Strategic pricing challenges –

from a buyer’s perspective

Fish Pool / DNB Brussels Seminar, 24. April 2017

Dag Sletmo, DNB Foods & Seafood

dag.sletmo@dnb.no, tel +47 95286134

A Cluster Partner

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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»

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But sometimes things actually are different

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A farewell to the traditional cyclical pattern

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A new dynamic and an end to the traditional cycle

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No growth = no «pork cycle»

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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+

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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

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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

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• 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

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2) Hard discount penetration has increased..

..but we don’t see higher price elasticity in the numbers yet

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Source: Norwegian Seafood Council, MHG

DNB Foods & Seafood

3) Downstream integration continuesRetailer relationships & brand focus

19Source: MHG

DNB Foods & Seafood

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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

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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

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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

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• 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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