NZs Dairy Sector Institutions LEANZ Bell Gully, Auckland April 30, - - PowerPoint PPT Presentation

NZ’s Dairy Sector Institutions

Bell Gully, Auckland April 30, 2019

LEANZ

Contents

1. What did DIRA do? 2. Has DIRA worked? 3. Is DIRA still needed?

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• 1. What Did DIRA Do?

1. Created a near-monopsony for Fonterra at the farm-gate 2. Removed the monopsony of the Dairy Board at the factory-gate 3. Preserved competition in the domestic dairy-products market

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• 2. Has DIRA Worked?

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5 10 15 20 25 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Litres (billion)

Milk processed (billion litres)

Growth in the sector until reaching peak-cow in approx. 2015-16

Fonterra’s Place in the Sector

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60% 65% 70% 75% 80% 85% 90% 95% 100% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Market Share

Actual Forecast

Fonterra’s Farmgate Market Share

Increasing Competition

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Market Share at Farm-gate

Dairy Processors’ Performance

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19% 11% 9% 6% 2% 0% 8% 16% 24% Tatua* OCD Synlait Fonterra Westland

Average Return on Capital Employed, 2014-2018

Fonterra’s Financial Performance

• Downward trend in performance

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0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 2006 2008 2010 2012 2014 2016 2018 2020

ROCE (%)

Fonterra Return on Capital Employed

Fonterra: Commodities vs “Value Add”

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• 2%

0% 2% 4% 6% 8% 10% 12% 2006 2008 2010 2012 2014 2016 2018 2020

Fonterra ingredients Fonterra value add

Return on Capital Employed

Source: Northington Partners and TDB Advisory analysis

What went wrong at Fonterra?

• Structure or Strategy?
• Co-op structure not inherently flawed: but sources of

capital limited: debt & retained earnings

• Was there a clear strategy? volume/commodity and

“value-add”

• Both strategies need capital

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• 3. Is DIRA Still Needed?

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74% of milk collected has access to more than one processor

Farm-gate Market

• 3. Is DIRA Still Needed?

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ComCom Part IV regulation typically applied where one supplier

Farm-gate Market

Dairy Region Total production (millions kgMS) Percentage of national market (kgMS)

• No. of processors

Waikato 503 27% 3 Whanganui / Manawatu 81 4% 2 Westland / Nelson / Tasman 85 5% 2 Canterbury 385 21% 4 Otago 101 5% 2 Southland 223 12% 3 Rest of NZ (5 regions) 483 26% 1

• 3. Is DIRA Still Needed?
• Under DIRA, Goodman Fielder has guaranteed access to 250M litres of raw

milk p.a. at a regulated price

• The Commerce Commission has estimated that if the DIRA Regulations were

removed, the domestic raw milk price would increase by around 25%

• Leading to an estimated:

– transfer of wealth from New Zealand consumers to suppliers of $51M to $92M p.a.; and – an efficiency (deadweight) loss to the economy of around $6M p.a.

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Domestic Dairy Products Market

Conclusions

• Under DIRA:

– The dairy sector overall has fared well; but – Fonterra has struggled

• With increased competition there are valid questions

whether DIRA is still needed at the farmgate

• Given the domestic presence of Fonterra, regulation is

still needed for the domestic dairy products market

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Over Paying for Milk?

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• The Farm-Gate Milk Price shows a general increasing trend
• Fonterra's constitution states that it’s goal is to maximise pay-out for milk

to farmers, this has incentivised farmer volume production, requiring investment in processing capacity and not value add business

Over Investing in Processing?

• Fonterra has out-spent competitors

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Invested Capital since 2001

NPAT and Revenue per kgMS

2010-2018

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Debt to debt plus equity, 2018

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17% 26% 40% 52% 67% 0% 20% 40% 60% 80% OCD Synlait Tatua Fonterra Westland

Debt/(debt+equity), (%)