rdi workshop: hedging as a cooperative and nzx milk futures · pdf filerdi workshop: hedging...
TRANSCRIPT
RDI Workshop: Hedging as a Cooperative
and NZX Milk Futures
Confidential to Fonterra Co-operative Group
May 2016
Page 2 Confidential to Fonterra Co-operative Group
Disclaimer
The information and comments in this presentation are necessarily generalized, are
not intended to be used for specific trading strategies, and do not constitute advice
or a securities recommendation or any offer to buy, sell, subscribe for, any
securities, contracts or any derivative.
Commodity and derivative trading is risky and Fonterra, its officers, employees, and
agents do not warrant its accuracy, adequacy, currency, or that it is suitable for your
intended use. Any examples given are illustrative and are not indicative of future
performance or actual outcomes of particular trading strategies.
Page 3 Confidential to Fonterra Co-operative Group
1. History of Fonterra Risk Management
• Why do we manage risk?
• Whats creates commodity risk for the Co-op?
• How do we manage it?
2. NZX Milk Futures
• The journey, how did we get here?
• The contract
RDI Dairy Risk Management Workshop
Page 4 Confidential to Fonterra Co-operative Group
Agricultural commodity prices exhibit
extreme volatility
WMP 41%
SMP 33%
AMF 35%
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What creates Commodity Risk within Fonterra
1. Asset footprint
2. Forward contracting
History of Fonterra Risk Management
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New Zealand
Processing Sites
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Milk Price Products
AMF
SMP
WMP
Milk Price Products
Non Milk Price Product
Farmer Market
Asset footprint
• Fonterra passes the spot price through to the farmer in the form of Milk Price
• Due to the mix of assets not all sales return Milk Price
Cost of Milk Fonterra Assets
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Extreme Volatility Impacting on Margins
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Forward contracting
• Customers require certainty in order to value their COGS when making pricing decisions for end users.
• When Fonterra provides a long dated price for a customer it exposes itself to rising commodity prices.
• Commodity Risk and Trading (CR&T) assume and manage the risk on Fonterra’s behalf.
Buy Sell
(short) (long)
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Commodity Risk & Trading (CR&T) at Fonterra
Commodity Risk and Trading
Portfolio Management Origination Trading
Activity
•Centralised Risk Management approach
•Monitor the Hedge Plan and position limits to ensure compliance.
•Leading the development of risk management products.
•Providing ongoing support for customer and supplier risk management tools.
•Support the development of risk management tools, in particular financial swaps and exchange traded instruments
•Pricing in developing markets and supporting the process of educating and attracting new participants
Contr
ols
• Hedge Plan and position limits defined • Daily Management processes to review exposures • Ongoing pricing review • Reporting framework to Risk Committee
•Allocated risk capital, VaR, stop loss and position limit controls •Daily review
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Convergence of international prices
As the trading of dairy matures we see a convergence of global prices.
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Risk is managed using exchange traded contracts
• CR&T inherits the portfolio of long dated physical commodity products from Fonterra.
• The financial markets are used, where possible, to offset exposure, lock in margin and reduce risk for Fonterra.
Buy Sell
(short) (long)
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The CR&T objective is to reduce risk for Fonterra
CR&T Portfolio
Long Fixed Priced
Contracts
GMP
Physical Collars
Derivative Markets
Forward Price Curve
Buy Sell
(short) (long)
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Strategic commodity stream decisions
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There are 3 main pricing regions, all have dairy
derivatives and are at different stages of development
International
WMP, SMP,
AMF, butter
SMP, Butter,
Whey
Cheese,
Butter, Whey,
NFDM SMP, Butter
Whey
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Global Dairy Contract Summary
Exchange Contract Use Settlement Type Settles To Contract Size (mt) Currency Open Interest Lots Traded/Day Months Priced Expected Launch
Class III Milk Hedge Cheese Cash USDA monthly price 90 USD 20,000-40,000 500-1,000 6-24 Established
Nonfat Dry Milk Hedge NFDM/SMP Cash USDA monthly weighted average price 20 USD 5,000-10,000 100-1,000 6-24 Established
Butter Hedge Butter Cash USDA monthly weighted average price 9 USD 3,000-5,000 50-200 6-24 Established
Cheese Hedge Cheese Cash USDA monthly weighted average price 9 USD 10,000-20,000 200-400 6-24 Established
Class IV Milk Hedge NFDM/SMP Cash USDA monthly price 90 USD 2,000-5,000 10-100 6-24 Established
Dry Whey Hedge Whey Cash USDA monthly weighted average price 20 USD 3,000-5,000 50-200 6-24 Established
WMP Hedge WMP/Cheese Cash
GDT - simple average of the two WMP C2 prices for
the month 1 NZD 25,000-30,000 500-3000 6-18 Established
SMP Hedge WMP/NFDM Cash
GDT - simple average of the two SMP C2 prices for
the month 1 NZD 3,000-10,000 100-500 6-18 Established
AMF Hedge AMF Cash
GDT - simple average of the two AMF C2 prices for
the month 1 NZD 500-1,000 20-200 6-18 Established
Butter Hedge Butter Cash
GDT - simple average of the two Butter C2 prices for
the month 1 NZD 500-1,000 20-200 6-18 Established
Milk Futures Hedge Milk Cash TBC 10 NZD N/A N/A N/A 2016
SMP Hedge SMP/NFDM Cash
Indexed simple average of German (33%), France
(33%) & The Netherlands (33%) prices 5 EUR 500-1,000 0-300 6-18 Established
Butter Hedge Butter Cash
Indexed simple average of German (33%), France
(33%) & The Netherlands (33%) prices 5 EUR 0-500 0-100 6-18 Established
Whey Powder Hedge Why Cash
Indexed simple average of German (33%), France
(33%) & The Netherlands (33%) prices 5 EUR 0-500 - 6-18 Established
SMP Hedge SMP/NFDM Physical
Physical delivery to one of the delivery points set
by Euronext 6 EUR 0-100 - 6-18 Established
Whey Powder Hedge Butter Physical
Physical delivery to one of the delivery points set
by Euronext 6 EUR 0-100 - 6-18 Established
Butter Hedge Why Physical
Physical delivery to one of the delivery points set
by Euronext 6 EUR 0-100 - 6-18 Established
CME
NZX
EEX
Euronext
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The journey to NZX Milk Price Futures
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Drivers for Risk Tools – Volatility and Uncertainty They are here to stay…
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USD/MT
GDT Trading Event
Dairy Volatility Since 2008
WMP
SMP
AMF
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What does this volatility look like for NZ farmers? The volatility effect on Fonterra Farmgate Milk Price
0.00
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2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15* 2015/16*
$/KgMS
Dairy Season
Fonterra Farmgate Milk Price
10yr Average FWE
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Milk Price Futures
Page 21 Confidential to Fonterra Co-operative Group
GDT was the enabler..
• Established by Fonterra in 2008
• Twice monthly auctions
• Helps discover the ‘benchmark price’
• Major volumes transacted
• Hundreds of bidders from more than 80
countries
• Other major global suppliers have joined:
Arla, Murray Goulburn and Dairy Farmers
of America
• www.globaldairytrade.info
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Guaranteed Milk Price
Page 24 Confidential to Fonterra Co-operative Group
What is the Fonterra Farmgate Milk Price?
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NZX Milk Price Futures Contract and the Fonterra
Farmgate Milk Price
Approximately 85% of NZ farmers supply Fonterra, with some other processors also
hinging their milk price to the final Fonterra Farmgate Milk Price (“Milk Price”)
Because many NZ farmers are paid on this basis, a futures contract settling to the Milk
Price will represent a perfect hedge to the majority of NZ farmers (before allowance for
milk composition).
The Milk Price is already reviewed by the NZ Commerce Commission as required under
the Dairy Industry Restructuring Act (DIRA).
DIRA requires the Milk Price to be at a level that is fair to both farmers and Fonterra’s
competition. For this reason Fonterra’s competitors also understand well how their
businesses interact with the Milk Price.
Both Fonterra and the NZ Commerce Commission already have stringent processes,
guidelines and reporting standards relating to the Milk Price
For the reasons above and others, the NZX Milk Price Futures contract settles to the
final announced Fonterra Farmgate Milk Price.
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How the Milk Price mechanism works
Page 27 Confidential to Fonterra Co-operative Group
Or…..How the Milk Price mechanism works
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The Milk Price model
Collects all the Milk that Fonterra would collect ~1.6B KGMS
Manufactures 5 products:
WMP, SMP, BMP AMF and Butter
Sells all of these products on the GDT
Theoretical Revenue
MINUS: Operating Costs (to run a company that collects all the milk makes 5 product and sells it
on GDT)
MINUS: Financing Costs
The MILK PRICE
Real Revenue
from 100s of different products priced and sold via a myriad of different channels and
methods.
MINUS: Operating Costs, to run all of Fonterra
MINUS: COGS, or the cost of the milk
EBIT
MINUS: Interest and Tax
Profit and Dividends
Fonterra Cooperative Group Ltd
Or…..How the Milk Price mechanism works
Page 29 Confidential to Fonterra Co-operative Group
Milk Price vs EBIT Some key points to be aware of
The Milk Price Manual assumes that the notional processor in NZ would choose to
export Reference Commodity Products (RCPs) which are the milk powder streams –
WMP, SMP, Butter, AMF and BMP – in simple terms this is using GDT prices and the
actual Fonterra FX rate. This goes into the Milk Price Revenue.
Any additional revenue made by making non-RCP products or by selling RCPs at prices
above GDT prices goes into Earnings Before Interest and Tax. This is reflected in the
distributable profit (dividend and retained earnings) for the shareholders of Fonterra.
Should the prices of the RCPs increase rapidly, the ability of Fonterra to make profits
over and above those prices can be minimal. In this situation the Fonterra Board of
Directors can choose to review the Milk Price down in order to ensure they remain
profitable. This happened in the 2013/14 season when the final Milk Price was reviewed
downwards from $9.00/kgms to $8.40/kgms.
The Board is highly unlikely to review the Milk Price upwards as that would directly
affect the Co-operative’s profitability.
As a Fonterra farmer supplier, the effect on a hedging position using Milk Price futures if
the price is reviewed down is negligible as their underlying physical exposure is to the
final Milk Price.
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The contract
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Thank You