline in cultivation areas with its efforts to win market share and grow sales in other areas of production. A wide-ranging product portfolio contributes to diversification of risks. The company ensures the high quality of its products through strict internal quality standards and monitoring. KWS tackles the risks involved in investing in acquisitions and research and construction projects by means of efficient controlling and professional project management. It also addresses the liquidity risk with professional cash management, sufficient long-term, syndicated credit lines – of which only some were made use of in the year under review – and a comfortable equity ratio of 59.3 %. It uses extensive trade credit insurance to counter the risk of losing receivables in risky regions and business segments. The risk of interest rate changes and currency risks are addressed through the usual standardized hedging instruments.
Political risks
In the strongly regulated agriculture industry, political risks have a significant impact on business development. The new EU Sugar Market Regime, which came into effect on July 1, 2006, and will remain in force until September 30, 2015, has a serious effect on KWS, the world market leader in sugarbeet seed. However, it has so far largely been possible to cushion the declines in net sales in the EU 27 by higher sales volumes outside the EU, in particular in the U.S. and Turkey.
Demand for high-yielding energy plants is dependent on the price of fossil fuels and on general regulatory conditions, such as government market incentive programs for startup financing for the investments needed for bioenergy production, admixture ratios for biofuels or regulations on direct feeding of biogas into existing natural gas networks, to name a few examples.
We believe that the Genetic Engineering Act (GenTG) adopted by the German Parliament on January 25, 2008, is not efficacious, since it impedes the use of state-of-the-art, internationally acknowledged breeding methods in Germany. It entails serious competitive disadvantages for agriculture, research institutions and medium-sized enterprises such as KWS, in particular because it fails to define the issue of liability precisely and because the exact plot of areas has to be reported in the location registry.
It is not only direct legislative procedures that impact business operations. Reservations on the part of the population can also influence opportunities for business development. For example, there is strong disapproval of “green genetic engineering” in agriculture, especially in Europe. Worldwide, on the other hand, genetically improved crops are cultivated on more than 110 million hectares a year, with remarkable economic and ecological advantages. In the U.S. in particular, it is mainly genetically improved varieties that are cultivated and that are helping to solve problems in agriculture. However, rapid market penetration of our herbicide-resistant, genetically modified sugarbeet varieties (Roundup Ready) in the U.S. has also provoked opposition from opponents of genetic engineering in that country. On January 23, 2008, environmental protection associations filed legal action against the United States Department of Agriculture (USDA), with the aim of revoking the approval for cultivation of Roundup Ready sugarbeet awarded in March 2005. Although we expect the ruling to be positive for us, a risk to our business in North America cannot be fully ruled out.
A further risk is the suspension of approval for a number of common pesticides for treating seed by the German Federal Office of Consumer Protection and Food Safety. If this directive remains in force, it would necessitate significant impairment to the value of already treated stocks and a loss of value created from the way we treat our products.
Weather-related risks
The agricultural production process of breeding and multiplying seed depends to a large extent on the weather. KWS counteracts the risk of production losses as a result of bad weather with a broad product range that needs a variety of weather conditions for a successful harvest. Seed multiplication is distributed over various locations in Europe and North America. Contraseasonal multiplication is carried out in the winter half-year in Chile and Argentina if there are bottlenecks in seed availability.
