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

NZ’s Dairy Sector Institutions LEANZ Bell Gully, Auckland April 30, 2019

Contents 1. What did DIRA do? 2. Has DIRA worked? 3. Is DIRA still needed? www.tdb.co.nz 2

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 www.tdb.co.nz 3

2. Has DIRA Worked? Milk processed (billion litres) 25 20 15 Litres (billion) 10 5 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Growth in the sector until reaching peak-cow in approx. 2015-16 www.tdb.co.nz 4

Fonterra’s Place in the Sector Fonterra’s Farmgate Market Share 100% 95% Actual Forecast 90% Market Share 85% 80% 75% 70% 65% 60% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 www.tdb.co.nz 5

Increasing Competition Market Share at Farm-gate www.tdb.co.nz 6

Dairy Processors’ Performance Average Return on Capital Employed, 2014-2018 24% 19% 16% 11% 9% 8% 6% 2% 0% Tatua* OCD Synlait Fonterra Westland www.tdb.co.nz 7

Fonterra’s Financial Performance Fonterra Return on Capital Employed 10% 9% 8% 7% 6% ROCE (%) 5% 4% 3% 2% 1% 0% 2006 2008 2010 2012 2014 2016 2018 2020 Downward trend in performance • www.tdb.co.nz 8

Fonterra: Commodities vs “Value Add” Return on Capital Employed 12% 10% 8% 6% 4% 2% 0% 2006 2008 2010 2012 2014 2016 2018 2020 -2% Fonterra ingredients Fonterra value add Source: Northington Partners and TDB Advisory analysis www.tdb.co.nz 9

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 • www.tdb.co.nz 10

3. Is DIRA Still Needed? Farm-gate Market 74% of milk collected has access to more than one processor www.tdb.co.nz 11

3. Is DIRA Still Needed? Farm-gate Market Percentage of Total production Dairy Region national market No. of processors (millions kgMS) (kgMS) 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 ComCom Part IV regulation typically applied where one supplier www.tdb.co.nz 12

3. Is DIRA Still Needed? Domestic Dairy Products Market 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. www.tdb.co.nz 13

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 www.tdb.co.nz 14

Over Paying for Milk? 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 www.tdb.co.nz 16

Over Investing in Processing? Fonterra has out-spent competitors • Invested Capital since 2001 www.tdb.co.nz 17

NPAT and Revenue per kgMS 2010-2018 www.tdb.co.nz 18

Debt to debt plus equity, 2018 80% 67% 60% 52% Debt/(debt+equity), (%) 40% 40% 26% 17% 20% 0% OCD Synlait Tatua Fonterra Westland www.tdb.co.nz 19