Strategic pricing challenges –
from a buyer’s perspective
Fish Pool / DNB Brussels Seminar, 24. April 2017
Dag Sletmo, DNB Foods & Seafood
[email protected], tel +47 95286134
A Cluster Partner
2
DNB Bank is a global seafood player
DNB Foods & Seafood
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
• No margin payment of mark to market – simplifies liquidity
management and reduces administration
• Simplified documentation
• Possible to hedge salmon price in EUR, USD and other currencies
• Client maintains direct dialogue with Fish Pool
0%
6% 7%
25%29%
34%
2011 2012 2013 2014 2015 2016
DNB market share at Fish Pool
Source: DNB
DNB Foods & Seafood
Agenda
4
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
The salmon price has sky rocketed…Current level ~100% above average
5Source: SSB, DNB
Norwegian salmon price reaching new highs
DNB Foods & Seafood
Famous last words: «this time is different»
6
But sometimes things actually are different
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A farewell to the traditional cyclical pattern
7
A new dynamic and an end to the traditional cycle
DNB Foods & Seafood
No growth = no «pork cycle»
8
CAGR 1992-2011: 10% CAGR 2012-16: 2%
Global supply of Atlantic salmon
Source: Kontali, DNB
DNB Foods & Seafood
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+
9
Norwegian salmon price, NOK/kg
Source: Kontali, DNB
Actual salmon price
New «normal» salmon price?
(NOK/kg 40)
16-year average
(NOK/kg 33)
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
DNB Foods & Seafood
What sets the global price long term?Norwegian cost plus return on capital
10Source: Directorate of Fisheries, DNB. Price and cost are WFE, not GWE
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
New technology needs high pricesAt least right now..
11Source: Nofima, Kontali, DNB
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
The consumer has other choices, there is a limit to how
high the salmon price can fly..
Source: Index Mundi, DNB
Salmon high in the trading range vs pork, ok vs chicken, ok vs beef
Beef
Chicken
Salmon
Pork
Salmon price not out of whack yet. USD/kg
DNB Foods & Seafood
..but can we really speak about the salmon price anymore?
13Source: DNB
149
233
289
368
First Price privatelabel
Frøya mid loin Frøya sashimi Salma 190
Four products
on the same
shelf at my
local discount
retailer
NOK/kg salmon price at Kiwi, Norwegian discount retailer
DNB Foods & Seafood
Demand to become more important in forecasting pricesA challenge, we know way more about supply than demand
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Price trends
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
Agenda
15
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
Thoughts on volatility from 2013What has happened since then?
16Source: Dag Sletmo’s presentation at Fish Pool X-mas seminar December 2013
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: Kontali, DNB
1) The volatility of global supply growth has declined
Standard deviation in global yoy supply growth, 12m roll
DNB Foods & Seafood
2) Hard discount penetration has increased..
..but we don’t see higher price elasticity in the numbers yet
18
Source: Norwegian Seafood Council, MHG
DNB Foods & Seafood
3) Downstream integration continuesRetailer relationships & brand focus
19Source: MHG
DNB Foods & Seafood
20
4) Fish Pool has not reached the tipping point yet..
Source: Fish Pool
4
32
6573
101116
47
102 97
56
90
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Fish Pool volume, tons (000s)
No
tipping
yet..
DNB Foods & Seafood
4)..but the fixed price contract share of the market has!Estimated contract share, Atlantic salmon, Norway
Source: Kontali
Estimated contract share, Atlantic salmon, Norway
Adding Fish
Pool contracts,
brings the fixed
price share of
the market
above 50%
DNB Foods & Seafood
22
Quiz; why does the Norwegian Gov’t continue to
issue debt when it doesn’t need the money?
Source: Norges Bank
-476 NOKbn
7956 NOKbn
Norwegian Gov't debt
Nowegian Gov't Oil Fund
Gov’t wealth fund almost 20x larger than Gov’t debt
The answer:
The industry should use Fish Pool in
addition to bilateral contracts. It gives
a reference point and transparency in
the market.
The relevance of the quiz:
DNB Foods & Seafood
Source: FAO, Ragnar Tvererås (Barkema, Drabenstott, Novack)
Why has the fixed price share increased?A high level is the natural state of affairs
Long term contracts or vertical integration
Spot and auction markets are a limited part of US and EU meat sectors
0
10
20
30
40
50
60
70
80
90
100
Chicken Pork Beef
Pe
rcen
tage o
f to
tal
1980
2000
Typical age
at slaughter:
5-7 weeks
Typical age
at slaughter:
6 months
Typical age
at slaughter:
36 months
DNB Foods & Seafood
Why did it take so long?A young industry & long value chains
FarmRegional
transport
Packaging/
VAP
National
transport
FarmingLocal
transport
Harvesting/
fillet
International
transport
Fillet/
VAP
National
transport
Fishing
vessel
Fish
landing
International
transport
Importer/
wholesale
Fillet/
VAP
National
transport
National
transport
Wild catch fishing
Salmon farming
Agriculture
Time, transaction cost
End b
uyer
Source: Ragnar Tveterås
DNB Foods & Seafood
Suppliers must increasingly adjust to end customers
End
customer
Processing
company
Farmer
Farmer Processing
company
End
customer
Price
Volume
Timing
Quality
Price
Volume
Timing
Quality
Price
Volume
Price
Volume
The past
Now
Source: Ragnar Tveterås
DNB Foods & Seafood
Has volatility dropped?Yes, but not all that much. Room for further reduction
26
Salmon export price volatility
Source: SSB, DNB
DNB Foods & Seafood
Spot price volatility dropped less than export price
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Spot price (Nasdaq) premium/discount to export price (SSB)
Source: Kontali, SSB, Fish Pool, DNB
High contract share has reduced the available spot
volume…
..which has helped propel the spot price above the
export price
DNB Foods & Seafood
Agenda
28
• The “normal” salmon price
• Volatility and the value chain perspective
• Hedging strategies
DNB Foods & Seafood
Why hedge?
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• Smooth earnings
- 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!
More important for farmers than
earlier as the investor perception
has changed from cyclical
commodity play to secular growth
focus
DNB Foods & Seafood
Implications of the tipping point: Go with the crowd!
30Source: DNB Markets
• 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
Airline example
31Source: DNB Markets
• 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
Does the company hedge?
Yes No
YesStable Unstable
NoUnstable Stable
Do
es t
he
ind
ust
ry o
vera
ll
hed
ge?
Impact on earnings from hedging raw material cost
DNB Foods & Seafood
The force is with us!“All” the mega-trends in favor of the fish farming industry
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An increasing
world
population
needs food
Low feed
conversion rate
vs other animal
production
Limited CO2
waste and
water
consumption
vs other animal
production
Ageing
population eats
more fish
Higher
educated
population eats
healthier
Growing
middle class in
emerging
markets
demands more
protein
Limited volume
potential in
fishing, growth
has to come from
fish farming
The road ahead, #1
Better grocery
retail supply
chains in
emerging
markets
Source: DNB
DNB Foods & Seafood
Thank you for your attention
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