Quote Originally Posted by CJ View Post
My point being, is there any benefit to the Dairy company since all it does is increase the farmgate price (ie. cost of sales). Is it linked directly or does the dairy company take a margin.

I note that Synlaits milk supply cost is linked to the Farmgate price (less upto 25c)
I've been pondering this issue as well. I'm not going to be providing answers but this is how I see it:

The farmgate milk price is based on the 'world price' - essentially the world price less costs that Fonterra incurs in collecting the milk and (not too sure) basic processing costs. The farmgate milk price also accounts to an extent the opportunity costs of milk collection. And because the farmgate milk price is paid by Synlait to farmer-suppliers, indeed a higher farmgate milk price means additional costs of production for Synlait.

I think it will be all doom and gloom if the story stopped here. But the flipside is that dairy-exports are also linked to the 'world price'. While a higher world dairy prices would mean a higher farmgate price, it also means a higher price that milk powders, baby formula etc command, translating to higher revenue.

I wouldn't have a clue how the COGS effect would weigh against the revenue effect so I won't elaborate further. Rather I'm more interested in pondering how Synlait will be affected when Fonterra enters the Chinese baby formula market.