Fonterra Shareholders Fund

[nizzy]

Fonterra has a substantial Ingredients business. It has real scale, is respected globally and generates probably 70% of EBIT for the Co-op.
Most of the world's food industry is made up of similar ingredient companies supplying other food manufacturers, who in turn combine them to produce a finished good. Complex global supply chains which Fonterra is really good at.
Only about 20% of Fonterra's Ingredients are pure "commodities" sold on GDT .
Most milkpowders, proteins, fats etc are sold off GDT in direct B2B contracts with food manufacturers. Almost all of these sales generate returns above the basic GDT. Customers will pay premiums for such things as delivery schedules, tighter specs, specific packaging, finance arrangements, etc etc , all extra services not offered on the GDT. The margins aren't as high as Food service or Consumer but can be very respectable.
The challenge is moving ever higher % of the milk into higher margin.
Building big consumer brands is so much harder today that even 10 years ago with disrupted traditional channels, social media, supermarket power, etc - even the really big players like Nestle or Unilever are finding it tough.
But Foodservice is a real winner for Fonterra - it uses a lot of the Ingredients expertise (technology, R&D, B2B sales techniques, scale logistics) with brand. Try Googling Anchor Foodservice Professionals.

[bull....]

Fonterra has a substantial Ingredients business. It has real scale, is respected globally and generates probably 70% of EBIT for the Co-op.
Most of the world's food industry is made up of similar ingredient companies supplying other food manufacturers, who in turn combine them to produce a finished good. Complex global supply chains which Fonterra is really good at.
Only about 20% of Fonterra's Ingredients are pure "commodities" sold on GDT .
Most milkpowders, proteins, fats etc are sold off GDT in direct B2B contracts with food manufacturers. Almost all of these sales generate returns above the basic GDT. Customers will pay premiums for such things as delivery schedules, tighter specs, specific packaging, finance arrangements, etc etc , all extra services not offered on the GDT. The margins aren't as high as Food service or Consumer but can be very respectable.
The challenge is moving ever higher % of the milk into higher margin.
Building big consumer brands is so much harder today that even 10 years ago with disrupted traditional channels, social media, supermarket power, etc - even the really big players like Nestle or Unilever are finding it tough.
But Foodservice is a real winner for Fonterra - it uses a lot of the Ingredients expertise (technology, R&D, B2B sales techniques, scale logistics) with brand. Try Googling Anchor Foodservice Professionals.

totally agree good summary of a successful part of the business, and yes the challenge is being able to effectively manage the vertical between commodity and higher value ... it can be done.

As for china think it is well known for making life tuff for outside companies

[Sideshow Bob]

Fonterra has a substantial Ingredients business. It has real scale, is respected globally and generates probably 70% of EBIT for the Co-op.
Most of the world's food industry is made up of similar ingredient companies supplying other food manufacturers, who in turn combine them to produce a finished good. Complex global supply chains which Fonterra is really good at.
Only about 20% of Fonterra's Ingredients are pure "commodities" sold on GDT .
Most milkpowders, proteins, fats etc are sold off GDT in direct B2B contracts with food manufacturers. Almost all of these sales generate returns above the basic GDT. Customers will pay premiums for such things as delivery schedules, tighter specs, specific packaging, finance arrangements, etc etc , all extra services not offered on the GDT. The margins aren't as high as Food service or Consumer but can be very respectable.
The challenge is moving ever higher % of the milk into higher margin.
Building big consumer brands is so much harder today that even 10 years ago with disrupted traditional channels, social media, supermarket power, etc - even the really big players like Nestle or Unilever are finding it tough.
But Foodservice is a real winner for Fonterra - it uses a lot of the Ingredients expertise (technology, R&D, B2B sales techniques, scale logistics) with brand. Try Googling Anchor Foodservice Professionals.

I posted these in the Synlait thread, but obviously re-post here for relevancy.

https://issuu.com/farmersweeklynz/do...68707/62169149 (Pages 4 & 5)
https://issuu.com/farmersweeklynz/do...68707/61932637 (Pages 18-20)

11% goes into foodservice products, growing 27% in FY17. 19% into ingredients. 58% of LME into basic ingredients, raw milk or GDT.

[kiwidollabill]

totally agree good summary of a successful part of the business, and yes the challenge is being able to effectively manage the vertical between commodity and higher value ... it can be done.

As for china think it is well known for making life tuff for outside companies

I'm trying to think of other good examples of where a company can do the whole commodity-branded product..... Synlait kinda, but they rely on partnerships for the retail brands. Silver Fern Farms are somewhat having some luck here with their retail products. Any others?

[bull....]

I'm trying to think of other good examples of where a company can do the whole commodity-branded product..... Synlait kinda, but they rely on partnerships for the retail brands. Silver Fern Farms are somewhat having some luck here with their retail products. Any others?

Keiretsu way to go

[Out to lunch]

Man NZHerald are loving this Fonterra bashing recently, I am exhausted reading all of this.

Fundamentally stepping back and thinking about a co-op, I thought it makes sense for farmers to own their value chain, and be close to their actual end customers.
However my view is in the face of a lot of suppliers supplying Synlait, OCD and even Fonterra Australia.

Imagine no Fonterra during the dairy downturn - Farmers not getting the high dividend during the downturn, the shareholder loans, reducing farmer inputs costs for farmers through Farmsource/RD1,

Fonterra's Ingredients and C&FS business act as a natural hedge - when the milk price is high like right now, Fonterra's value add doesn't perform because their input costs are so high... but when the milk price is low, Fonterra make a killing and pay 40c dividends.

Would we be having this debate if the Beingmate losses didn't happen?

[RTM]

Would we be having this debate if the Beingmate losses didn't happen?

But they did happen. And the botulism scare. And the SanLu melamine-tainted milk issue. I really wonder why I am a holder, albeit a small one.

[Sideshow Bob]

Silver Fern Farms are somewhat having some luck here with their retail products. Any others?

Potentially, but big spend to do it and maybe not making a positive difference to the bottom line?? Many of the SFF packs are gone from our local supy as New World have similar packs under their Pams brand. Hard to differentiate meat.

Meat is difficult to add-value to, as a deconstruction business. With regulations etc, typically value is added at (export) destination. Milk is relatively easy to change it to many different forms.

[nizzy]

tks Sideshow. Interesting reads.
So 77% of the milk goes to ingredients of one sort or another (19% specialised and 58% more basic, which incl 20% on GTD and about 5% raw milk sold to others under DIRA.

[kiwidollabill]

Man NZHerald are loving this Fonterra bashing recently, I am exhausted reading all of this.

Fundamentally stepping back and thinking about a co-op, I thought it makes sense for farmers to own their value chain, and be close to their actual end customers.
However my view is in the face of a lot of suppliers supplying Synlait, OCD and even Fonterra Australia.

Imagine no Fonterra during the dairy downturn - Farmers not getting the high dividend during the downturn, the shareholder loans, reducing farmer inputs costs for farmers through Farmsource/RD1,

Fonterra's Ingredients and C&FS business act as a natural hedge - when the milk price is high like right now, Fonterra's value add doesn't perform because their input costs are so high... but when the milk price is low, Fonterra make a killing and pay 40c dividends.

Would we be having this debate if the Beingmate losses didn't happen?

The problem is that the coop model promotes an inward looking culture (its all about the farm) rather than a customer focused one. Consequently there are few coops which are effectively able to be a value component across the supply chain....

It does work like that, however the divvy doesnt make up for a low farm gate price....