Sometimes you win, sometimes you lose

BY BARRY EASTON

"OUR expectation of our palm kernel contracts is that we will fully meet them and so will our farmers," RD1 Nutrition operations manager Mike Borrie told those attending a field day at Rahotu last week.

Mr Borrie's statement followed speculation at the seminar that, in light of the reduced payout for dairy farmers, some contracted to pay considerably more than the current spot price of $195 per tonne might simply walk away from their contracts.

"The way we look at contracts is that they are a two-way street," Mr Borrie said, admitting he'd heard comments about high-priced contracts.

"Palm kernel is a commodity it goes up and down (in price). Sometimes you win and sometimes you lose."

Backgrounding events that led to the formation of RD1 Nutrition, which is half-owned by Fonterra, Mr Borrie said the company was set up in June last year to source and provide high-quality, cost-competitive supplementary feeds for New Zealand farmers.

International Nutrition Ltd was formed as a joint venture between RD1 and C.T.G. Wilmar, which is the world's largest producer of palm oil, of which palm kernel is a by-product.

"Wilmar supplied 85 per cent of all palm kernel imported into New Zealand in 2007," Mr Borrie said.

"One of the things we are keen to do is to keep the market competitive.

"From our point of view, being 50 per cent owned by Fonterra farmers, we are not only involved in making RD1 involved in business, but we have got Fonterra farmers' interests at heart to a degree.

"Being a commodity, the price for palm kernel sets itself to a degree. The majority of palm kernel is priced on replacement pricing.

"What I mean by replacement pricing is that people are pricing their cargoes on what they can buy their next one for. It's not as simple as just buying a product and applying a margin like we have always done from our retail business."

Whatever price a company might pay for palm kernel at source, explained Mr Borrie, if the spot market was selling at a lower price, there were two choices: Suppliers could either sit on their stock or match the market price.

"With palm kernel, it's not something you can sit on forever. It will eventually grow mushrooms! You need to rotate your stock.

"It's really important that people are aware of that. If you own the stock, you can choose whatever you want to do. If a company wants to sit on it in the belief that the price is going to rise, then they can go down that route.

"We have certainly taken the view that the market is the market and that we have to be competitive or we don't sell tonnage. And that's a real good thing for you guys.

"Three months ago, everyone probably had stock. If I was trying to sell product now at $360 per tonne, I wouldn't be moving a single kilogram.

"You have to take a hit and sell your tonnes, but eventually you will be able to buy back in and then you will be able to hopefully sell at a profit. Eventually, by booking in your contracts, having a forward book and understanding where your spot tonnage sales are, you are likely to come out on the right side of the ledger."

Three factors, Mr Borrie said, drive the price of palm kernel.

The first of these is the price at origin, which in turn is driven by demand. Low demand causes prices to decrease.

Foreign exchange was cited as the second factor and ocean freight rates as the third.

"Ocean freight has dropped significantly in the last three months, which is therefore reflected in the price of palm kernel as well.

"As I mentioned, palm kernel is a commodity. It is not a traded commodity, but it is a commodity that is driven by different markets. New Zealand is not a big market. We are at the whim of other markets to a degree. The Europeans buy palm kernel to burn in their power plants to generate energy and they use a significant amount. They base it on the price of coal, which is an alternative fuel."

Stressing that he considered contracts between suppliers and farmers to be worthwhile, Mr Borrie urged farmers not to be too bullish in the tonnage they commit to.

"If you think that you are going to use 200 tonnes and you sign a contract for 200 tonnes, the person who does that contract fully expects you to take that 200 tonnes over the period that you have committed to receive it.

"What I recommend you to do is to contract half or 70 per cent of that tonnage and then buy the remainder on the spot market if you require it.

"If the contract goes the wrong way for us, we are committed to supplying those tonnes at that price. If it goes the right way for you guys, that's great, but if it goes the wrong way, there is still a commitment to taking those tonnes at that price.

"It is really important to be very clear and understand the obligations of the contract, but also ensure that you are not being too bullish on your tonnage as well. Whether it's RD1 Nutrition or some other firm, they will want that tonnage taken because they have made some commitments around those tonnes as well.

"Contracts are an important part of importing palm kernel because from the point of view of a supplier, contracted forward tonnage allows you to plan your shipments. It's not like you can dial up a boat of palm kernel quickly. You have to plan it out. If there were no contracts, continuity of supply would be very variable."

With each shipment, RD1 Nutrition's commitment is to supply contracted tonnage first and spot tonnage next, Mr Borrie stressed.

"That's the way it should be and that's the way we are certainly working.

"I am responsible for fielding those phone calls if contracted tonnage isn't going to be delivered and I don't plan to take any of those!

"It's morally wrong to sell someone's contracted tonnage to a spot-market person at a higher price and leave your contracted person high and dry.

"People have long memories. If we have a contract and I don't supply you, I wouldn't be waiting for the phone call for the next contract. You guys are in a great position in that you can vote with your feet.

"You own 50 per cent of our business and we have a real obligation to deliver upon and we plan to, as well."

 

- © Fairfax NZ News