1. 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

2. 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.

3. 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%

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

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

6. So what does this mean for Mexican dairy?

7. 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

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Looking to the future in an uncertain market.

16. 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.

17. 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

18. 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.

19. 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?

20. Thank you!