Presentation to Oireachtas Joint Committee on Agriculture, Food and the Marine Joe Collins – MD Ornua Dairy Trading & Ingredients Anne Randles – Company Secretary 24th November 2015

Content Volatility – Definition Frequency and magnitude What’s driving it from a dairy perspective Irish milk seasonal output and farming lead/lag compounding factors Ornua approach to managing volatility Ornua Purchase Price Index (PPI) Market situation report & outlook

Volatility defined …………. Volatility is a term given to frequent, significant and unpredictable fluctuations in a commodity's value But volatility is a normal feature of commodity markets Mainly caused by mismatches in supply and demand, which can occur for many reasons.  Understanding and managing volatility and associated risks is essential for businesses in the dairy sector For dairy products, minor changes in supply and demand can have major impacts on price due to lead and lag in supply chain

Volatility increasing …….. Max move: +/-24cpl Max move: +/-10cpl 4

Why is Dairy Volatility increasing …………. EU Dairy has moved from regulated market to free market Weather shocks - impact As global demand grows, areas more vulnerable to weather shocks are being used to produce milk Trade policies impacting demand Russia’s ban on EU food imports vs free trade agreement   Stock policies impacting on price movements   Data availability and speed Hedge funds, dairy auctions and futures

Irish Milk: Seasonal, Grass-based system compounds Volatility risks

How can Ornua help insulate farmers against volatility Grow brands – Kerrygold , Pilgrims Choice , Dubliner etc   Develop value-added, differentiated ingredients   Diversify markets & sectors   Strengthen supply chain partnerships Fixed Price Milk Schemes   Trading expertise focus, contract & stock management

Ornua PPI 2015 ytd – 10 point swing The Ornua Purchase Price Index (2010 = 100)

Extra milk (from 2014) has depressed prices

Dairy Market: Weakness returning after brief upturn October 6th: Recovery Peaks; Prices begin to weaken again August 4th : Low Point

Recent signs of an output slowdown in NZ have improved sentiment…but further stabilisation required New Zealand: Early season supplies showing decreases; forecast for more substantial declines as season progresses (Fonterra estimating 5%+ decline)

EU milk output is very strong (post quota) +1.3 est.

Exports have been hindered by events in Russia

And China…

China stocks still weighing on market Source: Dairy NTEL

EU export performance has been good, considering the difficult market environment Presentation Title

Demand for Dairy Fat is Increasing in US & EU EU Butter consumption up 3.7% in 2014, compared to annual average increases of 0.8% for 2004-2014 EU Cheese consumption up 1.6% in 2014, compared to annual average increases of 1.1% for 2004-2014 US Butter sales up 14% in 2014; Sales of whole milk up 11%, with Skim milk down 14%

Market Outlook In the absence of a rapid (weather-related) supply-correction, the coming months will be difficult for dairy farmers some commentators forecasting weak prices out to H2 2016 Market still digesting 2014 supply-overshoot and demand shocks Demand (+c.1.5%) will eventually catch-up with supply growth (+c.1.25%) & stocks: Question is when? Current (below cost of production ) prices are not sustainable for farmers or processors Milk price recovery may lag recovery in product prices Long term, future is positive; Fundamentals remain in place; world populations are growing, getting wealthier, and becoming more positively disposed towards dairy fat and protein Ireland has a competitive edge in milk production

In conclusion Volatility is increasing Only the strongest in the supply chain and those that adapt will succeed For farmers, the best insulator against volatility is a combination of: Open market returns Fixed milk pricing schemes Hedging on a relevant financial exchange when liquidity allows Efficient and shrewd financial planning (in those key times of plenty) For its part, Ornua’s volatility management mechanisms ensure its own product prices (as evidenced by the PPI) trade in a narrower, less volatile range than the market highs and lows

Thank You Presentation Title