New realities of the dairy market Steve Spencer Freshagenda

What we do Track world market in milk Simulate future dairy trade Market surplus/shortage Product values Translate impacts on suppliers, traders, buyers Forecast value of products, milk But also Study trends across food Analyse supply chain conditions Published analysis of food pricing

Realities Some that are not news No immunity from global forces We can’t influence global situation You’re on a rollercoaster Domestic market is a tough landscape “Value-adding” is elusive New? Structure of global supply Low value of oil We’re in a slow recovery

Theme park ride

The global market Who buys Who supplies (2015) Product mix

Milk use Exposed to trade Exports

The grocery playing field

How we got here? EU slowed to avoid fines EU slowing, NZ down EU sped up output China’s bubble deflating Russian embargo

How we got here? Quota + grass

How we got here?

The market for milk What HASN’T changed Global market sets value Weather drives volatility Geopolitical stuff happens Limited transparency China’s buying bubble Oil, feed, milk track closely Long-term demand is sound (…but…) What HAS changed EU is unshackled Oil is cheap Russia is closed Faith in the Chinese miracle Power of BRICs

Outlook: Highlights Fundamentals: bottom of the cycle Slow firming in prices expected in 2016, improving stronger in 2017 Large stocks overhang the market Powders (EU), Cheese (US) Several risks remain Sustained growth in EU? How will intervention be used? US now expanding – adding to cheese stocks Weak demand-side growth

EU unshackled Growth sustained longer Will add 13bl (2013 to 2016) Country level variation Milk prices tumbling, but…milk growing (at least) to Q3-2016 Growth milk into SMP Intervention going to 500Kt Milk +5.8bn, Stocks (5.6bn) When does it come back? Alters milk use for 3-4 years Weather and feed prices critical

NZ supply 2016/17 output is a crucial variable Far more resilient 3 years at <NZ$5.00/kgms? Weather will drive result Debt, fertility, supplements Culls not increasing … yet Expecting 3% less milk in 16/17 Longer impacts? Investor confidence? Retreat to lower cost systems? Cap on output?

US market A glut getting worse Growth steadily improving Mostly about feed quality Demand not keeping up Cheese is flying off shelves Milk sales, exports weak Pressure on cheese prices Milk growing into 2017

Low oil: good or bad? Impact of “low oil” on dairy prices Pros (stronger prices) Cons (weaker prices) Demand Better affordability for oil importers? Lower fuel prices in developed regions – more cash for eating out? Oil exporters have weaker demand economies Weaker economic activity, slows growth Supply ? Weakens biofuel demand = lower feed costs Lower fertiliser costs

Oil, feed, milk powder

The China bubble

China Good and bad Smaller powder market Return to 2012 for WMP Cheese (fast food), IMF strong (pref for EU brands)

Price sensitive buyers

Price sensitive buyers

Price sensitive buyers

What does it mean for you….

Our approach Historical dairy production and trade 10 major exporters (10 exporters into all regions) 10 major exporters Milk output growth Product mix Domestic demand Import demand growth? Dairy Trade Simulator Export availability Projected short-term trade balance Products Milk equivalents Market tension index (SMP and WMP) Stocks Impact on projected Commodity values Milk price outlook

Milk value $4.10/kgms $4.80-$5.20/kgms Outlook for trade Product mix Expected commodity values Product mix Conversion costs Commodity milk value $4.10/kgms Capacity to add higher value $4.80-$5.20/kgms Projected 2016/17 full year price range

Milk value $4.80-$5.20/kgms $4.50 - $4.75/kgms Outlook for trade Expected commodity values Product mix Conversion costs Prices rise slowly over H2-2016, faster in early 2017 Lagged translation of spot into achieved prices Dollar weakens slightly Commodity milk value Better execution Assume returns to FY15 level Capacity to add higher value $4.80-$5.20/kgms Projected 2016/17 full year price range Opening price range $4.50 - $4.75/kgms

Milk value – following year Outlook for trade Expected commodity values Product mix Conversion costs Commodity milk value Capacity to add higher value $5.80 - $6.30/kgms Projected 2017/18 price range

Is the dairy game stuffed?

Australia – medium term Likely to shrink - 3 years back to 2014/15 volumes Little chance of spur to sustained growth Domestic shares will continue to creep higher Increasing diversity of business models and specialisations Further consolidation? Proposition: agile, tailored, niche Don’t forget: A strong co-op is critical to capture and pass returns to farmers

The long term After 2017 Market keeps growing at 4.4% (last 6 years at close to 5%) Developing markets slow from current rates EU and NZ expand export capacity by largest volumes Notional gap = 5.4bn litres Key supply side assumptions EU grows at 2% slowing to 1% NZ grows at 3%, slowing to 2% US grows at 1.5% (steadiest)

The long term A lot can go wrong? What does it mean? Outlook still finely balanced Most sensitive to EU growth rate after quota shake-out US longer-term risk China still a significant variable What does it mean? Upward trajectory for prices, but remaining volatile!

For farmers, the challenge remains Are they up for the rollercoaster? Volatility is assured? Beware of the “value-add” cordial What’s the destination outcome? Is the business capacity OK? Yield, cost structures, margins Can they manage the lows and harvest the highs?

Thank you