Arla Foods Annual Report 2020

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data Funding 4.1 FINANCIAL RISKS 4.1.4 Commodity price risk Difficult hedging conditions in a volatile market Supply contracts are predominately related to a floating official price index. The treasury department uses financial derivatives hedge commodity price risk. This secures full flexibility to change suppliers without having to take future hedging into consideration. Hedging activities concentrate on the most significant risks, including electricity, natural gas and diesel. The total energy commodity spends, excluding taxes and distribution costs, amounted to approximately EUR 70 million. Table 4.1.4 Hedged commodities (EURM) The purpose of hedging is to reduce volatility in costs related to energy. In 2020, hedging activities have resulted in a loss of EUR 15 million vs a loss on EUR 6 million last year. However, the loss in 2020 was more than offset by lower physically energy costs of EUR 24 million. The result of hedging activities, classified as hedge accounting, is recognised in other income and costs. At the end of 2020, 35 per cent of the energy spend for 2021 was hedged. A 25 per cent increase in commodity prices would negatively impact profit by approximately EUR 11 million. Conversely, other comprehensive income would be positively impacted by EUR 10 million. Potential accounting impact ✓ Risk mitigation Risk The group is exposed to commodity risks related to the production and distribution of dairy products. Increased commodity prices negatively impact the costs of production and distribution. Fair value sensitivity A change in commodity prices will impact the fair value of the group's hedged commodity derivative instruments, measured through other comprehensive income and the unhedged energy consumption through the income statement. The table shows the sensitivity of a 25 per cent increase in commodity prices for both hedged and unhedged commodity purchases. A decrease in commodity prices would have the reverse effect. Policy According to the treasury policy, the forecasted consumption on electricity, natural gas and diesel can be hedged for up to 36 months, of which 100 per cent can be hedged for the first 18 months, with a limited proportion thereafter. How we act and operate Energy commodity price risks are managed by the treasury department. Commodity price risks are mainly hedged by entering financial derivative contracts, independent of the physical supplier contracts. Arla is also exploring other commodities relevant for financial risk management. Arla's energy exposure and hedging are managed as a portfolio across energy type and country. Not all energy commodities can effectively be hedged by matching the underlying costs, but Arla aims to minimise the base risk. Dairy derivative market in EU, US and New Zealand remain small but are evolving. The group has engaged in hedging activities for a minor part of the group's dairy commodity trading volume. As the dairy derivative market develops, we expect this to play a role in managing fixed price contracts with customers, in the coming years. 2020 Diesel/natural gas Electricity Sensitivity Contract value Income statement Other comprehen- sive income 25% 2 -7 25% - -4 2 نها -11 649 2019 Diesel/natural gas 25% Electricity 25% -5 415 -4 -8 -1 -6 -14 10 640 97 ARLA FOODS ANNUAL REPORT 2020

View entire presentation