Annual Report 2009 Annual Report 2009
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Notes to the annual financial statements
for the year ended 30 September 2009

    GROUP
    2009   2008
    R’000   R’000
21. Share capital      
  Authorised – ordinary shares      
    400,000,000 (2008: 400,000,000) ordinary shares of 10 cents each 40 000   40 000
  Authorised – class A ordinary shares      
    18,130,000 (2008: 18,130,000) class A ordinary shares of 10 cents each 1 813   1 813
  Issued and fully paid – ordinary shares      
    Beginning of year: 201,183,898 (2008: 181,183,898) ordinary shares of 10 cents each 20 118   18 118
    Rights issue: Nil (2008: 20,000,000) ordinary shares of 10 cents each –   2 000
    At end of year: 201,183,898 (2008: 201,183,898) ordinary shares of 10 cents each 20 118   20 118
  During the year the Company issued Nil (2008: 20,000,000) ordinary shares of 10 cents each at Rnil (2008: R25) per share through a rights issue. The cost of the 2008 rights issue amounted to R14,332,674 and was written off against share premium.
      
  Net treasury shares held by share incentive trusts      
    Beginning of year: 8,570,935 (2008: 8,871,064) ordinary shares of 10 cents each 857   887
    Net treasury shares sold: 1,812,830 (2008: 715,513) ordinary shares of 10 cents each (181)   (72)
    Rights issue: Nil (2008: 415,384) ordinary shares of 10 cents each –   42
    At end of year: 6,758,105 (2008: 8,570,935) ordinary shares of 10 cents each 676   857
  Net treasury shares held by subsidiary      
    Beginning and end of year: 17,982,056 (2008: 17,982,056) ordinary shares of 10 cents each 1 798   1 798
  Net listed ordinary share capital      
    Issued and fully paid – ordinary shares 20 118   20 118
    Net treasury shares held by share incentive trusts (676)   (857)
    Net treasury shares held by subsidiary (1 798)   (1 798)
    17 644   17 463
  20,000,000 (2008: 20,000,000) unissued ordinary shares are under control of the directors until the next annual general meeting.
      
  Issued and fully paid - unlisted class A ordinary shares of 10 cents each      
    12,619,180 (2008: 14,213,080) treasury shares held by employee share scheme trust at beginning of year 1 262   1 421
    1,221,990 (2008: 1,593,900) bought back and cancelled (122)   (159)
    11,397,190 (2008: 12,619,180) treasury shares held by employee share scheme trust at end of year 1 140   1 262
  Class A ordinary shares are not listed on the Johannesburg Stock Exchange.  These shares have full voting rights, similar to those of ordinary shares.
      
22. Share-based payments      
22.1 Employee share incentive scheme      
  The Group has a share option scheme for qualifying management. Options are exercisable at a price equal to the average quoted market price of the Company’s shares on the grant date. The options vest over a 5 year period. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee resigns from the Group before the options vest.      
    Number   Number
    ‘000   ‘000
  Number of shares made available      
  Unallocated under control of directors 550   502
  Shares under option in terms of option scheme:      
  Number at the end of the year 6 208   8 069
  Number at the beginning of the year 8 069   8 412
  Redeemed (1 813)   (645)
  Expired (48)   (113)
  Rights offer at R25,00 per share –   415
         
    6 758   8 571
  Number of options      
  At R3,80 per share, exercisable up to 5 July 2009 –   260
  At R2,80 per share, exercisable up to 6 July 2009 –   200
  At R4,70 per share, exercisable up to 1 February 2010 –   10
  At R3,30 per share, exercisable up to 18 October 2010 10   10
  At R8,65 per share, exercisable up to 27 May 2014 3 021   4 311
  At R14,05 per share, exercisable up to 24 December 2014 1 278   1 302
  At R21,86 per share, exercisable up to 25 January 2016 984   1 011
  At R31,42 per share, exercisable up to 12 February 2017 524   550
  At R25,00 per share, payable by 5 July 2009 –   15
  At R25,00 per share, payable by 6 July 2009 –   8
  At R25,00 per share, payable by 1 February 2010 1   1
  At R25,00 per share, payable by 18 October 2010 1   1
  At R25,00 per share, payable by 27 May 2014 389   390
    6 208   8 069
  The weighted average share price at the exercise date, for share options exercised during the year, was R28,06 (2008: R28,83).

In 2008 the scheme exercised its right in terms of the rights offer to acquire 415,000 shares.

These fair values were calculated using the Actuarial Binomial Option Pricing Model. The principal assumptions for the last issue (during 2007) were as follows: 		     
    Number   Number
  Weighted average share price at grant date (cents per share) 1 269   1 269
  Weighted average exercise price (cents per share) 1 214   1 214
  Expected volatility 20.0% to 33.8%   20.0% to 33.8%
  Expected life (years) 4 to 6   4 to 6
  Risk free rate 7.2% to 9.7%   7.2% to 9.7%
  Expected dividend yield 2.7% to 4.4%   2.7% to 4.4%
 
Expected volatility was determined by calculating the historical volatility of the share price of a similar JSE entity in the food sector over the previous six years.

The cost accounted for during the current year amounts to R5,089,600 (2008: R5,066,000).
     
    GROUP
    2009   2008
    Number   Number
22.2 Broad-based employee share scheme      
  During 2006 the Group introduced a broad-based employee share scheme for all employees, other than management qualifying for the share-based compensation scheme.  In terms of the scheme, employees received class A ordinary shares with full voting rights and dividend rights equal to 30% of that of ordinary shares. Once the notional threshold debt has been repaid, class A ordinary shares will convert into ordinary shares. The vesting period is expected to be approximately 20 years.

In case of termination of employment prior to the final date the resultant actions depend on whether the employee is considered to be a “good leaver” or an “other leaver”.

An employee is considered to be a “good leaver” if employment is terminated because of:
  • Death
  • Permanent disability
  • Retirement
  • Retrenchment
  • Sale of business
  • Termination for a reason that in the discretion of the board has the effect of qualifying the employee as a “good leaver”
  • Any other reason after the lapse of a period of five years
An employee is considered to be an “other leaver” in the event that termination takes place within a period of five years for any reason other than that constituting a “good leaver”, or an employee fails to adhere to the provisions of the scheme.

The class A ordinary shares of “good leavers” will be purchased by the Company at a price equal to the market value of an ordinary share, less the notional threshold debt. The purchase price will, at the option of the Company, either be settled in cash, or utilised on behalf of the “good leaver” to subscribe for ordinary shares at the market value of ordinary shares.

The class A ordinary shares of “other leavers” will be purchased by the Company at R0,01.
      
  Reconciliation of number of class A ordinary shares      
  Balance at beginning of the year 12 619 180   14 213 080
  Good leavers – purchased by the Company (412 160)   (354 200)
  Other leavers – purchased by the Company (809 830)   (1 239 700)
  Outstanding at year-end 11 397 190   12 619 180
  The basis of accounting was changed to cash-settled from 1 October 2007 to reflect the Group’s current settlement practice.

The estimated fair value of a class A ordinary share on 30 September 2009 was R15,29 (2008: R5,92). The fair value per class A ordinary share was used to calculate the total cost of the scheme in terms of IFRS 2 – Share-based payments. The cost accounted for during the current year amounts to R41,363,286 (2008: reversal of cost previously accounted for amounted to R4,829,381).

These fair values were calculated using the Actuarial Binomial Option Pricing Model. The principal assumptions were as follows:		      
  Ordinary share price at 30 September (cents per share) 3 350   2 500
  Notional loan amount at 30 September (cents per share)  2 651   2 477
  Prime rate at 30 September 10.5%   15.5%
  Expected volatility 25.0% to 33.3%   23.5% to 31.2%
  Expected duration to repay notional debt (years) 16.5   20.0
  Expected dividend yield 2.8%   3.7%
  Risk free rate 6.9% to 8.7%   8.1% to 10.2%
  Expected volatility was determined by calculating the volatility of a JSE listed share in the food industry.

The principal assumptions used to calculate the expected number of shares that will vest, are as follows: 		     
  Expected rate of "other leavers" (% per annum) 5   5
  Expected rate of "leavers" (including "other leavers") (% per annum) 10   10
    Group
    2009   2008
    Number   Number
    '000   '000
22.3 Employee share appreciation rights scheme      
  The Group adopted a share appreciation rights scheme for qualifying management during the year ended 30 September 2008. The share appreciation rights vest over a five-year period.  Share appreciation rights that remain unexercised after a period of 10 years from the date of grant, expire.

The exercise of vested share appreciation rights entitles the employee to ordinary shares in Pioneer Food Group Limited. This number of shares is calculated by dividing the amount by which the share price, relating to the exercised share appreciation rights, appreciated from grant date to exercise date, by the share price at the exercise date.

     
  Number of share appreciation rights made available      
  Number at the beginning of the year 1 249   –
  Expired (53)   –
  New offer at R25,48 per share –   1 249
  New offer at R24,20 per share 790   –
  Number at the end of the year 1 986   1 249
  Number of share appreciation rights      
  At R25,48 per share, exercisable up to 9 June 2018 1 201   1 249
  At R24,20 per share, exercisable up to 27 February 2019 785   –
    1 986   1 249
  Share appreciation rights were granted on 27 February 2009 (2008: 9 June 2008) at a strike price of R24,20 (2008: R25,48). Vesting takes place over a five year period with the first 20% of the share appreciation rights vesting on 27 February 2010 (2008: 9 June 2009).

The net estimated weighted average fair value per share appreciation right at 30 September 2009 is R7,06 (2008: R7,78). The fair value per share appreciation right was used to calculate the total cost of the scheme in terms of IFRS 2 – Share-based payments. The cost accounted for in the current year amounts to R4,910,800 (2008: R2,122,500). 		     
    Number   Number
  The principal assumptions were as follows:      
  Weighted average share price at grant date (cents per share) 2 626   2 800
  Expected volatility 22.0% to 30.9%   22.0% to 23.7%
  Expected dividend yield 3.3% to 4.0%   3.3%
  Risk free rate 7.0% to 8.9%   8.7% to 8.9%
  Expected life (years) 3 to 6   3 to 6
  Expected volatility was determined by calculating the volatility of the share price of a similar JSE listed entity in the food industry.
      
    R'000   R'000
23. Other reserves      
  Statutory reserve (insurance captive) 4,483   4,021
  Fair value reserve 14,181   14,345
  Reserve relating to translation of foreign currency (6,561)   18,672
  Hedging reserve (63,548)   (54,353)
  Equity compensation reserve 44,379   33,862
    (7,066)   16,547
         
24. Borrowings      
  Non-Current      
  Secured financing      
    Syndicated and other 1 076 484   1 165 682
  Unsecured financing 20 076   15 629
  Total non-current 1 096 560   1 181 311
  Current      
  Secured financing 138 497   182 517
    Lease agreements –   12
    Syndicated and other 138 497   182 505
  Unsecured financing 17 182   12 110
  Bank overdrafts 5 413   15 711
  Call loans –   289 000
  Total current 161 092   499 338
         
  Total borrowings 1 257 652   1 680 649
  Refer to note 45 for further detail.

The level of borrowings is within the limits prescribed by the articles of association of the Company and its subsidiaries.

During 2008 the Group obtained syndicated financing of R1,3 billion in the form of bullet and amortising loans. These loans are secured by mortgages over certain immovable properties with carrying values of R421,465,083 (2008: R365,158,138) at year-end as well as notarial bonds over certain items of plant and equipment with carrying values of R834,760,374 (2008: R842,534,764) at year-end.  These loan facilities are also secured by general notarial bonds over all movable assets of Pioneer Foods (Pty) Ltd, Ceres Fruit Juices (Pty) Ltd, Continental Beverages (Pty) Ltd and Retail Brands Interafrica (Pty) Ltd.

Short-term facilities utilised of R80,527,643 (2008: R450,306,138) are secured by pledges over certain Group companies’ inventories, biological assets and trade receivables (outstanding for less than 90 days). Per agreement, the carrying value of the specified inventories and trade receivables should at all times, be at least twice the value of these facilities utilised.  At year-end inventories (including biological assets) and trade receivables pledged as security for this purpose amounted to R1,999,673,000 (2008: R2,200,726,822) and R1,474,105,000 (2008: R1,600,090,127) respectively.

The carrying values of borrowings approximate their fair values at the balance sheet date and are denominated in the following currencies:		      
  UK Pound 18 814   31 094
  Botswana Pula 5 413   6 802
  SA Rand 1 233 425   1 634 319
  Other currencies –   8 434
  Total 1 257 652   1 680 649
  The following balances, included in the summary above, are denominated in the functional currencies of the relevant entities:      
  UK Pound 18 814   31 094
  Botswana Pula 5 413   6 802
    24 227   37 896
         
25. Deferred income tax      
  Balance at beginning of year 406 171   389 903
  Charge in income statement 93 340   36 325
  Deferred income tax on swaps and collars charges to equity (5 595)   (13 230)
  Foreign exchange translation adjustment (473)   245
  Rate change on amounts previously recognised in income statement –   (13 412)
  Deferred income tax on foreing exchange contracts charged to equity (4 053)   7 142
  Rate change on hedging reserve fair value adjustments –   147
  Deferred income tax on share-based payment of share appreciation rights (516)   –
  Deferred income tax on fair value adjustment of avaialable-for-sale financial assets charged to equity (316)   (930)
  Rate change on fair value reserve –   (110)
  Business combinations –   91
    488 558   406 171
  Due to the following timing differences:      
  Capital allowances, including trademarks 565 261   523 562
  Inventories 5 268   4 211
  Biological assets 40 051   36 754
  Provision for post-retirement medical benefits and long service awards (23 048)   (21 921)
  Leave accrual (30 155)   (25 878)
  Prepaid expenses 4 166   2 926
  Provision for impairment of trade receivables (3 065)   (306)
  Rebates, growth incentives and settlement discount accruals (18 697)   (16 608)
  Assessed losses (22 469)   (57 648)
  Hire-purchases and leased assets 160   164
  Re-insurance commission received in advance (296)   (232)
  Fair value adjustments on available-for-sale financial assets 1 823   2 139
  Provision for credit notes (11 442)   (12 452)
  Derivative financial instruments (21 499)   (10 876)
  Deferred revenue (5 467)   (6 564)
  Other 7 967   (11 100)
    488 558   406 171
  For the purpose of the balance sheet deferred income tax is presented as follows:      
  Non-current assets 2 657   36 205
  Non-current liabilities (491 215)   (442 376)
    (488 558)   (406 171)
         
26. Provisions for other liabilities and charges      
  Post-retirement medical benefits 57 142   55 200
  Balance at beginning of year 55 200   52 697
  Interest cost 5 403   4 829
  Actuarial (gain)/loss (114)   730
  Service cost 230   222
  Payments (3 577)   (3 278)
  Long service awards 25 172   23 093
  Balance at beginning of year 23 093   19 189
  Interest cost 2 367   1 929
  Actuarial loss 1 044   2 139
  Service cost 5 020   4 331
  Payments (6 352)   (4 495)
         
    82 314   78 293
  Post-retirement medical benefits      
  The amount recognised in the balance sheet was determined as follows:      
  Present value of unfunded obligations 55 216   52 715
  Unrecognised actuarial gain 1 926   2 485
    57 142   55 200
  Long service awards      
  The amount recognised in the balance sheet was determined as follows:      
  Present value of unfunded obligations 25 172   23 093
  Existing provisions are based on the following important assumptions:      
  Post-retirement medical benefits      
  Medical inflation rate: 10,0% (2008: 10,3%) p.a.      
  Investment rate of return: 10,0% (2008: 10,3%) p.a.      
  The date of the most recent actuarial valuation is 1 October 2009.      
  Long service awards      
  Discount rate: 10,0% (2008: 10,3%) p.a.      
  Salary increases: 6,0% (2008: 6,3%) p.a.      
  Normal retirement age: 60 (2008: 60) years      
  The date of the most recent actuarial valuation is 1 October 2009.      
  The effect of a 1% increase in the assumed health cost trend is as follows:      
  Increase in the aggregate of current service and interest cost 710   715
  Increase in the defined benefit obligation 4 761   6 527
  The effect of a 1% decrease in the assumed health cost trend is as follows:      
  Decrease in the aggregate of current service and interest cost 587   589
  Decrease in the defined benefit obligation 7 490   5 410
         
27. Share-based payment liability      
  Balance at beginning of year 19 424   –
  Transfer from equity compensation reserve at beginning of year –   28 164
  Share-based payment 41 363   (4 829)
  Dividends paid on class A ordinary shares (3 680)   (3 911)
    57 107   19 424
  During 2008 the Group changed its accounting treatment of the broad based employee shares scheme from equity-settled to cash-settled to reflect the Group’s current settlement practices. The opening balance of the equity compensation reserve on 1 October 2007 was therefore, transferred to the share-based payment liability.  Refer to note 22.2 for detail on the broad-based employee share scheme.
      
28. Trade and other payables      
  Trade payables 1 076 899   1 111 794
  Accrued expenses 83 586   94 370
  Related parties (refer to note 34) 8 875   8 753
  Deferred revenue 50 438   56 240
  Value-added tax 1 209   2 142
  Accrual for leave 109 649   94 449
  Accrual for 13th cheque 53 663   46 924
  Other 109 814   70 699
    1 494 133   1 485 371
  The carrying amounts of the Group’s trade payables are denominated in the following currencies:      
  Covered by means of foreign exchange contracts: 53 345   49 873
  Euro 1 002   310
  US Dollar 51 629   49 563
  Other currencies 714   –
  Uncovered: 1 023 554   1 061 921
  Euro 9 280   2 778
  UK Pound 21 566   25 400
  Botswana Pula 2 594   2 599
  US Dollar 3 933   18 971
  SA Rand 984 014   1 010 636
  Other currencies 2 167   1 537
         
  Total 1 076 899   1 111 794
  The following balances, included in the summary above, are denominated in the functional currencies of the relevant entities:      
  UK Pound 20 153   24 311
  Botswana Pula 2 594   2 599
    22 747   26 910
  Other payables are mostly denominated in the Group’s functional currency and no significant risk concentrations exist outside South Africa.
      
29. Financial risk management      
29.1 Financial risk factors      
  The Group’s activities expose it to a variety of financial risks: market risk (including interest rate risk, foreign exchange risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

The board approved an overall decision making framework in terms of which financial risks are evaluated, managed and hedged by executive management.
      
  (a) Market risk      
  (i) Interest rate risk      
  The Group’s interest rate risk arises from both financial assets and financial liabilities.

Financial liabilities exposed to interest rate include interest-bearing short- and long-term borrowings, bank overdrafts and call loans.  The Group only borrows at variable interest rates. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The interest rate characteristics of new borrowings and the refinancing of existing borrowings are positioned according to expected movements in interest rates.

The interest rate profile as at 30 September is summarised as follows:		      
  Variable rate 1 257 652   1 680 649
  Fixed rate –   –
  Total loans 1 257 652   1 680 649
  Percentage of total loans:      
    %   %
  Variable rate 100.0   100.0
  Fixed rate –   –
  Total loans 100.0   100.0
  Refer to note 45 for detail regarding interest rates.

Based on various scenarios the Group manages its interest rate risk by entering into floating-to-fixed interest rate swaps, zero-cost interest rate collar contracts or any other applicable hedging instruments. The portion of interest-bearing borrowings to be hedged is determined based on macro-economic factors.  It is the Group's policy to hedge at lease 50% of all its major interest-bearing borrowings for three years rolling through appropriate hedging instruments.  The main purpose of the Group's hedging strategy is to hedge the Group against a possible increase in interest rates; however, the Group also contracts for sharing  in the up-side of a possible decrease in interest rates.  Where such instruments qualify for hedge accounting, hedge accounting principles are applied in accounting for these hedging instruments.

Interest rate swaps have the economic effect of converting a portion of borrowings from floating rates to fixed rates. Under the interest rate swap agreements, the Group agrees with other parties to exchange, at specified intervals (primarily quarterly), the difference between contracted fixed interest rates and floating interest rates calculated by reference to agreed notional amounts.

A zero-cost interest rate collar contract is an instrument which combines the purchase of a cap and the sale of a floor to specify a range in which an interest rate will fluctuate. The instrument insulates the buyer against the risk of a significant rise in a floating rate, but limits the benefits of a drop in that floating rate. Financing costs are effectively “collared” between these upper and lower limits. Cash flows are only settled, at specified intervals, if the benchmark rate was exceeded. Settlement amounts are calculated by reference to the agreed notional amounts.

Financial assets exposed to interest rate risk include cash, short-term bank deposits, loans to associates and joint ventures. The Group’s cash and cash equivalents are placed with creditable financial institutions.

Cash and short-term bank deposits are invested at variable rates. At year-end R296,128,471 (2008: R119,692,723) was invested at rates that varied from 1,4% to 8,3% (2008: 4,5% to 11,5%).

At year-end loans to associates and joint ventures were granted interst free or at variable rates from 9,5% to 10,5% (2008: 13,0% to 16,0%).

(ii) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro, US Dollar and UK Pound. Foreign exchange risk arises from future commercial transactions denominated in foreign currencies, recognised assets and liabilities denominated in foreign currencies and derivative financial instruments. Apart from the Group’s exposure to trade receivables and payables denominated in foreign currencies, no other financial assets or liabilities expose the Group to significant foreign currency risk.

The Group manages short-term foreign exchange exposure relating to trade imports and exports, in terms of formal foreign exchange policies with prescribed limits. Foreign exchange risk arising from capital imports is hedged in total by means of foreign exchange contracts or other appropriate hedging instruments. On a case by case basis, depending on potential income statement volatility caused by the fair value movement of the derivative, management decides whether or not to apply hedge accounting.

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. However, the Group’s exposure to this risk is insignificant as the Group’s investments in foreign operations are not material.

Refer to note 49 for detail of foreign exchange contracts at year-end.

(iii) Price risk
The Group is exposed to price risk of equity securities due to investments held by the Group that are classified on the consolidated balance sheet as 'available-for-sale'. To manage its price risk arising from investments in equity securities, the portfolio is managed by three major professional fund managers and investments are spread over a variety of industries in the market. The Group’s investment in equity securities is not material.

The Group is further exposed to commodity price risk. The risk arises from the Group’s need to buy specific quantities and qualities of raw materials to meet its milling requirements. These raw materials include wheat, maize, soya beans, sorghum, barley and oats.

The Group uses exchange-for-physical contracts, options and futures to hedge itself against the price risk of these commodities. These contracts hedge the future purchase price of raw materials. Settlement of the physical contracts and local futures are effected by physical delivery. To the extent that commodity forward contracts and futures qualify for hedge accounting under IAS 39, the effective portion of the movement in fair values of these derivatives are accounted for as cash flow hedges in equity. Any ineffective portion is recognised in the income statement.

Commodities are hedged in terms of a formal procurement policy which includes a raw material procurement hedging policy, pricing options and exposure limits, approved by the board of directors. The policy is regularly reviewed by the procurement committee under chairmanship of the managing director. The policy is sufficiently flexible to allow management to rapidly adjust hedges following possible changes in raw material requirements.

Refer to note 49 for detail of commodity instruments at year-end.

(iv) Sensitivity analysis
 The table below summarises the impact on post-tax profit and equity of changes in market risks relating to the Group’s financial instruments exposed to foreign currency risk, interest rate risk and price risk.

Change in foreign currency
 Derivative financial instruments affected by changes in exchange rates include futures, options and foreign exchange contracts. The summary below reflects the results of an expected change in US Dollar of 7,0% (2008: 15,9%), UK Pound of 16,0% (2008: 13,0%), Botswana Pula of 4,0% (2008: 2,0%) and Euro of 8,5% (2008: 12,6%), with all other variables held constant.

Rand deteriorates against foreign currencies		      
  – Increase/(decrease) in profit after tax      
    Trade receivables 3 174   7 135
    Trade payables (3 341)   (10 472)
    Derivative financial instruments not earmarked for hedging 8 832   4 387
  – Increase in equity (after tax)      
    Derivative financial instruments earmarked for hedging 5 432   24 243
    14 097   25 293
  If the Rand appreciates against these currencies the impact will be a decrease/(increase) in reserves of the same amount.
      
  Change in interest rate      
  The summary below reflects the results of an expected change in the prime interest rate of 0,5% (2008: 1,0%), with all other variables held constant.
      
  Interest rates increase      
  – Increase/(decrease) in profit after tax      
    Short-term bank deposits 1 329   732
    Interest-bearing borrowings (4 346)   (7 299)
    Derivative financial instruments not earmarked for hedging 3   1 527
  – (Decrease)/increase in equity (after tax)      
    Derivative financial instruments earmarked for hedging (5 534)   6 539
    (8 548)   1 499
  Interest rates decrease      
  If the prime interest rate decreases, the impact will be a decrease in the profit after tax of the same amount on financial instruments other than interest rate swaps and collars.

Derivative financial instruments affected by changes in the interest rate include interest rate swaps and interest rate collars. The effect of a decrease in the prime interest rate of 0,5% (2008: 1,0%) on these derivative financial instruments will result in:
      
  – Decrease in profit after tax      
    Derivative financial instruments not earmarked for hedging (3)   (3 025)
  – Decrease in equity (after tax)      
    Derivative financial instruments earmarked for hedging (5 615)   (9 757)
         
  Change in commodity prices      
  Derivative financial instruments affected by changes in the commodity prices relate to futures and options. The summary below reflects the results of an expected change in the wheat price of 10,0% (2008: 2,9%) and a change in the maize price of 30,0% (2008: 3,7%), with all other variables held constant.
     
  Commodity price increase      
  – Increase in profit after tax      
    Derivative financial instruments 1 503   –
  – Increase in equity (after tax)      
    Derivative financial instruments 20 940   6 793
  If these prices would decrease it will result in a decrease in reserves of the same amount.
      
  Change in security prices      
  Available-for-sale financial assets relate to investments in securities. The summary below reflects the results of an expected change in the security prices of 14,0% (2008: 14,0%), with all other variables held constant.
      
  Security prices increase      
  – Increase in equity (after tax)      
    Available-for-sale financial instruments 2 639   2 924
         
  If these prices would decrease it will result in a decrease in reserves of the same amount.

(b) Credit risk
Financial assets that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents, derivative financial instruments and deposits with financial institutions, as well as credit exposure to trade receivables, including outstanding receivables and committed transactions.

The Group’s credit risk exposure relating to cash and cash equivalents, derivative financial instruments and deposits with financial institutions is managed on a Group level. Cash equivalents and short-term deposits are placed with a limited group of creditable financial institutions, all of which have A1+ short-term credit ratings.

The Group’s credit risk exposure relating to trade receivables is managed on a decentralised basis. Trade receivables are subject to credit limits, control and approval procedures. The credit quality of customers is assessed, taking into account its financial position, past experience with the customer and other factors when approving new customers and determining or revising individual credit limits. The utilisation of credit limits is regularly monitored.

Credit risk with respect to trade receivables is limited due to the large number of customers comprising the Group’s customer base and their dispersion across different industries and geographical areas.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.

The Group manages its liquidity risk by using reasonable and retrospectively-assessed assumptions to forecast the future cash-generating capabilities and working capital requirements of the businesses it operates and by maintaining sufficient reserves, committed borrowing facilities and other credit lines as appropriate. The Group’s policy has been to maintain substantial unutilised banking facilities and reserve borrowing capacity as well as significant liquid resources.

At year-end the Group has borrowing facilities in the form of committed borrowings as well as overnight facilities at the four major South African banks. Sufficient collateral in the form of inventory, biological assets, trade receivables and property, plant and equipment are provided as security for the debt. The Group also has the option to repay long-term debt as excess cash flow is available, without incurring any penalties.

The Group tends to have significant fluctuations in short-term borrowings due to seasonal factors. Consequently, Group policy requires that sufficient borrowing facilities are available to exceed projected peak borrowings.
      
  The Group’s unutilised borrowing facilities are as follows:      
  Total borrowing facilities 3 515 580   3 686 614
  Net interest-bearing liabilities (660 122)   (1 454 918)
    2 855 458   2 231 696
  Refer to note 50 for a maturity analysis of the Group’s financial liabilities.
      
29.2 Capital risk management      
  For capital management purposes the current level of capital in the Group is defined as the difference between the total assets and total liabilities of the Group. The capital employed is managed on a basis that enables the Group to continue operating as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group monitors capital on the basis of the debt to equity ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings and bank overdrafts as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as capital and reserves attributable to equity holders of the Group as shown in the consolidated balance sheet.

The main focus of the Group’s capital management is to ensure liquidity, in the form of short-term borrowing facilities, in order to have sufficient available funding for the Group’s working capital requirements.

     
29.3 Fair values      
  The fair value of financial instruments traded in active markets (such as publicly traded derivatives and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The appropriate quoted market price for financial liabilities is the current ask price.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter securities) is determined by using valuation techniques. The Group uses a variety of methods that makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments. Other techniques, such as estimated discounted cash flows, are used to determine the fair value for the remaining financial instruments. The fair values of interest rate swaps and collars are calculated as the present value of the estimated future cash flows. The fair value of foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.

The carrying amounts of cash, trade and other receivables less provision for impairment, trade and other payables and short-term borrowings are assumed to approximate their fair values due to the short term until maturity of these assets and liabilities.

The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. The fair values of long-term investments and long-term borrowings are not materially different from the carrying amounts.
     
30. Contingent liabilities      
  Guarantees in terms of loans by third parties to contracted service providers 128 717   146 299
  Other guarantees 27 751   12 080
    156 468   158 379
  Litigation      
  Complaint referral by the Competition Commission of South Africa
 In June 2009 Pioneer Foods appeared before the Competition Tribunal on two complaint referrals initiated by the Competition Commission. On the 9th of September 2009 the final legal arguments of the Competition Commission and the Company's wholly-owned subsidiary Pioneer Foods (Pty) Ltd were made before the Competition Tribunal with regards to the complaint referrals for:
  • alleged prohibited practices in the Western Cape seeking, amongst others, the imposition of an administrative penalty of 10% of the revenue derived by Pioneer Foods (Pty) Ltd from the production and sale of bread in the Western Cape in 2006; and
  • allegations of participating in a national bread cartel seeking, amongst others, the imposition of an administrative penalty of 10% of Pioneer Foods (Pty) Ltd’s revenue in 2007.
In its answer to the complaint referrals received in 2007, Pioneer Foods (Pty) Ltd admitted to certain facts relating to prohibited practices in the Western Cape, but has continued to defend itself against all other allegations made by the Commission.

On 28 September 2009, the Commission applied to the Competition Tribunal for leave to amend the relief sought by it in the complaint referrals by introducing, amongst others, claims for:
  • substitution of the original relief sought in the Western Cape referral by the demand for an administrative penalty of 10% of Pioneer Foods (Pty) Ltd’s revenue for 2006; alternatively an administrative penalty of 10% of Pioneer Foods (Pty) Ltd’s revenue derived from the production and sale of bread in 2006; and
  • substitution of the original relief sought in the national referral by the demand for an administrative penalty of 10% of Pioneer Foods (Pty) Ltd’s revenue for 2006; alternatively an administrative penalty of 10% of Pioneer Foods (Pty) Ltd’s revenue derived from the production and sale of bread in 2006.
Pioneer Foods (Pty) Ltd has opposed certain of the amendments sought.

The legal entity Pioneer Foods (Pty) Ltd’s audited revenue in 2006 amounted to R7,86 billion, whereas the comparative revenue in 2007 amounted to R9,23 billion. Pioneer Foods (Pty) Ltd’s national revenue from the production and sale of bread in 2006 amounted to R1,65 billion. Pioneer Foods (Pty) Ltd’s revenue derived from the production and sale of bread in the Western Cape in 2006 amounted to R384 million. This was the maximum potential penalty base (10% being R38,4 million) for the Western Cape case in terms of the initial request for penalty from the Commission.

At the date of approval of the financial statements by the board, the Tribunal has not ruled on the amendment sought by the Commission nor on the two complaint referrals.

No provision for a potential administrative penalty has been made.

Land claims
 Regional Land Claim Commissioners acknowledged claims against the land of two Group companies, in terms of the provisions of sections 2 and 11 of the Restitution of Land Rights Act of 1994 (as amended), on 3 October 2004 as well as during 2007.

Claim received before the 2007 financial year:
The Group company concerned has followed the procedures prescribed by this Act with no specific course of action negotiated or agreed with the Commissioner or the claimants to date. Although the process is expected to continue for an undetermined period of time, it is not expected to have a material impact on this Group company’s ability to conduct business as usual in the foreseeable future.

Claims received during the 2007 financial year:
The valuations of the Commissioners were accepted for the two farms involved and the proposed sale for R10,5 million is in progress. The impact of discontinuing production at these two units is immaterial.

It is not anticipated that any material transactions will arise from these land claims.

Dispute with egg contract producers
As previously reported, claims were received from some contract producers for the alleged breach of the terms of specific supply agreements. The claimants then withdrew these claims in arbitration proceedings and they have now submitted new claims to the Western Cape High Court: Cape Town.

Pioneer Foods has filed answering pleas to all these claims. In several of these matters counter claims to recover damages suffered by Pioneer Foods as a result of breach of contract by the contract producers are being quantified and will be filed in the new financial year.

The Court is unlikely to hear these matters before 2011. Management remains convinced, based on legal advice regarding the legal merits of the claims against the Group, that the Group will not incur any material liability in respect of this matter.