Risk management

While operating in the market, AB Linas Agro Group and its controlled companies (further in text – the Group) face risks of market, trade and credit, political, financial, liquidity, changes in biological assets, personnel, safety, reputation and consumption habits, and technological change.

Market Risks

Market risk is understood as the risk of receiving a lower return than planned in the event of unfavourable market conditions. A market risk in the activities of the companies of the Group could occur through fluctuations in market prices of certain goods, emergence of new competitors in the market or a merger/formation of a group by competitors, relevant crop harvest quality/quantity in a given period, emergence of new goods and production technologies that lead to a fall in the market prices of specific goods, etc.

In order to manage the potential impact of a market risk, the employees of the companies of the Group:

• Constantly monitor the market of specialised products;
• Manage trading positions on the basis of permissible limits of open trading positions and criteria for their liquidation;
• Use derivatives;
• Etc.

In the financial year 2021/2022, due to high volatility of commodity prices and disruptions in the supply chain, the companies of the Group were exposed to market risk. However, the application of the above measures, diversification of activities and extensive experience have helped to manage the negative consequences of this risk.

The probability of the occurrence of market risk in future periods remains high due to the specifics of the Group’s normal business operations. Also, inflationary pressures are expected to have a negative impact on consumer purchasing power in the short term.  However, due to complex forecasting of market movement trends, it is not possible to anticipate the consequences of encountering this risk.

Trade and Credit Risks

A trade and credit risk is understood as the risk of a lower-than-expected profit if, due to reasons that are dependent or not dependent on the employees of the companies of the Group, improper performance of the terms and conditions of contracts is encountered.

A trade risk in the activities of the companies of the Group could occur through non-delivery of purchased goods, refusal of the buyer to accept the sold goods, non-compliance with contractual terms and conditions concerning the quantity, range, completeness, quality or other characteristics of the goods, inaccuracies in the procedures of the companies of the Group or of outsourced service providers, failure to ensure a due process, and criminal operation of parties to a transaction.

A credit risk in the activities of the companies of the Group could occur through the sale of goods with deferred payment, lending money, payment of an advance for the future delivery of goods or services, extension of an overdue payment term, etc.

In order to manage the potential impact of a trade and credit risk, the employees of the companies of the Group:

• Conduct a thorough screening of customers prior to starting trade operations and assesses the availability of additional security at the start of the cooperation;
• Observe the credit limit values set for the trade operations of the companies of the Group, perform continuous customer monitoring, and make use of insurance options;
• Ensure control over activities of outsourced service providers;
• Properly document the execution of trade operations and other procedures;
• Etc.

With the supply and demand mismatch continuing throughout the financial year 2021/2022, the Group faced the problem of non-performance of some supplier contracts due to high prices and their persisting volatility in the global market, however, the ability to reorient to other markets ensured loss minimization and even profit.

The manifestation of this risk is closely related to the market risk aspects and in some cases can be provoked by them. However, the Group estimates the probability of occurrence of trade and credit risk in future periods as moderate, due to the long-term experience of the staff of the companies of the Group and the thorough sreening and control activities carried out.

Political Risks

In the European Union, agriculture is a highly regulated and supervised industry. Although this regulation and supervision is aimed at ensuring a sufficient income for those engaged in agricultural activities, political changes may affect the situation in the market in which the Group operates. Political risks could arise from the reduction of agricultural subsidies, the tightening of financial assistance-related requirements (which would have a negative impact not only on the activities of agricultural companies managed by the Group, but also on the enterprises supplying those companies), as well as the adoption political decisions such as embargoes, quotas, import or export bans.

To minimize the consequences of such risks, the employees of the companies of the Group monitor the economic situation in Lithuania and all other countries with which they trade and assess possible changes that would result from certain political decisions.

In the financial year 2021/2022, the Company and the Group encountered political risk. Following Russia’s invasion of Ukraine, sanctions imposed on Russia by countries ‘unfriendly’ to the regime have led to further disruptions in supply chains worldwide (already seen in the COVID-19 pandemic). Supply restrictions imposed by the aggressor prior to the outbreak of hostilities also had a primary impact on changes in supply and prices.

It should be noted that during the financial year 2021/2022, the Government of Lithuania approved project of limitation of direct payments to farmers, initiated and proposed by members of the Seimas already in 2021. The ‘ceiling’ of benefits means that one subject shall not be able to receive more than 100 thousand Euro base benefits. However, the Group’s agricultural companies are expected not to be affected by this limitation since the amount of wages and related taxes for employees is deducted in calculation of the benefits.

Having in mind high geopolitical uncertainty, the probability of the occurrence of political risks to the Group in future periods is assessed as moderate.

HR Risks

The ability of the Group to maintain a competitive position and implement its growth strategy is determined by the experience and knowledge of the management. Loss of employees and/or inability to hire new employees with relevant knowledge may adversely affect the business prospects and financial position of the Group. HR-related risks in the activities of the companies of the Group could also be encountered in connection with the confidential information available to the staff members, the decisions made by the staff, the responsibility granted to the staff members based on their rights and duties, improperly designed employee motivation systems, etc.

To manage HR Risks:

• Non-compete agreements have been concluded with certain executives of the Group;
• Requirements and responsibility concerning the storage of confidential information are set for employees;
• The motivational system is developed, etc.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

The probability of the occurrence of the HR risks in future periods is assessed as low.

Funding and Liquidity Risks

Examples of funding and liquidity risks include funding supply risk, lack of liquidity, short-term investment risk, foreign exchange risk, interest rate risk, etc.

Information on the financial risk management objectives and used hedging instruments that are subject to hedge accounting, as well as the information on the extent of the price risk, credit risk, liquidity risk and cash flow risk arising for the Group when the Group makes use of financial instruments, all of which is important in assessing the assets, equity, liabilities, income and expenses of the Group, are disclosed in Note 30 to the Financial Statements of the Group for the FY 2021/2022.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

In the opinion of the Group, the probability of occurrence of funding and liquidity risks in future periods is low/moderate due to the annual credit limits set by the Group, significant diversification of bank financing sources, and hedging instruments used. The most significant impact in the coming financial year is expected to be due to the active monetary policy of the central banks and the increase in the interbank interest rate, however, it should be noted that the Group’s management has considered the impact of this factor in advance in the formulation of the budget for the coming year and does not anticipate a material negative impact.

Risks of Change in Biological Assets

The risk of change in biological assets used in the operations of the Group (cattle, birds and crops) is related to improper maintenance of biological assets, possible out-breaks of diseases, and other factors that may cause the loss of such assets.

To minimise potential losses relating to the risk of change in biological assets, the employees of the companies of the Group monitor the condition of the soil, use plant protection products and fertilizers, carefully control the quality of cattle and poultry feed, continuously improve animal housing conditions, apply infection prevention measures and make use of insurance options.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

In the opinion of the Group, although the probability of occurrence of the risk of change in biological assets in future periods is low due to the systems implemented in the companies of the Group and a strict control, it is still possible to encounter such risk in case of extremely unfavourable weather conditions independently of the Group’s actions.

Security Risks

The security risk could be encountered by the Group due to information technology security vulnerabilities, malware, viruses, illegal and criminal activities of third parties encroaching on the information systems in order to seize information and steal funds. This risk may also be encountered in the course of storage and archiving of copies of electronic and written documents, and when carrying out the protection and surveillance of the premises and the area of the companies of the Group.

In order to manage the security or environmental risks within the Group, the installation of antivirus programs, archiving of IT and paper documents in accordance with the established rules and with the assistance of third parties, and installation of office environment surveillance systems is carried out and updated on a regular basis.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

In the opinion of the Group, the probability of occurrence of safety risks in future periods is low due to the systems implemented in the companies of the Group and strict controls.

Consumption Patterns and Technological Change Risks

The risks posed by changes in consumption patterns and technology are related both to temporary trends and to consistent changes caused by increased education and better living conditions or scientific progress.

To manage these risks, the companies of the Group that produce, prepare and sell agricultural and food products, and supply goods and provide services to farmers perform ongoing monitoring of market trends, sustainability, consumer value and functionality perspectives, assess changes in supply and demand, analyse new products and market penetration of such products.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

In the opinion of the Group, the probability of occurrence of these risks in future periods is low due to the continuous promotion of innovation and the first necessity and high-energy value product.

Reputation Risks

Reputation risks are related to the image of the Group and the companies managed by the Group in the course of building and maintaining relationships with employees, suppliers, customers and the public.

To prevent the occurrence of these risks, the actions of the companies of the Group must comply with the values represented, the mission and vision set, as well as correlate with the provisions of the Code of Business Ethics and social responsibility objectives of the Group. Any deviations from the above could lead to a diminished trust in the Group by its partners, more complicated supply or lower demand for products, as well as reduced attractiveness of the Group’s companies as employers.

In the financial year 2021/2022, the Company and the Group did not encounter these risks.

In the opinion of the Group, the probability of occurrence of these risks in future periods is low due to the standards set by the Group and the responsibility in applying the provisions of the Code of Business Ethics and performing its content revisions and compliance checks.