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GLOBAL DAIRY UPDATE AUSTRALIA

SEPTEMBER 2019

• Still early in New Zealand season. EU and US production flat. Australia continues to decline.

• Monthly exports from New Zealand, Australia and the US decline. EU exports continue to grow.

• Monthly imports into China show strong growth. Latin America, Asia and Middle East & Africa down.

• A multi-year supply agreement for our nutritional powders will help feed growing demand for nutritionals across South East Asia.

• Scrap materials collected from Fonterra’s Stanhope cheese plant following the 2015 fire and subsequent rebuild have been upcycled into things like cubby houses, tables and chairs – and has made a local Men’s Shed a winner in more ways than one.

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Australia milk production decreased 8.4% in July compared to the same period last year.

Production for the 12 months to July was down 8.4% on the previous 12 months.

Dairy Australia is forecasting 2019/20 season production to decline by 3% to 5%.

New Zealand milk production was up 0.8% in August compared to the same period last year although it is still early in the season. Season-to-date production represents less than 9% of seasonal production.

New Zealand milk production for the 12 months to August was 2% higher than last year.

EU milk production increased 0.5% in July compared to July last year. Growth continued in Ireland, up 10.4%, driven by a return to more normal weather conditions following challenging conditions in 2018.

Key exporting countries with production declines were Germany (1.2%), France (1%) and The Netherlands (1.5%).

US milk production increased slightly by 0.2% in August, compared to August last year.

Growth continues to be limited by record low cow numbers as poor on-farm profitability is leading to an increase in culling.

Milk production for the 12 months to August was 0.3% higher compared to the same period last year.

Australia dairy exports decreased by 1.9% in July compared to last July, driven by SMP, whey, WMP and cheese, down 5,776 MT. Exports for the 12 months to July rose 4.6%, or 34,798 MT. Fluid milk products, infant formula and butter were the main drivers, up a combined 59,325 MT, while WMP and cheese declined 22,849 MT.

New Zealand dairy exports decreased by 11.7%, or 36,417 MT, in July compared to July last year driven by WMP and butter down a combined 43,137 MT. SMP exports increased by 8,985 MT.

Exports for the 12 months to July were up 6.8%, or 219,726 MT driven by WMP and fluid milk products, up a combined 198,077 MT.

EU dairy exports increased by 6.7%, or 29,128 MT, in June compared to last June driven by SMP and fluid milk products, up 28,180 MT.

Exports for the 12 months to June were up 5.4%, or 285,597 MT. SMP, fluid milk products and lactose were the main drivers, up a combined 325,347 MT, partially offset by a decline in WMP of 69,048 MT.

US dairy exports decreased 4.0%, or 7,539 MT, in July compared to last July. SMP and whey were the main drivers, down a combined 8,550 MT. African Swine Fever continues to have a negative impact on whey exports to China.Exports for the 12 months to July were down 7.4%, or 179,086 MT, driven by whey, SMP, WPC and lactose, down a combined 197,780 MT.

China dairy import volumes increased 14%, or 32,847 MT, in July compared to last July driven by fluid milk products, up 32,749 MT, and smaller increases in SMP, infant formula partially offset by decreases in butter and whey, down by 12,574 MT.

Production change for the 12 months to August 2019

Export change for the 12 months to July 2019

Import change for the 12 months to June 2019

Production change for the 12 months to July 2019

Export change for the 12 months to July 2019

NEW ZEALAND

NEW ZEALAND

CHINA

AUSTRALIA

AUSTRALIA

8

5

2

7

11

%%

USA

USA

MIDDLE EAST & AFRICA

%

Production change for the 12 months to July 2019

Export change for the 12 months to June 2019

Import change for the 12 months to June 2019

Production change for the 12 months to August 2019

Export change for the 12 months to July 2019

Import change for the 12 months to July 2019

EUROPEAN UNION

EUROPEAN UNION

ASIA

0

7

9

%

%

0

5

6

%%% %

Global production

Global exports

Global imports

%%

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OUR MARKETS

DAIRY COMMODITY PRICES

Australian dollar trend

Global pricing

Local factors affecting farming conditions

HayHay prices eased in central Victoria this month with a reduction in volume traded around the country as many farmers held off purchasing feed due to increasing pasture availability heading into spring and the new season crop just around the corner. Hay prices remain historically high as stocks are transported across the country, particularly into NSW and QLD, which are largely driving demand. The unfavourable rainfall outlook for this region and much of the country will most likely result in demand remaining strong and supply will largely be determined by on-farm decisions between fodder or grain/oil harvest.

GrainDry weather and a lower production forecast has softened expectations on the upcoming winter crop harvest with ABARES revising their 2019/20 winter crop projection to an 11 per cent increase on 2018/19 – a downward revision of seven per cent from the June outlook. The revised figures are predominantly due to a challenging winter in QLD and NSW and the increase in acreage expected to be cut for hay. The current crop forecast is 16 per cent below the ten-year average. Forecasts vary greatly between and within regions, generally crops in Victoria are in good condition, while SA and WA are mixed and QLD and NSW are poor.

SOURCE: Global Dairy Trade SOURCE: Dairy Australia, August Pricing

AUD/USD SPOT RATE

SEP 19MAY 19MAR 19 APR 19 JUL 19 AUG 19SEP 18 NOV 18 JAN 19DEC 180.66

0.68

0.70

0.72

0.74

AU

D/U

SD

September Average Price (USD/MT, FAS)

September Average Price (USD/MT, FAS)

August Average Price (USD/MT)

August Average Price (USD/MT)

2,549USD 3,104USD 4,900USD 4,200USD

SMP WMP BUTTER CHEDDAR

Change vs. 12-month Rolling Average of USD 2,345/MT

Change vs. 12-month Rolling Average of USD 2,985/MT

Change vs. 12-month Rolling Average of USD 5,083/MT

Change vs. 12-month Rolling Average of USD 4,075/MT

8.7 4.0 3.6 3.1% % %%

SOURCE: Reserve Bank of AustraliaSOURCE: news.com.au

SOURCE: Dairy Australia SOURCE: Dairy Australia SOURCE: Bureau of Meteorology

GDT Event 244, held 17 September resulted in an index increase of two per cent.

The Australian dollar was traded within a one cent range of US$0.6750 during September. During the month, the US Federal Reserve lowered the federal funds rate by 25 basis points, Sino-US trade talks continued with no real progress, and the Reserve Bank of Australia left the cash rate unchanged.

WeatherRainfall in August was very much below average across Australia. It was particularly dry in NSW, stretching into SA and southern QLD. Small areas in VIC, TAS and WA received above average rain although the majority of these states recorded average to below average. Overall, this has been one of the driest winters on record. Winter rainfall for NSW and the Murray-Darling Basin was the fourth lowest on record. Australia experienced a warmer than average August. BOM’s latest 3-month climate outlook forecasts hotter and drier conditions for the vast majority of Australia, with WA, TAS and parts of Southern VIC expected to receive average to slightly above average rainfall.

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COMMUNITY

OUR

BUSINESS

Partnering with Indonesia’s biggest healthcare company to grow Australian exports

A multi-year supply agreement for our nutritional powders will help feed growing demand for nutritionals across South East Asia.

Kalbe Nutritionals is Indonesia’s biggest healthcare provider, and in August we signed a multi-year supply agreement with them for nutritional powders from our Darnum plant, destined for supermarket shelves across Indonesia and the wider South East Asia market.

Fonterra’s Director of Nutritionals and Value Added Ingredients Fabrizio Jorge says Indonesia is South East

Asia’s biggest market for nutritionals, with children accounting for 10 per cent of Indonesia’s population.

“The agreement with Kalbe will help us deliver premium nutrition to children across Indonesia and other South East Asian markets,” says Fabrizio.

“It also creates long-term demand for nutritionals out of our Darnum site, so that the factory is running at maximum efficiency and we’re squeezing value out of every drop of our farmers’ milk.”

Indonesia is Australia’s fifth-largest importer of dairy in terms of volume, and third-

largest in value, with around A$184 million of Australian dairy exported to Indonesia in 2017/18, and our agreement with Kalbe will see that value grow even further.

“Kalbe’s choice to partner with us recognises our state-of-the-

art technology, sustainability, traceability, and quality systems,” says Fabrizio.

“We’re so proud to be partnering with Kalbe to help them feed demand for nutritionals, made from our farmers’ high-quality milk.”

Fonterra’s Director of Nutritionals and Value Added Ingredients Fabrizio Jorge at the signing of the MOU in Jakarta last month

From trash to treasure – local Men’s Shed transforms more than upcycled wood

Scrap materials collected from Fonterra’s Stanhope cheese plant following the 2014 fire and subsequent rebuild have been upcycled into things like cubby houses, tables and chairs – and have made a local Men’s Shed a winner in more ways than one.

Over the last three years, the Stanhope & District Men’s Shed has collected around 300 trailer loads of timber, crates, boxes and pallets destined for landfill, to create items for use and for sale, such as butcher’s blocks, garden ornaments and even Christmas decorations.

The group has now been recognised for their ingenuity at the National Men’s Shed Awards – winning the recycling category as one of only four awards given across the 1,200

Men’s Sheds in the country.

Over the course of the factory rebuild, cheese making equipment was delivered in large wooden crates – important to keep the equipment safe from damage, but not used again creating the potential for waste.

While Fonterra is always looking for ways to give back to local communities and be more sustainable, the partnership with the Stanhope & District Men’s Shed has meant a lot more than simply transforming ‘trash to treasure’.

Member of the Men’s Shed, Des Crichton, says the abundance of materials means the Shed doesn’t have to rely on grants and donations to survive, and it has given meaningful work to many men

in the local community.

With around 40 members, the group has also used the materials to build the self-professed ‘smallest pub in Australia’. About the size of a trailer, the upcycled pub brings the men together for companionship.

Fonterra’s Stanhope production manager Frank diFede (pictured with Des Crichton) has helped coordinate the transfer of over 300 trailer loads of materials from our Stanhope site. He describes the partnership as ‘an absolute win-win situation’.

“I feel so proud when they show me the photos of what they have made out of our material and there is a real sense of achievement when they’ve made it from something that

would have gone to landfill.

“The factory has been here for nearly 100 years and this is just a really incredible addition to its history,” says Frank.

Men’s Shed is one of Australia’s largest male-based community development organisations, which aims to deliver services to improve men’s health and wellbeing and provide the opportunity to work on meaningful projects to support their communities.