What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
A guaranteed milk price (GMP) will be offered on 60 million kgMS in two tranches. Applications to supply 40 million kgMS will open in June, offering a 12 month GMP. In December, applications will open to supply 20 million kgMS with a six month GMP offered on production from December 1. Further details will be provided in May, including the process to set the GMP price and allocate volumes to farmers applying.
The guaranteed milk price for the 2014/15 season follows a successful pilot involving 328 farmers who supplied 15 million kgMS for a guaranteed price of $7 per kgMS this season. The $7 price was based on the opening forecast for the season. The pilot attracted such a high level of support that applications were received to supply 37 million kgMS. Participants were scaled back to 40% of their original application.
Chief financial officer Lukas Paravicini says the positive feedback from the pilot shows the GMP is seen as a useful tool for farmers to manage price volatility and secure income certainty. Having an opportunity to apply for the GMP in December meant farmers could follow the farmgate milk price trend for the first half of the financial year before deciding on whether to lock down the price for some of their production in the second half.
"GMP has given them certainty around a proportion of their income for this season. Having certainty means they have been able to confidently make decisions around servicing debt or making capital investments on farm especially when prices are volatile and this certainty comes regardless of the final Milk Price. It is a useful risk management tool for farmers who want to take advantage of it. Some may want to use it every year, others when they want financial certainty to undertake major projects or negotiate debt.
"From the cooperative's perspective, the GMP also gives us certainty. We can lock in longer-term contracts with customers at a set price and attract a premium knowing there will be no risk with those contracts from price volatility. Having this capability enables us to build long-term and mutually beneficial relationships with our key customers."
