milk price introduction
TRANSCRIPT
Fonterra Farmgate Milk Price
An Introduction
Russian Dairy News Group
Auckland Monday 23 February 2015
Mark Hannagan - Milk Price Manager
Confidential to Fonterra
Page 2
Topics Covered
• Why do we have a Milk Price?
• Organisational Structure. And Governance
• Basics of the Milk Price Calculation.
Confidential to Fonterra
Page 3
• Currently there is no true market for all raw milk produced in New Zealand.
• No ‘market price’ for milk collected within NZ
• Therefore the Milk Price needs to be a modelled price
RATIONALE FOR A MODELLED MILK PRICE
The Fonterra Farmgate Milk Price
is the theoretical estimate of the
maximum amount a
properly-managed and efficiently-run,
producer of commodity milk products
could afford to pay for milk
and still make a return on new capital to justify investment Fonterra 86.8%
Westland 3.8%
Open Country
Dairy 4.6%
Synlait 2.6%
Tatua 0.7%
Other 1.4%
Share of New Zealand Milk Collection 2014
Information from Dairy NZ Annual Reports
Page 4
MILK PRICE OVERVIEW
• MP should strike a sustainable balance between returns to milk suppliers and shareholders in Fonterra by: – Ensuring suppliers receive a MP that reflects their collective selling power.
– Reflecting an unbiased assessment of the total amount which can be paid for milk while
allowing shareholders to obtain a return that warrants long-run investment in new and replacement plant necessary to process milk.
– Ensuring Fonterra faces strong incentives to maximise prices for commodities in global markets, optimise product mix and obtain market-leading efficiencies in processing and capital utilisation.
Confidential to Fonterra
Page 6
MILK PRICE MANUAL
Milk Price Manual
Milk Price Model
Principles
Dairy Industry
Restructuring Act
Page 7
Milk Price Management
Steering Committee
Internal Audit
Internal
6
7
The Fonterra Board has established a robust governance structure to oversee
the setting of the Farmgate Milk Price
Fonterra Board
Milk Price Group
External Reviewers
External Auditor – PwC
Commerce Commission
External
2
3
4
5
• 2 x Shareholders Council Appointees
• 2 x Appointed Fonterra Directors
• 1 x Farmer Director
Milk Price Panel
1
Page 9
KEY ASSUMPTIONS
• No reliable NZ wide benchmark price for milk supplied in NZ. If an alternative benchmark becomes available, it will be the basis for the Milk Price.
• Fonterra's near term competition would be from new entrants who build milk powder
plants. • Processing capacity of Standard Plants of Fonterra is greater than processing plant capacity
of Fonterra’s efficient near-term competitors.
Underpinning the Milk Price Model is a notional pure Commodity manufacturing business. The revenue, cost and asset data of Fonterra used are adjusted to reflect that assumption.
Page 10
MILK PRICE OVERVIEW
DEPRECIATION (NET OF REVALUATIONS)
REASONABLE RATE OF RETURN
ASSET BASE
EXISTING ASSETS
CAPITAL EXPENDITURE
CAPITAL RECOVERY
OPERATING COSTS
REVENUE
less
less
equals
TOTAL AMOUNT PAYABLE FOR RAW MILK
Page 12
Milk Price Model (MP)
Confidential to Fonterra
Mixture of Actual &
Modelled Cost
Information
Costs covers Milk
Collection to Delivery of
Finish Product to the NZ
Export Port
Independently reviewed
parameters based on
standard powder and
cream plants that match
current Fonterra
capacities and locations.
Model Assumptions
Plant Size
oWMP / SMP 1.9M L/day
12 MT per Hour
8.5 MT per Hour
o Butter / AMF 0.5M L/day
14 MT per Hour
o BMP 0.8M L/day
4 MT per Hour
Milk Solids based on
Fonterra total supply (incl
Town Milk)
Plants have Current
Appropriate Technology &
Efficient 1-Spec
manufacture
Approx 250k tonnes
lactose for standardising
Qualifying
Revenue
$8.00 / kgMS
Cash Cost
MP MODEL
Depreciation
Economic
Charge
MILK PRICE
$6.00 / kgMS
Less
Less
Less
=
Based on 5 products –
WMP, SMP, Butter,
AMF, BMP that inform
Milk Price revenue
Sales Commission
Milk Collection
Lactose
Operating
Supply Chain
Overhead
Modelled on
Replacement Costs
Working capital Costs
Includes WACC on assets
Tax expense
Page 13
REVENUE
• MP revenues reflect allocation of all milk supplied in a June – May season to the manufacture of powder Reference Commodity Products (RCPs) - Note the Milk Price Model processes the total amount of milk collected by Fonterra
• RCPs reflect 4 product streams: WMP/Butter/BMP, WMP/AMF/BMP, SMP/Butter/BMP &
SMP/AMF/BMP
• Allocation of milk to product streams broadly aligned to Fonterra’s.
• Sales phasings broadly aligned to Fonterra’s sales of RCPs.
• WMP, SMP and AMF sole reliance on prices achieved on GDT.
• Notional revenue converted from USD to NZD at Fonterra’s average monthly conversion rates (i.e. FX risk largely passed through into Milk Price).
Page 14
CASH COSTS – KEY ASSUMPTIONS
Cash Costs
Milk Collection
Factory
Lactose
Supply Chain
Admin / Overhead
• Fonterra’s Collection Cost
• Manufacturer’s specifications of resource
usages (energy, labour, losses) for modern
powder plants, but Fonterra’s unit costs.
• Bought-in lactose for powder standardisation
• Reflect assumption that Milk Price business
supported by an offshore network.
• Based on Fonterra’s, but reflect narrower
scope of Milk Price business.
Page 15
CAPITAL CHARGE
Fixed asset base reflects: • Manufacturer’s costs for ‘standard’ 1.9m litres per day milk powder plants
• Other assets based on Fonterra replacement costs
• WACC charge & depreciation allowed for in respect of fixed assets.
• Working capital requirements over the course of the season primarily vary with Milk Price sales
phasings and the profile of payments to farmers (Advance Rate Schedule).
• Capital charge is applied to monthly net working capital balance. (One implication is that farmers are compensated for deferral of payments for milk, & that Milk Price therefore effectively includes an interest component, which varies from year to year.)
• WACC is post-tax, so separate provision included for tax.