CHINA’S GREAT BEEF CHALLENGE

A GOLDEN OPPORTUNITY FOR THE AUSTRALIAN BEEF SECTOR

SAMPLE PRECIS

ANZ AGRIBUSINESS INSIGHTS 2014

-

11,000

22,000

33,000

44,000

2005 2006 2007 2008 2009 2010 2011 2012-

4

8

12

16

No. of hotels and Catering Services Revenue per Hotel

-

4,000

8,000

12,000

16,000

2008 2010 2012 2014F 2016F 2018F-

3%

6%

9%

12%

GDP Per capita (PPP) Growth (RHS)

2.5

-

0.7

1.4

2.1

2.8

3.5

Lowest Low LowerMiddle

MiddleIncome

UpperMiddle

HighIncome

HighestIncome

Per capita Beef Purchasesby Urban Households

National Average

-

15

30

45

60

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13China National Retail Beef prices

-

2

4

6

8

10

12

14

16

- 10,000 20,000 30,000 40,000

-

350

700

1,050

1,400

2000 2002 2004 2006 2008 2010 2012 2020F 2030F-

20%

40%

60%

80%

Urban Population Rural Population Urbanisation % (RHS)

GDP (PPP) vs BEEF CONSUMPTION CHINA GDP (PPP) PER CAPITA

URBANISATION Millions

PER CAPITA ANNUAL BEEF PURCHASE (IN KG)1 Of Urban Households By Income Group; 2012

HOTELS & CATERING SERVICES IN CHINA Revenue; CNY million

CHINA BEEF PRICES CNY per Kg

China Vietnam Philippines S Korea JapanGDP Per Capita (PPP)

Per

Cap

ita

Bee

f C

on

sum

pti

on

(K

g)

R2=75.6%

Prices have increased ~2.7x when compared to 2007

DEMAND DRIVERS

> Beef consumption increases with rising GDP per capita.

Rising income levels result in a change in lifestyle and higher consumption of higher priced protein, such as beef

> China has low per capita beef consumption at around 4.1kg per capita. Rising urbanisation coupled with increasing disposable income is driving demand for beef in China

> Per capita beef consumption varies significantly between urban and rural areas in China. Historically, consumption in urban areas has been about four times rural per capita consumption

> In urban areas, the ‘Upper Middle’ to ‘Highest Income’ household groups consume as much as 40% more beef than the ‘Low Income’ group

> Increasing beef prices fuelled by supply constraints and rising demand, further discourages demand in rural areas

> Beef is not part of regular diets and only accounts for 7.8% of total meat consumption. It is perceived as a special item with the common Chinese family unfamiliar with cooking methods – this has led to eating beef away from home, mostly in the restaurants

> In urban areas it is though more than half of the beef being consumed is taking place away from home, mostly in restaurants. A large portion of beef consumed in rural areas also takes place away from the home

> In recent times, western style food service has increased and beef consumed in the form of burgers and steaks, is gaining acceptance. With an increasing number of fast food restaurants like McDonalds and Burger King, beef consumption is expected to grow

INCOME GROWTH AND URBANISATION ARE KEY DEMAND DRIVERS OF BEEF IN CHINA

Source: USDA, China Statistical yearbook, China MOA, IMF and ANZ research

Note 1: Per capita beef purchases excludes consumption away from home

>2

Inte

rnat

ion

al D

olla

r

31%

25%

40%

4%

Wet market

Hotels,Restaurants &CateringservicesQuick ServiceRestaurants

Organisedretail

512

Northeast China East China

Northwest China North China

South Central China

Southwest China

Beef

Poultry

− Most popular in North and Northeast regions

− Highly expensive, compared to other meats

− Leaner & healthier

− Mainly sliced and consumed in hotpots, soups and stews

− Prefer ‘fresh’ beef over ‘chilled’ or ‘frozen’

− Strong demand for offal and variety meats

− Tenderness is less important

− Consumption is high during winters – due to factors like lack of refrigeration, perceived as ‘hot food’ etc.,

Pork is the staple protein consumed across China

MEAT CONSUMPTION IN CHINA Regional preference of Pork, Poultry and Beef

PER CAPITA MEAT CONSUMPTION IN CHINA Kilograms

-

14.0

28.0

42.0

56.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Beef Chicken Pork

Beef: 4.1

Pork: 38.4

Poultry: 10.0 76%

20%

2%2%

CHANGE IN CONSUMER CHANNELS1 Beef Consumption

2010

2020

CONSUMPTION

> Historically, per capita consumption of beef only

accounted for a small portion of total meat consumption

> But, with 27 million people entering middle class status every year, demand for beef is increasing

> Recent safety issues with other meat (pork and poultry) has also contributed to increases in beef consumption

> Given the domestic supply side constraints, the anticipated increase in demand provides a huge opportunity for major beef exporting countries

> The majority of the beef consumed in China is sourced through wet markets. Wet markets are very important for fresh produce, especially meat, seafood, fruit and vegetables

> However, increasing concerns about food safety and hygiene are changing meat and beef buying patterns away from the wet market and towards more retail packaged and processed products

> It is thought that 2% of beef was sold through retail consumer channels in 2010. By 2020 it is thought that 40% of beef in China could be sold through ‘organised retail’, making it the largest consumer channel for beef

> A small rise in per capita beef consumption from the current low levels in China would create further significant demand for beef. At the current population every 100 gram increase in per capita consumption will require about 140,000 tonnes of beef. An increase in per capita consumption by 2.0 kg, will increase the demand by 2.7million tonnes, which is about 50% of 2012 estimated consumption

China Beef consumption is estimated to reach ~7.3 million tonnes by 2020

BEEF CONSUMPTION CHARACTERISTICS

BEEF CONSUMER CHANNELS IN CHINA ARE CHANGING TO SUIT THE GROWING MIDDLE CLASS

Source: USDA, China Statistical yearbook, OSI Group, Agmanager and ANZ research

1. Sourced from OSI Group presentation, 2013

>3

-

9

18

27

36

45

54

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Chilled Frozen

Uruguay, 297.0

New Zealand, 161.1

Australia, 748.0

Canada, 80.4

Argentina, 42.7

2,000

2,400

2,800

3,200

3,600

- 50,000 100,000 150,000 200,000 250,000 300,000

Australia Uruguay New Zealand Canada Argentina

IMPORTS

> As a result of stalled production growth, production has not been able to keep pace with consumption, resulting in the establishment of unofficial trade channels (the grey channel) and more recently a rapid increase in official beef imports

> In 2013, official imports grew four fold. A contributing factor for this increase was the safety issues in other meat products which increased demand for beef. While poultry was effected by H7N9, pork consumption slowed down due to ‘The Floating Dead Pig’ incident, where 16 thousand dead pigs were found in a Shanghai river in March 2013, with numerous similar incidents in other rivers since

> China mainly imports beef to meet its growing demand while cattle are mainly imported to improve predominantly dairy but also beef cattle genetics. With its low meat yield when compared to the main beef producing nations, cattle imports are required to improve genetics and hence productivity

> China’s beef import policy has been driven by domestic health and food safety issues, banning imports from those countries that do not have disease free cattle/beef industries. This has benefited Australia, Uruguay and New Zealand whom have low disease risk as well as high animal husbandry and food safety standards

> Australia is the major exporter of beef to China and has benefited most from China’s increasing beef consumption. Australian beef exports have grown at a CAGR of 500% or 1,900% across the period 2012 and 2013

> Other than official imported beef and cattle, there are large volumes entering China through grey channels, in particular via Hong Kong and Vietnam. Beef imports into Hong Kong have increased significantly after China imposed a ban on US beef due to the BSE outbreak in 2003. Brazilian beef also reaches China in large volumes via Hong Kong. Large volumes of Indian buffalo meat are entering China via Vietnam

MAJOR BEEF EXPORT PARTNERS - 2013 Bubble size represents trade value in USD millions

AUSTRALIAN BEEF EXPORTS TO CHINA ‘000 tonnes cwt

VIETNAM BEEF IMPORTS ‘000 tonnes cwt

HONG KONG BEEF IMPORTS ‘000 tonnes cwt

CHINA CATTLE IMPORTS ‘000 head

CHINA BEEF IMPORTS ‘000 tonnes cwt

CHINA BEEF & CATTLE IMPORTS INCREASING RAPIDLY

Source: USDA, UN Comtrade, China MOA, China Statistical yearbook and ANZ research

Ave

rage

pri

ce U

SD

per

ton

ne

Trade Volume (cwt)

-

200

400

600

800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Brazil United States Argentina Australia Other

228.7

41.6 22.0 19.6 28.9 27.7 53.1103.8

112.4

1,330.1

281.4

-

100

200

300

400

500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Volume ('000 t) Value (USD m)-

35

70

105

140

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-

90

180

270

360

450

540

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

India Hong Kong USA Australia Other

>4

Despite being a small market for Australian packaged beef, Vietnam is an important market for Australian live cattle. In 2013 it was the third largest market taking 67 thousand head

BEEF TRADE THROUGH ‘GREY’ CHANNELS HAS BEEN IMPORTANT FOR CHINA IN RECENT YEARS

Ban on US and Brazil beef exports to China coupled with recent scandals in pork and poultry meats has led to an increase in exports to the peripheral countries, which then enters into China via unofficial trade channels called ‘grey trade channels’

RECENT TREND IN BEEF IMPORTS

HONG KONG VIETNAM THAILAND ‘000 tonnes cwt ‘000 tonnes cwt ‘000 tonnes cwt

Source: USDA, UN Comtrade, US MEF and ANZ research

-

140

280

420

560

2008 2009 2010 2011 2012 2013India Hong Kong USA Australia

THAILAND

INDIA

AUSTRALIA

NEW ZEALAND

HONG KONG

CHINA

FROM U.S.A.

VIETNAM

Estimated grey trade from HONG KONG is +100kt

Estimated grey trade from VIETNAM is ~400kt

Estimated grey trade from THAILAND as high as 60kt

GREY TRADE CHANNELS ACCOUNT FOR ATLEAST 500KT TO AS MUCH AS 750KT OF BEEF PER ANNUM

BANGLADESH

-

25

50

75

100

2008 2009 2010 2011 2012 2013Australia India NZ Argentina USA

62

100115

188171

108

2008 2009 2010 2011 2012 2013

162

242192

390 404443

2008 2009 2010 2011 2012 2013

5 48

21

59 58

2008 2009 2010 2011 2012 2013

All are in cwt

Estimated grey trade from BANGLADESH as high as 80kt

7172

73

77

80 80

2008 2009 2010 2011 2012 2013

Beef and cattle received into China via grey channels have played an important role in recent years, supplementing constrained China domestic beef supply. Vietnam is thought to be the largest middle market, supplying Indian sourced buffalo meat in volumes that may be higher than 400kt cwt annually. Large volumes (probably more than 100kt cwt annually) of higher quality, predominantly Brazilian and US sourced beef is also entering China via Hong Kong. Smaller volumes may also be entering via other Asian countries. It is thought as much as 60kt could be entering via Thailand, but this is considered high and not as likely due to import tax on beef into Thailand. It is also understood high volumes of cattle are being walked across the Indian border into Bangladesh. Industry commentators talk of numbers as high as 20k a day, much of which is being processed in Bangladesh with some cattle and beef entering China via Myanmar stock routes, maybe as high as 80kt cwt beef equivalent annually

-

150

300

450

600

750

2008 2009 2010 2011 2012 2013

Brazil USA Argentina Australia Other

>5

17%

14%

11%

10%4%

44%

USA Brazil EUChina India Other

17%

12%

11%

11%4%

45%

USA Brazil EUChina Russia Other

WHERE CAN CHINA OFFICIALLY SOURCE BEEF FROM TODAY?

GLOBAL BEEF INDUSTRY

> As beef is a perishable, supplies will always be tight due to higher storage costs. In 2013 estimated total production and consumption was around 67.5 million tonnes

> The United States, the world’s largest beef producer currently has a record low cattle herd and low slaughter and beef production. This is a result of the devastating drought that has impacted key cattle producing states that have now been through a period of drought induced herd liquidation

> Brazil, the world’s second largest producer and exporter is expanding production, however the industry is constrained by rising labour cost, rising beef export prices, its continued positive FMD status and also rising domestic consumption

> India, the fourth largest beef producer and largest

exporter is expected to experience continued growth in beef production. The cow is considered sacred in India so bovine meat is predominantly from buffalo and is therefore lower in quality. India also carries a positive FMD status

> China’s beef production is flat due to a significant deterioration in the herd since 2000. The domestic industry is not able to keep pace with consumption growth making it a net importer

> The US has been suspended from exporting beef to China since the outbreak of BSE in 2003, while Brazil has been suspended since 2012 after a positive BSE case in Parana state. India also has no facilities approved for export to China

> Today China relies predominantly on Australia for its beef imports. Other major exporters are Uruguay and New Zealand with smaller volumes being sourced from Canada and Argentina. Due to their early adopter positions these countries and in particular Australia and New Zealand with their geographic locations and high quality and safety standards are well placed to capitalise on future demand growth

> China will encounter intense competition for tight beef supply from the Asian region which has a net beef import position of 3.5 million tonnes annually. This will result in continued high prices for beef in global markets

GLOBAL BEEF TRADE – MAJOR REGIONS/ COUNTRIES 2013F, million tonnes

Source: FAO Food Outlook November series – 2010, 2011, 2012 & 2013

MAJOR PRODUCERS & CONSUMERS – 2013F ‘000 tonnes cwt

Total Production

67,544

Total Consumption

67,421

NET IMPORTS NET EXPORTS

UNITED STATES

0.3

BRAZIL

1.5

0.4 URUGUAY

0.2 ARGENTINA

1.4

INDIA

AUSTRALIA

0.5

1.4 NEW ZEALAND

EUROPE 0.9

0.8

AFRICA

0.8

CHINA

0.8

JAPAN

0.3

SOUTH KOREA

1.6 OTHER ASIA

Australia and New Zealand are well placed to cater to the growing demand in China. However, competition is anticipated in the short to medium term from the other main beef producers not currently suppling beef through official export channels. Brazil is taking steps towards having processing facilities accredited for export to China, in December accepting a China inspection team and has also recently had a number of facilities approved for pork and chicken export to China. India also recently signed an MOU to supply buffalo meat

>6

MAJOR BEEF EXPORTERS ‘000 tonnes cwt

72.2%

75.1%

77.6%78.6% 78.3%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010 2011 2012 2013

Brazil

NZ

India

Australia

USA

EU

g y% Share of Global Exports

(45%)

(30%)

(15%)

-

15%

30%

45%

60%

75%

90%

- 10% 20% 30% 40% 50%

Japan USA South Korea China South East Asian countries

AUSTRALIAN BEEF EXPORTS MARKETS, 2008 & 20131 BUBBLE SIZE REPRESENTS VOLUME

JAPAN

TRADITIONAL EXPORT MARKETS – JAPAN, US & SOUTH KOREA

> Japan, US and South Korea have traditionally been the major export destinations for Australian beef, accounting for more than 80% of total exports up to 2007 and more than 70% of total exports up to 2011

> With the changing demographics and food consumption patterns throughout the emerging APAC countries and in particular China, diversification in Australia’s beef export markets is occurring

> In 2012, Australian beef exports to these traditional three export markets fell to 69% of total beef exports before falling to 59% of total beef exports in 2013

> Growth in beef exports to China in 2012 and 2013 is the major reason for the market diversification which has occurred across that period

CHINA

> China has emerged from less than 1% share of Australia’s beef exports in 2008 to the third largest market by volume in 2013

> Demand for beef has increased with urbanisation and the recent food safety issues in the pork and poultry sectors. Official imports are increasing with stagnating domestic production not keeping up with demand and also the crack down on the unofficial grey trade

> China’s suspension of US and Brazil beef has helped boost the export volumes from Australia

USA

SOUTH KOREA

CHINA

AUSTRALIA’S BEEF EXPORT MARKET PROFILE IS DIVERSIFYING DUE TO CHINA BEEF DEMAND

360%

375%

390%

China - 08

China - 13

SE Asia -08

SE Asia -13

S Korea -13

S Korea -08

USA - 13

USA - 08

Japan-08 Japan-13

% C

han

ge

in B

eef

imp

ort

volu

me

from

pri

or y

ear

% of Total Australian Exports to each region

Source: MLA, DAFF

1. South East Asian countries include Indonesia, Taiwan, Philippines, Malaysia, Hong Kong, Thailand, Singapore

>7

0.6% 0.6% 0.8%

14%

0.3%

3%

-

50

100

150

200

250

2008 2009 2010 2011 2012 2013

`

13% 13%15%

13% 13%12%

-

50

100

150

200

250

2008 2009 2010 2011 2012 2013

24%27%

20%

23%

18%19%

-

80

160

240

320

400

2008 2009 2010 2011 2012 2013

38% 36%32%

26%

38% 39%

-

160

320

480

640

2008 2009 2010 2011 2012 2013

Chilled Frozen % Share of Total Australian Exports

-

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

THE OPPORTUNITY FOR THE AUSTRALIAN CATTLE AND BEEF SECTORS IN SUMMARY

Year Production

in year ‘000 t cwt

Decadal Average

‘000 t cwt

Decadal % Increase

Decadal Annual

Productivity

Period % Increase

Period Annual

Productivity

Period % Increase

Period Annual

Productivity

Period % Increase

Period Annual

Productivity

1969 952

1979 1,770 1,573 86% 6.4%

1989 1,573 1,483 -11% -1.2% 65% 2.5%

1999 1,991 1,835 27% 2.4% 109% 2.5%

2012 2,152 2,110 8% 0.6% 126% 1.9%

AUSTRALIAN BEEF EXPORT VALUES UNDER DIFFERENT SCENARIOS In AUD millions

Official China consumption + high case China exports + Australian productivity improvement

No Australian productivity improvement + higher competition for Australian beef exports between China and traditional markets

Official China consumption + low case China exports + Australian productivity improvement

Lower China consumption + high case China exports + Australian productivity improvement

Lower China consumption + low case China exports + Australian productivity improvement

AUSTRALIAN OPPORTUNITY SUMMARY

> With urbanisation and a growing middle class in China

the demand for beef is rising. Due to stagnate domestic production and food safety issues in China, the ANZ model analysis concludes there is likely to be a significant supply side opportunity for global players

> Specifically for Australia there is significant opportunity given its leading cattle and beef industry as well as its early adopter status

> However the success that Australia has achieved in the China beef market in 2012 and 2013 may not continue unless the Australian beef and cattle sectors rise to the challenge

> For Australia to maintain its share in the growing China market and at the same time continue to service its traditional markets the sector will require continued productivity growth

> To achieve the high case export scenario the sector will require annual productivity growth of between 2.5% and 2.9%, depending on the actual level of China beef consumption. This is similar to productivity rates of the 1990’s and is more than the long term annual productivity growth rate across the period back to 1970. Given Australia’s mature sector it is unlikely these productivity rates can be achieved, but if they were it could see an export value of between $9.9b and $10.7b in 2030. This could be $131.6b across the period to 2030 or an extra $43b compared to a scenario where the sector does not rise to this challenge and lift productivity

> The low case export scenario is considered achievable, but would still require annual productivity growth of between 0.9% and 1.2%, depending on the level of China beef consumption. The high side of this growth rate is twice the annual productivity growth since 2000, but less than the long term annual productivity growth rate across the period back to 1970. If the sector can achieve this productivity growth it could result in an export value of between $6.8b and $7.1b in 2030. This could be $109.2b across the period to 2030 or an extra $14.2b compared to a scenario where the sector does not rise to this challenge and lift productivity

>8

High case scenarios require annual productivity growth between 2.5% and 2.9% and are not likely to be achieved

Low case scenarios require annual productivity growth between 0.9% and 1.2%

KEY ANZ CONTACTS

Global Agribusiness Research

Michael Whitehead

Director Agribusiness Research

+61 3 8655 6687 +61 401 097382

michael.whitehead@anz.com

>10

DISCLAIMER AND CONFIDENTIALITY

> This document is issued by Australia and New Zealand Banking Group Ltd (‘ANZ’). The information and opinions contained in this document (on which ANZ may have acted or may act for its own purposes) are published for the assistance of recipients but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. While such information and opinions have been compiled or arrived at by ANZ in good faith and from sources believed to be reliable, no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness, any opinions contained in this document may be changed by ANZ without notice. ANZ, its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of the contents of and/or any omissions from this document

> Information contained in this presentation is strictly confidential. It is the property of ANZ. As such, no part of it may be circulated, copied, quoted or otherwise referred to another party without prior written consent of ANZ

> The terms noted in this presentation is subject to receipt by ANZ of formal credit approval and appropriate legal, accounting, tax and technical advice. This is not an offer to finance

> The points made in this presentation are subject to further discussion with you and we would be pleased to address any comments and queries that you may have in relation to the proposed funding options so as to ensure that your particular requirements are satisfied