America’s Role in the Emerging Global

Dairy Market

Philip Turner24 May 2005

Washington DC

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Fonterra is the world’s leading dairy exporter...

• Private cooperative owned by 12,000 farmers

• Assets $8.3 bn, revenue $7.8 bn

• World’s largest dairy exporter – second largest processor of milk after DFA

• Collects 40 billion pounds of milk

• NZ base produces 2% of world milk – less than California and Wisconsin

• Increasingly procures product around the world - Latin America, Australia, US

• Through Dairy America, one of the largest dairy exporters from the US

• In US: in 2004 1 bn pounds milk worth over $300m

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We see excellent prospects for growth in world dairy consumption

14.0%

5.0%3.5% 3.0%

1.0% 1.0%2.0%

China SouthEast Asia

MiddleEast/NorthAfrica

LatinAmerica

NorthAmerica

EU-25 TotalWorld

Total annual demand growth exceeds NZ’s annual milk production

Average Annual Growth in Dairy Demand2003 - 2010

4

But only a fraction of world demand is met through trade...

Exports7%

Dairy Exports as a Share of the Total Global Dairy Market(2004)

Consumed Domestically

93%

5

This partly reflects barriers to trade and subsidised support for dairy

Butter Tariffs(%)

The EU spends $1.83 billion per year (2003) on dairy export subsidies

Domestic Support for Dairy Farmers($bn per year)

660

140 115

Japan EU US

24

11

EU US

PSE51%

PSE45%

6

Happily, growth is strongest where trade barriers are lowest

244%

72%54%

24% 15%24% 12%1.0%2.0%

5.0%

14.0%

1.0%

6.0%3.0%

Japan EU US Sub-Saharan

Africa

LatinAmerica

China SouthEast Asia

Tariff Protection Consumption Growth

• Consumption Growth: ZMP, Rabobank, 2004; Average annual change 2003 to 2010• Tariff Protection: Average outside tariff quota rate for chapter 4 dairy products (EU, US, Japan-

average OTQR AVE for SMP, WMP, Butter and Cheddar Cheese)

Dairy Consumption Growth versus Tariff Protection2003 - 2010

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Demand by value will continue to be dominated by developed countries...

100,000

58,000

42,00035,000

20,00012,000 8,000

WesternEurope

Nth AmericaAustralasia LatinAmerica

EasternEurope

Africa/MiddleEast

Asia/Pacific

Dairy Consumption 2008(USD millions)

WesternEurope

NorthAmerica

Austra-lasia

LatinAmerica

EasternEurope

Africa /MiddleEast

Asia /Pacific

8

100,000

58,000

42,00035,000

20,00012,000 8,000

3.25

4.504.50

3.503.00

1.501.25

WesternEurope

Nth America Australasia Latin America EasternEurope

Africa/MiddleEast

Asia/Pacif ic

...but the main growth will come from the developing world

Growth of Dairy Consumption

2008 USD millions CAGR 2003-08

WesternEurope

NorthAmerica

Austra-lasia

LatinAmerica

EasternEurope

Africa /MiddleEast

Asia /Pacific

9

0.2

0.3

0.4

0.5

0.8 0.8

China Indonesia Thailand Philippines Malaysia Singapore

Milk Powder Consumption 2003(kg per capita)

There is enormous scope for growth in per capita demand...

Source: Fonterra Internal Analysis

10

0

10

20

30

40

50

60

2002 2020

mill

ion M

T (

milk

equiv

ale

nt)

Domestic demand growing at CAGR of 9.3%

Domestic milk supply growing at CAGR of 7%

Supply gap of over

20 Million MT ME by 2020

China will be a powerful engine of demand growth as incomes and urbanisation increase

Supply versus Demand – China

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Since supply of milk is constrained...

EU supply will reduce due to :

– CAP reform

– accession

– the end of export subsidies through WTO

Oceania will grow less quickly than in the past:

– New Zealand milk growth slower due to competition for land use and rising costs

– Australian supply will be limited by water

Result will be more dairy products traded andconsumed, at higher and more stable prices

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Strong demand will open the door to new exporters

Existing suppliers will be unable to fill the gap . . .

EU in retreat

Oceania to grow more slowly

So where will the milk growth come from?

Argentina / Brazil / Chile / Uruguay?

Ukraine / Eastern Europe?

India /Pakistan?

USA?

13

In Latin America, unlike China, supply will exceed demand – it will be a bigger force in exports

30

35

40

45

50

55

60

65

2002 2020

Mill

ion M

T (

milk

equiv

ale

nt)

Domestic Milk supply growing at CAGR of 4%

Surplus supply of over

15 million MT ME by 2020

Domestic demand growing at CAGR of 2%

Projected Mercosur Supply versus Internal Demand

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How does the US fit into this picture?

Change is occurring in the US industry already:

• On-going shift of milk production and processing towards the west and south west

• Consumer demand driven by health – particularly obesity – presenting both opportunities and threats

• A significant threat from soy for market share

• Doha Round / budget pressure will force US to end its subsidised exports and may affect its domestic support model

• Higher (on average) and more stable world prices will promote US dairy exports

15

Though the US is a minor player in the world market, US dairy exports have been rising steadily

353

795

1,018

1,490

1990 1995 2000 2004

US Dairy Exports Value(USD m)

202,908 MT 465,437 MT 566,900 MT 833,549 MTQty

322% increase in value over 14 years

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With recent growth particularly in non-fat dried milk powder

258,447

208,165

61,277

16,059

Non-fat driedmilk powder

Whey Products Cheese Whole MilkPowder

US Dairy Exports Volume 2004(tonnes)

75% 21% 18% 21%% growth2003-04

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The US has significant opportunities to exploit growth in world dairy demand

• Strong demand + more trade + supply changes = opportunity for US

• US exchange rate a factor but not a driver

• US industry, like Fonterra, needs market access barriers to come down – e.g. Canada, European Union, Japan

• Increasingly the US industry is poised to respond to the opportunity

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US is currently a minor player in the world market

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Whether it takes the opportunity to become a significant player globally....

...largely depends...largely dependson theon the

US dairy industryUS dairy industry

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