Feed Talk - May 2012

With the milking season coming to an end for most farmers in the North Island, and just around the corner in the South, it also means a number of PKE contracts are up for renewal. I wanted to take this opportunity to discuss contracts, their importance and also dispel some existing misconceptions

What is a contract and what does it mean for me?

"A contract is a binding agreement between two or more parties that have contractual obligations to one another. The seller promises that the buyer has the right, but not the obligation, to buy an asset at a set price on or before a given date". In relation to an RD1 Nutrition PKE contract, RD1 Nutrition, through International Nutritionals Ltd (INL), offers PKE to customers at a set price on the day. A customer then makes a commitment (verbally or written) to buy tonnes, based on that price, over a set monthly timeframe – and a contract is made.

Much has been made of our 'lack of flexibility' with regard to contracted PKE tonnage on a monthly basis. The reason we come across as less flexible than other companies is simple; our aim is to deliver on customer expectation. That is, INL and RD1 make a commitment to you to ensure that all contracted tonnes are delivered as per our contract. However, we can only deliver on this commitment if we understand when the tonnes are needed. By understanding the amount of tonnes we have to deliver in a set month, we can purchase vessel freight and product to meet this demand. If we left tonnes 'flexible' within a 12 month window, we'd have no ability to manage demand spikes and would inevitably find ourselves in the position where we couldn't deliver on a contract. I don't want to take that phone call!

The lead time between committing to a cargo of PKE and it arriving in New Zealand is approximately 10 weeks. It is important to understand when demand spikes, as it did in Southland this summer, it effectively takes from the time farmers recognise a shortage, and demand starts climbing, 10 weeks minimum to get increased tonnage to the affected area. This is based on our ability to purchase additional cargo at origin and highlights one of the true strengths of the INL supply chain. Through our ownership model, we have direct access to tonnes at the crushing plant and more ability to secure additional cargo quickly if required.

It's physically impossible to deliver upon a flexible contract when demand is high and supply tight; this is why some of our competitors in the PKE market have 'subject to supply' in the small print of their contracts. It gives them an 'out' if any issues occur on the supply front and they are unable to deliver on contracted tonnes.

For example, if a feed supplier had contracts of 30,000t to deliver, only 5,000t in the shed, with the next vessel arriving in a month's time and we entered a period of high demand, the feed supplier would quickly see their stock exhausted and, therefore, be unable to meet their contractual obligations. When period of high demand occurs it normally affects not just you, but the majority of farmers in the region, putting pressure on supply as demand increases above the norm.

RD1 and INL are not entirely inflexible either. We encourage you to maintain good communication with your local RD1 store, TSR or INL ANSR. What this does is sort most of the issues out even before they become one – we understand that forecasting tonnage out over a 12 month period is difficult and we want to help where we can.

In most cases, INL and RD1 will work with the farmer to ensure the tonnes are moved to the correct months. This comes at a cost as interest and storage charges apply. We will work with you to agree onaprice for the tonnes that have been moved to future months; 99% of the time this works out well for both parties. It also ensures that we maintain our supply guarantee for all contracted customers.

Contractual expectations

INL and RD1 enter into contracts with farmers in good faith and we fully intend to deliver on what's detailed in our contract with you, your expectations. Our expectations are that you will do the same. When both parties meet the other's expectations, the result is always positive. So it's important to understand each other's expectations at the start of the contracting process to ensure the potential for heartache is minimised. If you're unsure of anything in your contract, please check with your RD1 store, TSR or ANSR.

What does an RD1 Nutrition contract guarantee?

An RD1 Nutrition contract, through INL, will deliver you a guaranteed price, guaranteed tonnage delivered on a monthly basis as per contract, continuity of supply and excellent quality feed.

The farmers I speak to tell me that continuity of supply is critical to their operations and I agree whole heartedly. The importance of a continual feed supply through critical times of the lactation is one of the keys to profitability on farm, more so even than the price paid. RD1 and INL will ensure you are able to achieve this by delivering on your contract as contracted

So the moral of my story is makesure you understand your contract and your obligations once signed to a contract. This is whether you are buying through RD1 and INL (let's hope so!) or another party. The key objective is to minimise risk by securing supply when you need it, at a price that works for your business. If this is achieved you can't go too far wrong.

If you haven't already done so, contract your PKE for winter and next season. Do it online at WWW.RD1.COM/orderfeed. Alternatively contact the team at your RD1 store, your local technical sales representative or your INL animal nutrition sales representative and we'll get this sorted for you.

Meet your INL animal nutrition Representatives

For advice on feed options for your farm system, we have a team of animal nutrition sales representatives (ANSRs) available to come out to farm.

ANSRs are a new resource for farmers, bringing you answers on animal nutrition and supplementary feeds.

The team of five ANSRs work alongside the RD1 stores and technical sales representatives (TSRs) to provide you with on farm technical and sales support when it comes to supplementary feed.

You will notice that our ANSRs are branded International Nutritionals Limited (INL). INL is the Joint Venture company owned 50% by RD1 and 50% by Wilmar Gavilon. RD1 Nutrition is the face of INL within RD1.

Your Animal Nutrition Representatives: