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Production / Consumption / Trade

Dairy Business – 2014

Kevin Bellamy -Senior Dairy Analyst

Kyiv – Ukraine 27 Nov

The world dairy industry

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Food and Agribusiness Research and Advisory Rabobank’s world leading research network

Over 80 research professionals across 18 offices globally - 14 focused on dairy.

Global demand still expected to outstrip supply in the medium term

3

Population growth Urbanisation

Higher disposable incomes Globalisation

Global growth >2% CAGR per year for

dairy

Rabobank expects self sufficiency in demand regions to struggle

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Projections of changes in self-sufficiency to 2020

Source: Rabobank analysis

+3.1 Billion

+1.9 Billion

+0.1 Billion

+2.5 Billion

+3.5 Billion +3 Billion

+0.5 Billion

+2.4 Billion

+4 Billion

+3.8 Billion

+1.2 Billion

Prices declined rapidly in Q3

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Dairy Commodity Exports Prices (f.o.b Oceania)

-

1,000

2,000

3,000

4,000

5,000

6,000

USD

/T

Cheese

WMP

SMP

Butter

Whey Powder

Commodity Export Prices (USD)

Source: USDA, Rabobank

Significant differences have emerged in international markets

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Whole Milk Powder quotations – EU / US / NZ

The difference was particularly large in butter

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Butter quotations – EU / US / NZ

Milk production growth has continued to rise strongly in export regions

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Big 7 exporters increased production by almost 4.3% in the three months to July

Half of the increase was generated by the EU alone, with strong support from Brazil and NZ

Milk Production Growth of the ‘Big 7’ Milk production growth - key export regions

EU production is 5.3% up YTD

9

10000

10500

11000

11500

12000

12500

13000

13500

14000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012 2013 2014

Milk Production – 000 tonnes

Exporters are pushing a wave of milk onto international markets

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The wave of export milk has peaked just as China left the market

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Imports rose 57% in first 7 months of the year

But Chinese milk production is growing again

And domestic demand has been very weak

Anecdotal evidence of stock accumulation

Forward purchasing by Chinese buyers on the international

market has been weak since April

Import buying could be 75% down YOY in 2H

Top 3 dairy processors half-yearly sales

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1H2006 2H2006 1H2007 2H2007 1H2008 2H2008 1H2009 2H2009 1H2010 2H2010 1H2011 2H2011 1H2012 2H2012 1H2013 2H2013 1H2014

Top 3 Chinese players sales value (YoY) Top 3 sales value adjusted for price change (YoY)

Top 3 sales adjusted for price impact from premiumization (YoY)

Sources: Company reports, China Statistics Bureau, Rabobank estimate

Adjusted for price increase and premiumization, volume is estimated to have slowed in 1H2014

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Russia then banned imports from key suppliers in August

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,0

,50

,100

,150

,200

,250

,300

,350

,400

00

0 M

T P

rod

uct

wei

gh

t

Russian Dairy Imports 2013

Source: GTIS & Rabobank Note: Only include HTS 04 categories Banned markets represented in orange

33%

14%

7% 5%

3%

38%

Russia United States Switzerland

Japan Saudi Arabia ROW

EU Cheese export destinations (787k tonnes in 2013)

Others have yet to take up the slack

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China and Russia being abscent from the market will slow recovery

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Farmgate milk prices are now falling

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Meeting even this NZ

price relies on the

market improving over

coming months

But

Farmgate milk prices remain very high in many regions

EU quotas are removed in April 2015

Feed costs have fallen significantly

The prices of key feed commodities has fallen, and look set to remain low

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A phenomenal crop CME Corn and Soy Price

(futures price as at 24th Sept 2015)

0

2

4

6

8

10

12

14

16

18

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

US

D/B

ush

el

Corn Soybeans Corn futures Soy futures

The slowdown in milk production growth will only occur gradually

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Export surpluses will thus continue to expand over our forecast period

Upside and downside dairy price risks exist

1. Russia may elect to remove the ban on dairy imports

2. Overestimation of China’s milk production recovery or underestimation of demand growth could mean stronger demand from China

1. EU supply growth after quota removal may be stronger than we are forecasting

2. Further strengthening of USD

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Upside Risk

Downside Risk

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But then after the dust settles, what will be the next stage and how will the horizon change?

The amount and types of products demanded will vary

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Demand asymmetric

Product mix will vary

High growth Infant Milk formula

Nutritional food and beverages Hybrid beverages (juice/dairy)

Substitute products Healthier variants of traditional products

Moderate growth Yoghurt

Cheese (food service)

Slow growth Cheese (retail)

Fluid milk Butter

Source: Rabobank Analysis

79%

21%

Net investment volume

Powder

Cheese

• Our estimates suggest investment could lead to 1m tonnes of powder and 300k tonnes of cheese capacity added within Europe since 2012/13 (Gross investments)

• Based on publically available information not including fresh products

Source: Rabobank Analysis

Source: Rabobank Analysis

Processing investments following the expected milk increases

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Milk production growth concentrating in north and west

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Regional milk production fields

Milk production share 2012

The growth coming from north and west

Change in milk output (€ per hectare) 2012 v 2003

<0.5%

0.5%-0.7%

0.7%-1%

1%-1.5%

>1.5%

Change in output (€ per hectare) 2012 v 2003

20 to 50

50 to 100

over 100

less than 0

0 to 20

Sources: Eurostat, FADN and Rabobank analysis

EU needs further consolidation

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-200000

0

200000

400000

600000

800000

1000000

1200000

0 50 100 150 200 250 300 350 400 450 500

Pro

du

cer

Nu

mb

ers

Herd Size

Bubble equals milk solds per farm

New Zealand

EU

US Australia

Although the difference within Europe varies considerably

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-20000

0

20000

40000

60000

80000

100000

120000

140000

160000

- ,20 ,40 ,60 ,80 ,100 ,120 ,140 ,160 ,180

Pro

du

cer

nu

mb

ers

Herd size

Bubble is milk solids per farm

UK Netherlands

Denmark

Austria

France Germany

Finland

Spain Ireland

Italy

Investment fund interest building providing other capital sources

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Foreign investors get a taste for dairy industry 20 September 2014

AUSTRALIA’S $4 billion dairy industry is the new flavour of the month among foreign investors, with global pension funds, food companies and wealthy individuals turning their focus from New Zealand’s fertile dairy plains towards Victoria and Tasmania. At the same time, the local dairy industry is starting to adapt to the idea of greater foreign investment as a positive step, in an industry hamstrung for the past decade by low milk prices, high debt levels, poor profits and falling milk production.

Chinese investment fund to tip billions into Australian farm projects 17 September 2014

Investors queueing for elusive dairy farms 18 August 2014

Dairy Australia director John McKillop

AP1 eyes increased exposure to NZ dairy fund ahead of close 28 August 2014

Key questions for players

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• How will tension to valorise member milk vs. Pressure to supply expanding customer demand play out?

• How will companies support members/suppliers in organically growing milk production in a highly concentrated region with increasing land costs, and high bio-security risks?

• How can companies help protect members/suppliers against continued price volatility?

• How will small land locked farms in Western Europe compete with consolidated farms from elsewhere in the world?

• As a result is there a way to attract more international investment to Ukraine in production and processing

Thank you for your attention

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“The financial link in the global

food chain”™

Kevin Bellamy Senior Dairy Analyst +31 6 12 559 004 Kevin.Bellamy@Rabobank.com