But the market is rallying! But the market is rallying! Media telling us the world is falling apart Yet the stock and commodity markets are rallying. A confusing time for those in the markets. And then Mexico is caught in the middle Lets understand what it means Raboresearch Food and Agri Uncertainty and volatility abound Implications for Mexican dairy

1 2 3 4 5 Overview: Recap on global market activity. Review Mexican dairy market. 3 Mexican US trade relationship. 4 President Trump. 5 Market outlook and implications for Mexico.

Dairy markets are in a state of volatility. Significant political uncertainty Economic policy uncertainty (disagreement between economists) Dairy market fundamentals sending mixed signals. +50% -20%

Supply contraction is slowing. Milk production growth of the “Big 7”

But global demand for dairy remains strong. Global import growth (YOY change) Source: Rabobank

So what does this mean for Mexican dairy?

Mexican self sufficiency continues to slowly slip. Demand at 1.5% cagr (economy growing well 2-3%) Production at 1.3%, Imports +?, 80% of these imports come from the US. Self sufficiency is slowly decreasing. Source: Rabobank

Global per capita dairy demand vs. GPD per capita. 2016 Per capita demand vs. GPD per capita Explain Mexico falls into the western diet category. High levels are 250kg / capita. Mexico creeping, driven by GDP growth. Current market size is 15.5m MT of demand. Per capita is 120kg/capita. The size of the Mexican market will need to double to hit a EU/US per capita figure of 230.

Fluid milk demand has struggled, but cheese is in! Cheese driving growth in dairy consumption Fluid/fresh milk vols are contracting. Competition from non dairy alternatives and higher prices hurt vol sales. New products launched in the fluid milk space - should help demand Mexico is a large and growing dairy market with a lot of potential. Source: Euromon & Rabobank

Mexico milk supply growing in specific regions. Production +1.3% cagr Lagoon and central region core of milk supply in Mexico – Climate is more arid (good feed) High input operations. Southern mexico more pastoral Room for improvement. Only 2-3% use artificial insemination. But 95% of large farms use it. Gov programs and subsidies used to help boost milk supply. Need US genetics, farm tech, and supplies. Much cheaper than buying from EU. Prices are competitive Source: Rabobank

Mexican milk production is competitive. Global milk prices Current milk price vs. COP 0.45 0.40 Milk price $/lt 0.35 0.30 0.25 Mexico very competitive Milk prices are aligned to ROW Estimate that Mexico COP should be only slightly above US. (if we strip out small operations), feed Larger producers, while smaller struggle with land. 0.20 NZ US EU Source: Rabobank Source: Rabobank

TRUMP – big talk, but what's the likely scenario? Big talk for Mexico Wall NAFTA Immigration 2. Part of his strategy Be provocative Vagueness/options Leverage US Get the word out (be public) Aggressiveness 4. The end result Trump’s tone is softening Immigration will tighten Laborers may stay Trade will continue, but perhaps slightly lower levels Will seek Win-Win 3. The US needs Mexico Exports Production Labor A prosperous Mexico is better for all

Will Mexico differentiate supply base? Mexican industry has bought some EU product recently – looking to differentiate suppliers. Mexico permits 80k MT SMP from WTO members (including NZ, EU, and Arg). Sensible to consider – don’t want to be too reliant. Major advantages for US suppliers: Proximity Existing trade deals

Mexico is reliant on US for imports. US accounts for ~80% of Mexican imports Majority is SMP A trade war with the US would be disastrous for global dairy prices. But could mean increased domestic prices for Mexican producers. As it would be tough to make up trade deficit with other markets. Europe and NZ have quota limits on trade with Mexico. Latam still in a state of recovery Source: GTIS

Looking to the future in an uncertain market.

Milk production is turning the bend and should grow 2H. Producers above breakeven We expect positive growth 2H Driven by EU and NZ US also unlikely to slow at current prices.

High prices may choke demand in developing markets. Historically when we get over 3k dev demand falls USD having an effect Uncertainty an issue Slower economic growth

Rabobank is forecasting mixed price results. Pressure on intl powders due to overhang and turning production US market also faces headwinds, USD, stocks, production growth, limited demand growth. Cheese curve our only upside.

1 2 3 4 5 Conclusions 2017 brings significant uncertainty. Mexico is climbing the S curve. 3 Mex US trade may slow but not the end. 4 Global prices will remain low. Significant uncertainty ahead. Pricing volatility will remain a challenge. Mexico is mid S curve – significant headroom for demand growth. Mexico looking to domestic supply and non Us imports to help meet growing demand. There are opportunity for Mexican producers as they slow imports from the US. But consistently low prices will remain a challenge. 5 Opportunity for Mexican producers?

Thank you!