Strategic pricing challenges –
from a buyer’s perspective
A Cluster Partner
Fish Pool / DNB Brussels Seminar, 24. April 2017
Dag Sletmo, DNB Foods & Seafood
[email protected], tel +47 95286134
DNB Bank is a global seafood player
2
DNB sells salmon price forwards via Fish Pool
~30% market share
Some benefits of trading through DNB:
• Eliminates capital tied up as collateral with the clearing house
DNB market share at Fish Pool
34%
• No margin payment of mark to market – simplifies liquidity
29%
25%
management and reduces administration
• Simplified documentation
• Possible to hedge salmon price in EUR, USD and other currencies
6%
7%
2012
2013
0%
2011
2014
2015
2016
• Client maintains direct dialogue with Fish Pool
DNB Foods & Seafood
Source: DNB
Agenda
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
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The salmon price has sky rocketed…
Current level ~100% above average
Norwegian salmon price reaching new highs
DNB Foods & Seafood
Source: SSB, DNB
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Famous last words: «this time is different»
But sometimes things actually are different
DNB Foods & Seafood
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A farewell to the traditional cyclical pattern
A new dynamic and an end to the traditional cycle
DNB Foods & Seafood
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No growth = no «pork cycle»
Global supply of Atlantic salmon
CAGR 1992-2011: 10%
Source: Kontali, DNB
CAGR 2012-16: 2%
DNB Foods & Seafood
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New «normal» salmon price = NOK/kg 40+
To get 8% return on invested capital after tax, a Norwegian farmer needs
NOK/kg 10+ EBIT-margin. Given cost of ~30+, the price must be 40+
Norwegian salmon price, NOK/kg
Actual salmon price
New «normal» salmon price?
(NOK/kg 40)
Cost is currently
higher than
NOK/kg 30
which points to a
higher price than
40. And as long
as supply is
restricted, the
price should also
be above the
equilibrium
16-year average
(NOK/kg 33)
DNB Foods & Seafood
Source: Kontali, DNB
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What sets the global price long term?
Norwegian cost plus return on capital
Cost drives price longer term
As the industry
has approached
full capacity
utilization the last
few years, the
industry has
moved from
covering cost of
capital to earning
super profits
DNB Foods & Seafood
Source: Directorate of Fisheries, DNB. Price and cost are WFE, not GWE
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New technology needs high prices
At least right now..
Potential global supply curve
Hence new technology will not be built out on a large scale unless prices stay strong.
Large expensive structures with long life spans but not requiring licenses could lead to
long investment driven cycles ala shipping
DNB Foods & Seafood
Source: Nofima, Kontali, DNB
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The consumer has other choices, there is a limit to how
high the salmon price can fly..
Salmon price not out of whack yet. USD/kg
Salmon
Beef
Chicken
Pork
Salmon high in the trading range vs pork, ok vs chicken, ok vs beef
DNB Foods & Seafood
Source: Index Mundi, DNB
..but can we really speak about the salmon price anymore?
NOK/kg salmon price at Kiwi, Norwegian discount retailer
368
289
Four products
on the same
shelf at my
local discount
retailer
233
149
First Price private
label
Source: DNB
Frøya mid loin
Frøya sashimi
Salma 190
DNB Foods & Seafood
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Price trends
Demand to become more important in forecasting prices
A challenge, we know way more about supply than demand
Supply; we
drown in
data
Demand;
the dark side of
the moon
May tilt the information advantage away from the salmon farmers towards the buyers
who are closer to the end market
DNB Foods & Seafood
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Agenda
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
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Thoughts on volatility from 2013
What has happened since then?
The future – lower salmon price volatility?
The high volatility of the salmon price is not good for the industry. Will it ever change?
1.
Lower volatility in supply growth if the industry is close to full capacity utilization from a licensing
and/or sustainability point of view?
2.
Stronger salmon market penetration and distribution of fresh prepacked filets at discount retailers
give higher price elasticity of demand and hence more stable prices?
3.
Salmon farmers integrating downstream in combination with end consumer brands lead to more
stable retail prices, which feeds back to more stable whole sale prices?
4.
Fish Pool reaches the tipping point?
DNB Foods & Seafood
Source: Dag Sletmo’s presentation at Fish Pool X-mas seminar December 2013
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1) The volatility of global supply growth has declined
Standard deviation in global yoy supply growth, 12m roll
DNB Foods & Seafood
Source: Kontali, DNB
2) Hard discount penetration has increased..
..but we don’t see higher price elasticity in the numbers yet
Source: Norwegian Seafood Council, MHG
DNB Foods & Seafood
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3) Downstream integration continues
Retailer relationships & brand focus
DNB Foods & Seafood
Source: MHG
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4) Fish Pool has not reached the tipping point yet..
Fish Pool volume, tons (000s)
116
102 97
101
No
tipping
yet..
65
90
73
56
47
32
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
4
DNB Foods & Seafood
Source: Fish Pool
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4)..but the fixed price contract share of the market has!
Estimated contract share, Atlantic salmon, Norway
Estimated contract share, Atlantic salmon, Norway
Adding Fish
Pool contracts,
brings the fixed
price share of
the market
above 50%
DNB Foods & Seafood
Source: Kontali
Quiz; why does the Norwegian Gov’t continue to
issue debt when it doesn’t need the money?
Gov’t wealth fund almost 20x larger than Gov’t debt
7956
NOKbn
Nowegian Gov't Oil Fund
Norwegian Gov't debt
The answer:
-476
NOKbn
The relevance of the quiz:
The industry should use Fish Pool in
addition to bilateral contracts. It gives
a reference point and transparency in
the market.
DNB Foods & Seafood
Source: Norges Bank
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Why has the fixed price share increased?
A high level is the natural state of affairs
Long term contracts or vertical integration
100
Percentage of total
90
80
70
60
50
40
Typical age
at slaughter:
5-7 weeks
Typical age
at slaughter:
6 months
Typical age
at slaughter:
36 months
Pork
Beef
1980
2000
30
20
10
0
Chicken
Spot and auction markets are a limited part of US and EU meat sectors
DNB Foods & Seafood
Source: FAO, Ragnar Tvererås (Barkema, Drabenstott, Novack)
Why did it take so long?
A young industry & long value chains
Agriculture
Regional
transport
Packaging/
VAP
National
transport
Local
transport
Harvesting/
fillet
International
transport
Fillet/
VAP
National
transport
International
transport
Importer/
wholesale
National
transport
Fillet/
VAP
National
transport
Salmon farming
Farming
End buyer
Farm
Wild catch fishing
Fishing
vessel
Fish
landing
Time, transaction cost
Source: Ragnar Tveterås
DNB Foods & Seafood
Suppliers must increasingly adjust to end customers
The past
Price
Farmer
Price
End
customer
Processing
company
Volume
Volume
Price
Price
Now
Farmer
Volume
Timing
Quality
Processing
company
Volume
Timing
End
customer
Quality
DNB Foods & Seafood
Source: Ragnar Tveterås
Has volatility dropped?
Yes, but not all that much. Room for further reduction
Salmon export price volatility
DNB Foods & Seafood
Source: SSB, DNB
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Spot price volatility dropped less than export price
High contract share has reduced the available spot
volume…
..which has helped propel the spot price above the
export price
Spot price (Nasdaq) premium/discount to export price (SSB)
DNB Foods & Seafood
Source: Kontali, SSB, Fish Pool, DNB
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Agenda
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
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Why hedge?
• Smooth earnings
More important for farmers than
earlier as the investor perception
has changed from cyclical
commodity play to secular growth
focus
- Happier owners, higher valuation of company
• Operational focus
- Large earnings swings driven by market prices can be demotivating for
employees and an organization which works hard every day to make money on
regular operations
• Reduce risk of financial distress
- Lack of liquidity, breaking loan agreements, bankruptcy
But it is really earnings you want to hedge, not cost!
DNB Foods & Seafood
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Implications of the tipping point: Go with the crowd!
• If you are a price setter hedging the raw
material price reduces earnings volatility
• If you are a price taker you should follow
the hedging strategy of you competitors
in order to reduce earnings volatility
(don’t hedge if they don’t, do if they do)
-
What the majority does will set the market
price
-
Things even out over time, but the pain in
the mean time can be brutal and you may
need a very strong balance sheet to ride
out the storm
DNB Foods & Seafood
Source: DNB Markets
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Airline example
• Fuel is to an airliner what the salmon price is to a salmon processor
• The ticket prices track the fuel price closely; but with a one year time lag
• Increasing fixed price share in the salmon market may create a longer
lead time from changes in the salmon wholesale price to changes in
retail prices
Ticket prices (yield) track fuel prices with 1 year lag
Impact on earnings from hedging raw material cost
Does the
industry overall
hedge?
Does the company hedge?
Yes
No
Yes
No
Stable
Unstable
Unstable
Stable
DNB Foods & Seafood
Source: DNB Markets
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The road ahead, #1
The force is with us!
“All” the mega-trends in favor of the fish farming industry
Limited CO2
waste and
water
consumption
vs other animal
production
An increasing
world
population
needs food
Growing
middle class in
emerging
markets
demands more
protein
Better grocery
retail supply
chains in
emerging
markets
Higher
educated
population eats
healthier
Ageing
population eats
more fish
Limited volume
potential in
fishing, growth
has to come from
fish farming
Low feed
conversion rate
vs other animal
production
DNB Foods & Seafood
Source: DNB
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Thank you for your attention
DNB Foods & Seafood
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