CP Prima is exposed to certain risks which it manages by applying risk identification, measurement, concentration limitation and supervising systems.
The main principles defined by the Company when establishing its policy for the management of the principal risks are as follows:
Comply with the principles of Good Corporate Governance.
Comply strictly with the Company’s Code of Conduct.
Each business and corporate area defines the markets and product lines in which it can operate on the basis of having sufficient know-how and capabilities to ensure effective risk management.
The businesses and corporate divisions establish for each market in which they operate the level of risk that they are prepared to assume on a basis that is consistent with the strategy defined.
The businesses, corporate divisions, business lines and companies establish the risk management controls required to ensure that the transactions are performed in the markets in accordance with the policies, principles and procedures of the Company.
The following are principal risks identified by the Company.
Credit Risk
Credit risk arises as a result of the sale of products to customers. The Company manages and controls this risk by setting acceptable risk limits and monitoring the exposure related to such limits. Overdue receivables are monitored continuously and depending on the evaluation, an allowance may be provided if receivables are deemed uncollectible.
Liquidity Risk
Liquidity risk is the risk that occurs when the cash flows position indicates that short-term revenue is insufficient to cover short-term expenditure. Management always maintains cash and cash equivalents at adequate levels to finance the operations of the Company, while the effects of cash flow fluctuation can be overcome by the availability of bank loan facilities.
Foreign Exchange Rate Risk
The reporting currency of the Company is Indonesian Rupiah. The fair value of future cash flows of a financial instrument will fluctuate as a result of changes in foreign exchange rates, including changes of foreign currency rates in Indonesian Rupiah. In managing this risk, the Company seeks bank loan facilities in dual currencies offering flexibility in currency conversion under certain circumstances. In addition, the Company will shift foreign exchange rate risk from trade payables to customers through periodic evaluation of sales prices.
Commodity Price Risk
The Company is exposed to commodity price risk since most of the raw materials to produce feed, such as soybean, wheatflour, fishmeal, meatbone meal and corn are commodity goods. The availability and prices of such raw materials depend on weather, harvests and levels of supply or demand, government policies and global economic environment. Management’s policy to reduce this risk is through use of a formula which makes it possible to use a replacement raw material without reducing the quality of production goods and through passing on price increases to customers.
Interest rate risk
The fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company’s exposure to this risk is related to short-term bank loans. The Company continues to seek lowest loan interest rate from financial institutions.
Disease Risk
Farm industry diseases such as shrimp and fish specific diseases also constitute a business risk for the Company, since they can cause large-scale death of livestock within a short period of time. This may reduce demand and/or supply for the Company’s products, which will lower the Company’s income. Therefore, the Company constantly offers consultation and guidance to all farmers on the importance of bio-security and implementation of good pond management procedures to prevent infections and outbreaks of diseases.
Extreme Climate Risk
Observed changes in the earth’s climate will certainly lead to changes in aquaculture production cycle. Several factors, such as the maximum and minimum temperatures in a particular region, precipitation levels and climate shocks, during cultivation might result in change of production cycle and harvest. The Company monitors these extreme climate events in several production centers periodically and apply changes to formula, good pond operations techniques, among others, to alleviate the impact of extreme climate to the region.